Tuesday, November 12, 2013

Today's Links

Quote from The General Theory:

“There is no ground for the belief that a flexible wage policy is capable of maintaining a state of continuous full employment; - any more than for the belief than an open-market monetary policy is capable, unaided, of achieving this result...It follows, therefore, that if labour were to respond to conditions of gradually diminishing employment by offering its services at a gradually diminishing money-wage, this would not, as a rule, have the effect of reducing real wages and might even have the effect of increasing them, through its adverse influence on the volume of output.” John Maynard Keynes  (Monetary policy will not achieve full employment.)


 1---Stellar jobs report is downer for housing, cnbc
Mortgage apps down, sentiment down, prices up, construction jobs down, employment among firsttime homebuyers down, rates up.

a---Mortgage applications are down 42 percent from a year ago, driven by a 52 percent drop in applications to refinance. Applications to purchase a home are flat.
While the strong overall employment report is easing concerns that the partial government shutdown hurt the economy, consumer sentiment clearly took its own hit, especially when it comes to housing.

 b---The share of consumers who said it is a good time to buy a house in October fell to 65 percent, an all-time low for Fannie Mae's monthly National Housing Survey, which began in 2010

c---Higher prices, though, are also a double-edged sword. They bring more potential buyers and sellers out from underwater on their mortgages, but they also price out more buyers, especially those crucial first-time buyers.

d---This recovery needs more construction, more jobs for younger Americans, and more credit. Friday's October jobs report provided none of that

e---Employment among 25- to 34-year-olds, considered the prime age for housing demand, fell from 75 percent in September to 74.6 percent in October, according to the Bureau of Labor Statistics. It is still well below pre-recession levels

f---Even though home prices have rebounded strongly and are now close to 'normal' levels, construction still lags. New home starts and construction employment are still way below their pre-bubble norm and face a long, slow climb," said Jed Kolko, chief economist for Trulia.

g---Bond markets tanked immediately following this morning's jobs data. Today's rates will be at least an eighth of a point higher than yesterday, and as much as a quarter of a point for some borrowers," said Matthew Graham of Mortgage News Daily.
Average quoted rates for those with pristine credit and large down payments will now be 4.375 to 4.5 percent, compared with 4.25 percent Thursday, a substantial one-day move.

2---BUBBLE ALERT: The Day The Bubble Became Official, And Everyone Was Happy , Testosterone Pit

Bubble data keep piling up relentlessly. IPOs so far this year amounted to $51 billion, the highest for the period since bubble-bust year 2000, the Wall Street Journal reported. Of them, 62% were for companies that have been losing money, the highest rate on record. Follow-on offerings by companies that already had their IPO but dumped more stock on the market amounted to $155 billion, the highest in Dealogic’s book, going back to 1995. And throughout, the DOW and the S&P 500 have been jumping from one new high to the next.
 
It’s even crazier in the land of bonds, where issuers are dreading the arrival of higher interest rates – which have already arrived. And they’re pushing everything possible out the door while prices are still high. So far this year, $911 billion in bonds were issued, also a Dealogic record. Emerging-market bond issuance hit $802 billion, a notch below their all-time record last year, but emerging-market bonds went into tailspin during the summer taper-talk, which slowed things down temporarily.

These ominous clouds have been billowing up on the horizon for a while, but nothing is a bubble until enough people say it’s a bubble. And today, shortly before 10 a.m. Pacific Time, it officially became one....

Pinterest in San Francisco, an internet message board for images with 50 million monthly users, got $225 million in a round of funding that valued the company at $3.8 billion – though it has zero revenues. That a big chunk of the funding came from mutual fund company Fidelity, instead of venture capital funds, raised even more eyebrows. Or messaging app developer Snapchat in LA is stewing over an investment that would value it at $3.5 billion, and it doesn’t have any revenues either.
NO revenues???

3---The Obama rally? (Yipee) Mark Gongloff

...
The Standard & Poor's 500-stock index, the broadest measure of the U.S. stock market, is up 24 percent so far this year, Bloomberg pointed out on Monday. If the market keeps this up, it will be the best performance in the first year of a president's second term since 1997, the year after President Clinton's re-election, when the S&P rose 31 percent. ....
In fact, the S&P 500 is up 108 percent since the day Obama took office on Jan. 20, 2009, making him only the fifth president since the Great Depression to enjoy a stock-market doubling.

though Obama is often derided on the right as some kind of socialist, businesses have actually done quite well during his presidency. Corporate profits have nearly tripled, soaring to record highs relative to the size of the economy. Even the banking sector that often paints Obama as a villain has enjoyed record profits.

4---Shadow banks reap Fed rate reward, (more shabby underwriting to dodgy borrowers increases risk of meltdown) FT via CNBC

Loosely regulated non-bank lenders have emerged as among the biggest beneficiaries of the Federal Reserve's ultra-low interest rates with three specialist categories increasing their assets by almost 60 percent since the height of the financial crisis.
Such lenders, widely considered part of the "shadow banking" system, have expanded rapidly on the back of investors who are clamoring for the higher returns on offer from financing riskier types of lending.
Shadow banking has been steadily climbing the regulatory agenda, with the Financial Stability Board this summer proposing a package of measures aimed at curbing excessive risk-taking in the sector. The regulators' concern is that many of these lenders could over-borrow or make increasingly dicey loans as they rush to take advantage of historically low rates, exuberant markets and the retreat of traditional banks from certain businesses in response to tougher regulation.

"Think of it like a pipeline," says Dan Zwirn, managing partner of Arena Investors, a hedge fund focused on lending to companies that most banks will not lend to. "When you can connect the pipe between a type of asset and yield-hungry investors, then what happens is that issuance grows."
(Read More: Ronald Coase and the nature of shadow banking)
The amount of assets held by US business development companies (BDCs), specialist finance companies and real estate investment trusts (Reits) has jumped from $779 billion in 2008 to $1.22 trillion in the second quarter of 2013, according to data compiled by SNL Financial for the Financial Times.
The rapid growth of Reits, which borrow in the short term financial markets to make tax-favorable investments in longer-term assets like mortgage bonds, has drawn the attention of US regulators.

The New York Fed probed US banks' exposure to the investment vehicles earlier this year, amid concern that a rapid rise in rates could trigger a sell-off that would affect larger banking institutions. Last week, researchers at the Richmond Fed said that while Reits had "mushroomed" since the crisis, it remained unclear what risk they might pose to the financial system.
Regulators are attempting to strengthen oversight of the lightly-regulated sector while avoiding measures that would stifle its ability to contribute to the recovery.

Last month, Mark Carney, the FSB's chair and Bank of England governor, floated the option of opening up access to the BoE's liquidity facilities to non-banks, while adding that this would mean extending the reach of regulation.
(Read More: World leaders to put shadow banks on long leash)
Paul Tucker, the former Bank of England deputy governor, warned the same month that regulators need to "up their game" in overseeing hedge funds and shadow banks. He said it would be "disastrous" if the fragility of mainstream banks gets recreated beyond the mainstream banking sector, calling for securities regulators to improve the quality of data they are collecting on non-banks.

BDCs provide capital and loans for middle-market companies, using a tax-favorable structure that is similar to Reits. While the leverage of BDCs is capped under law, they too have experienced rapid growth in recent years, leading to heightened competition.
"Underwriting standards go lower, interest rate risk goes higher," said Mr Zwirn, adding that many BDCs have sought to boost returns by purchasing the riskiest pieces of collateralized loan obligations or the equity of specialist finance companies that are allowed higher leverage rates than BDCs.
Some such companies which proliferated before the financial crisis are still reducing the troubled assets they collected before 2008, while others have been expanding in fields such as lending to people with flawed credit histories to fill a gap left by retreating banks.

Springleaf, the former subprime consumer lending arm of the bailed-out mega-insurer AIG, has been able to take advantage of a turnaround in securitization markets to repackage its loans into asset-backed securities and expand its business.
"The combination of increased capital requirements and regulatory focus will make it harder for banks to serve non-prime customers," said Steven Moffitt, who leads the consumer structured finance team at Goldman Sachs.
He estimates that 25 to 40 per cent of bank customers will need to source credit from non-bank entities, potentially leading to further growth for specialty lenders

5---Roach: China's transition to personal consumption----including "retirement, social security, healthcare, unemployment, insurance, cnbc

The strategy is clear. It's [China] shifting the model from external to internal demand... and they've got to do things to achieve that goal," he said.
Roach said key to this transition would be altering the behavior of Chinese families, in terms of moving them away from a culture of "saving out of fear," to "spending with confidence."
 
"To do that [the government has] to build out the social safety net that has really been neglected," he said, adding that he hoped to see the government address issues around retirement, social security, healthcare, unemployment, insurance, reform to the residential Hukou system - a household registration system that has been criticized for restricting migration - and the liberalization of interest rates.

It is hoped that Chinese president Xi Jinping will unveil plans to create a national social security system, reform state-owned enterprises, and create equal valuation of urban and rural land following the meeting.

6---Canada's red hot housing market teeters on the brink, cnbc

We appear to be perched precariously at the peak," Adam Peterson, a residential real estate investor with New York firm JEN Partners told CNBC. "Prices are holding on, but inventory and land transaction indicators are telling a different story."
Jonathan Tepper, CEO of research firm Variant Perception told CNBC that ex-Bank of Canada Governor Mark Carney has played a part in one of "biggest housing bubbles in the world". Meanwhile David Rosenberg, chief economist and strategist at Canadian wealth firm Gluskin Sheff believes that the housing downturn has been rather orderly so far, but warns of weakness to come despite housing demand currently holding firm in many urban areas....

House prices in Canada have doubled in the last ten years, according to the Teranet-National Bank Composite House Price Index. July's figure, released on Wednesday, showed overall prices rose 0.7 percent from a month earlier, the fifth straight monthly gain which pushed the index to a fresh all-time high...

"I believe we're seeing the crash in slow motion, but the market has been so defiant that timing the correction is risky business," Peterson told CNBC. "A soft landing in home prices would require a truly unbelievable combination of artful policy making and the ability of consumers across the country to remain calm in the face of losing home equity while paying more."


7---Canada Housing: "Too late for a soft landing", cnbc

Home prices in the greater Vancouver area are down 3.9 percent from a year ago, according to the Real Estate Board of Greater Vancouver. In West Vancouver, which is sometimes said to be the wealthiest municipality in Canada, home prices have fallen 5.6 percent. Sales are down 20 percent from a year ago.
Vancouver is not alone. All over Canada there is fear that the country is in a housing bubble that is now in the process of popping. In March, Montreal saw sales decline 17 percent year over year, even while inventory continues to climb. In Ottawa, sales have fallen 16 percent.
"A housing correction—or, possibly, a crash—is no longer coming. It's here," Macleans magazine declared this past January.
The bubble seems fairly obvious, even if it's existence is still disputed within Canada. Canadian home prices are up nearly 100 percent since 2000. The price-to-rent ratios in major urban population centers are through the roof. In British Columbia, home prices rose 163 percent in the decade from 2001 to 2011, according to a study by the International Monetary Fund.
Although Canada has a reputation for having conservative banks—its banks weathered the global credit crisis without any bailouts—low interest rates have fueled a sort of mortgage and borrowing mania. Household debt has risen to a record 165 percent of disposable income. Total mortgage debt stands at $1.1 trillion...

While a falling housing market and subsequent wave of defaults would surely hit the income statements of Canadian banks, they may not have the same level of mortgage exposure as U.S. banks did because the government backstops so many of the mortgages. What's more, Canada's banking sector is so concentrated that the country would almost surely rescue any bank that did run into trouble because of mortgages

8---Goldman Sachs warns on 'large correction' in Canada housing, cnbc

9---Class war as policy: Cut benefits, Do not raise taxes, whether it works or not, Krugman

research at the I.M.F. suggests that when you’re trying to reduce deficits in a recession, the opposite is true: temporary tax hikes do much less damage than spending cuts.
Oh,... when people start talking about the wonders of “structural reform,” take it with a large heaping of salt. It’s mainly a code phrase for deregulation — and the evidence on the virtues of deregulation is decidedly mixed. ...
If all this sounds familiar to American readers, it should. U.S. fiscal scolds turn out, almost invariably, to be much more interested in slashing Medicare and Social Security than they are in actually cutting deficits. Europe’s austerians are now revealing themselves to be pretty much the same. France has committed the unforgivable sin of being fiscally responsible without inflicting pain on the poor and unlucky. And it must be punished.

10---QE in Japan: Past and Present , macromania

11--What crisis? Billionaires’ fortunes double since 2009, RT

12--Report: US taxpayers finance terror, RT

American taxpayers have unwittingly paid more than $150 million to companies throughout the Middle East that are known to have helped finance terrorist attacks on US soldiers stationed in Afghanistan, according to a new internal US government report.

At least 43 companies based in Afghanistan were found to have ties to terrorist networks according to findings by the Special Inspector General for Afghanistan Reconstruction (SIGAR), the leading US oversight authority on reconstruction in Afghanistan. SIGAR’s report seems to suggest that the very groups being targeted by the US through counter-insurgency operations sometimes become the beneficiaries of the federal government through contracted work.

13---Obamacare lies exposed, wsws

HealthCare.gov does not exist to extend affordable coverage to the millions of uninsured, offer life-saving treatments to the poor, or train new doctors and nurses. Its central feature is a requirement, backed up by fines, for people who are not insured through their employers or a government health plan such as Medicare or Medicaid to purchase coverage from a private insurance company. This will automatically expand the insurance industry’s pool of cash-paying customers.
At the same time, Obamacare will drastically reduce government expenditures on health care. It is set to slash $700 billion from the Medicare program for the elderly and disabled over the next decade
       ....The Obama administration has designed a health care system aimed at defrauding the population, stripping tens of millions of Americans of decent coverage and rationing health care along class lines. It is a scheme largely authored by the insurance and health care industry to boost their profits by depriving people of medicines, tests and procedures and lowering the life expectancy of workers.
This is the essence of the Affordable Care Act (ACA), better known as Obamacare. It is a health care counterrevolution posing as a progressive “reform.” Its full enactment will have devastating consequences for the health and the very lives of a large majority of the US population...

Obama was forced to go on national television last week amidst reports that hundreds of thousands of people insured through the individual market have been dropped from coverage by their insurers. These cancellations expose as yet another lie the president’s repeated claim that under Obamacare, “If you like your health plan, you can keep it.”
In the majority of cases, replacement plans offered to these customers are substantially more expensive....

As the World Socialist Web Site correctly stated months before its passage in March of 2010, the Obama administration’s overhaul of the health care system is a “counterrevolution in health care” that is “of a piece with his entire domestic agenda,” aiming to increase social inequality.
The political strategists of the corporate-financial elite are devising schemes, such as Obamacare, aimed at reducing life expectancy for workers. As they see it, advances in medical technology have created the undesirable result of workers living too long in retirement, sapping resources that could go to further enriching the multi-millionaires and billionaires at the top of society..

14---Andrew Huszar: Confessions of a Quantitative Easer, "the largest financial-markets intervention  in world history  only benefited Wall Street,  WSJ
We went on a bond-buying spree that was supposed to help Main Street. Instead, it was a feast for Wall Street

Chairman Ben Bernanke made clear that the Fed's central motivation was to "affect credit conditions for households and businesses": to drive down the cost of credit so that more Americans hurting from the tanking economy could use it to weather the downturn. For this reason, he originally called the initiative "credit easing."

My part of the story began a few months later. Having been at the Fed for seven years, until early 2008, I was working on Wall Street in spring 2009 when I got an unexpected phone call. Would I come back to work on the Fed's trading floor? The job: managing what was at the heart of QE's bond-buying spree—a wild attempt to buy $1.25 trillion in mortgage bonds in 12 months. Incredibly, the Fed was calling to ask if I wanted to quarterback the largest economic stimulus in U.S. history....
 
In its almost 100-year history, the Fed had never bought one mortgage bond. Now my program was buying so many each day through active, unscripted trading that we constantly risked driving bond prices too high and crashing global confidence in key financial markets. We were working feverishly to preserve the impression that the Fed knew what it was doing.
It wasn't long before my old doubts resurfaced. Despite the Fed's rhetoric, my program wasn't helping to make credit any more accessible for the average American. The banks were only issuing fewer and fewer loans. More insidiously, whatever credit they were extending wasn't getting much cheaper. QE may have been driving down the wholesale cost for banks to make loans, but Wall Street was pocketing most of the extra cash.
...

Over five years, its bond purchases have come to more than $4 trillion. Amazingly, in a supposedly free-market nation, QE has become the largest financial-markets intervention by any government in world history.

15---More bad borrowers are getting car loans in the US, making regulators nervous, quartz
http://www.cbsnews.com/8301-505123_162-57577528/is-a-bubble-growing-in-junk-bonds/

16---Bubble Trouble, Testosterone Pit

Junk bond issuance hit an all-time record of $47.6 billion in September, edging out the prior record, set in September last year, of $46.8 billion, according to S&P Capital IQ/LCD. Year to date, issuance amounted to $255 billion, blowing away last year’s volume for this period of $243 billion. The year 2012, already in a bubble, set an all-time record with $346 billion. This year, if the Fed keeps the money flowing and forgets about that taper business, junk bond issuance will beat that record handily.

Junk-bond funds got clobbered in July and August as retail investors briefly opened their eyes and realized what they had on their hands and fled, and they went looking for yield elsewhere, but there was still no yield in reasonable places, and so they held their noses and picked up these reeking junk-bond funds again. Cash inflow doubled over the last week to $3.1 billion, the most in ten weeks.

These retail investors were fired up by the Fed’s refusal to taper even a little bit, giving rise to the hope that it might actually never taper, that this is truly QE Infinity, Wall Street’s wet dream come true – on the theory that the Fed is mortally afraid that any taper would blow over the sky-high financial-markets house of cards it has constructed over the last five years. And the retail cash returned to these junk-bond funds and just about refilled the hole that had been dug during the summer.

“The cost of a high-yield bond on an absolute coupon basis is as low as it’s ever been,” explained Baratta, king of Blackstone’s $53 billion in private equity assets. Even the riskiest companies are selling the riskiest bonds at low yields. The September frenzy hit the upper end too and set a new record: companies sold $145.7 billion in investment-grade bonds in the US. And Baratta complained that valuations “relative to the growth prospects are out of whack right now.”
These “growth prospects” look grim, with corporate revenues barely keeping up with inflation, and with earnings growth, despite all-out financial engineering, getting decimated.

17---Fed Gov says wide range of financial assets may be in bubble stage: "Overheating in the junk bond market might not be a major systemic concern in and of itself, but it might indicate that similar overheating forces were at play in other parts of credit markets, out of our range of vision,” NYT

Mr. Stein said he took the junk bond data, along with similar patterns in other kinds of investments, as potential evidence of a broader trend.
“Overheating in the junk bond market might not be a major systemic concern in and of itself, but it might indicate that similar overheating forces were at play in other parts of credit markets, out of our range of vision,” he said.

We are seeing a fairly significant pattern of reaching-for-yield behavior emerging in corporate credit,” Mr. Stein said in St. Louis. He added, however, “It need not follow that this risk-taking has ominous systemic implications.”
Mr. Stein gave no indication that Fed officials were contemplating any change in their aggressive efforts to hold down interest rates. Rather, he described the signs of overheating as an emerging trend that might require a response if it intensified over the next 18 months.
But the speech nonetheless underscored that the Fed regards investment bubbles, rather than inflation, as the most likely negative consequence of its push to reduce unemployment by stimulating economic growth.
Mr. Stein also challenged the general view among central bankers that excessive speculation was best addressed through targeted regulation like loan underwriting standards, and not broad changes in monetary policy. He urged an “open mind” about the use of higher interest rates and changes in the Fed’s investment portfolio to curtail such speculation.
...

Critics of the Fed’s policies have pointed to the junk bond market as an area where low interest rates are encouraging excessive speculation. Investors are eagerly providing money to companies and countries with low credit ratings, and they are accepting historically low junk bond interest rates in return. Junk bond issuance in the United States set a new annual record last year — by the end of October.
“We must not ignore the possibility that the low-interest rate policy may be creating incentives that lead to future financial imbalances,” Esther L. George, the president of the Federal Reserve Bank of Kansas City, warned in a speech last month. Ms. George cited this same concern about financial destabilization in casting the sole dissenting vote at the most recent meeting of the Fed’s policy-making committee
 
18---THE SUBPRIME FINAL SOLUTION, Burning Platform
 
  • There were 200 million Americans in 1968 and $2 billion of credit card debt outstanding, or $10 per person.
  • By 1980 there were 227 million Americans and $54 billion of credit card debt outstanding, or $238 per person.
  • By 1990 there were 249 million Americans and $230 billion of credit card debt outstanding, or $924 per person.
  • By 2000 there were 281 million Americans and $650 billion of credit card debt outstanding, $2,313 per person.
  • By July of 2008 credit card debt outstanding peaked at $1.022 trillion and the population was 304 million, with credit card debt per person topping out at $3,361 per person.
  • Over the course of 40 years, the population of this country grew by 52%. Credit card debt grew by 51,000%. Credit card debt per person grew by 33,600%. This was a case of credit induced mass hysteria and it continues today. Have the American people benefitted from this enslavement in chains of debt? I’d venture to answer no. Who benefitted? The corporate fascist oligarchy of Wall Street banks, mega-corporations sourcing their crap from Chinese slave labor factories, and politicians in the back pockets of the bankers and corporate CEOs benefitted....

     Since July 2008 credit card debt has declined by $175 billion, with the majority of the decrease from banks writing off bad debt and passing it along to the American taxpayer through their TARP bailout and 0% money from their puppet Bernanke. It bottomed out at $834 billion in April 2011 and has only grown by a miniscule $13 billion in the last 29 months, and only $1.7 billion in the last twelve months. The muppets have refused to cooperate by running up those credit cards. Not having jobs, paying 40% more for health insurance due to Obamacare, and real inflation exceeding 5% on the things they need to live, have caused some hesitation among the delusional masses. Even a government educated, math challenged, iGadget addicted moron realizes their credit card is the only thing standing between them and living in a cardboard box on a street corner....

    Non-revolving debt has increased from $1.65 trillion in July 2008 to $2.2 trillion today, solely due to Obama and his minions doling out subprime auto and student loan debt to anyone that can scratch an X on a loan document.

    If middle class consumers were unwilling to borrow and spend, the oligarchs were going to use their control over the government to dole out billions to subprime borrowers in a final, ultimately futile, attempt to keep this Ponzi scheme going for a while longer. .....

    In 2008 there was $730 billion of student loan debt outstanding, of which the Federal government was responsible for $120 billion. Five short years later there is $1.2 trillion of student loan debt outstanding and the Federal government (aka YOU the taxpayer) is responsible for $716 billion. Using my top notch math skills, I’ve determined that student loan debt has risen by $470 billion, while Federal government issuance of student loan debt has expanded by $600 billion. ...

    While surging light-vehicle sales have been one of the bright spots in the U.S. economy, it’s increasingly being fueled by borrowers with imperfect credit. Such car buyers account for more than 27 percent of loans for new vehicles, the highest proportion since Experian Automotive started tracking the data in 2007. That compares with 25 percent last year and 18 percent in 2009, as lenders pulled back during the recession. Issuance of bonds linked to subprime auto loans soared to $17.2 billion this year, more than double the amount sold during the same period in 2010, according to Harris Trifon, a debt analyst at Deutsche Bank AG. The market for such debt, which peaked at about $20 billion in 2005, was dwarfed by the record $1.2 trillion in mortgage bonds sold that year.
     
    When has packaging subprime loans, getting them rated AAA by a trustworthy ratings agency, and selling them to little old ladies and pension funds, ever caused a problem before? With subprime auto loan issuance accounting for 50% of all car loans and an average loan to value ratio of 114.5%, what could possibly go wrong? Think about that for one minute. The government and Wall Street banks are loaning deadbeats $33,000 of your money to buy a $30,000 car, despite the fact the high school dropout borrower doesn’t have a job and has a history of defaulting on their obligations.
    ...
    Perhaps more than any other factor, easing credit has been the key to the U.S. auto recovery,” Adam Jonas, a New York-based analyst with Morgan Stanley, wrote in a note to investors last month. The rise of subprime lending back to record levels, the lengthening of loan terms and increasing credit losses are some of factors that lead Jonas to say there are “serious warning signs” for automaker’s ability to maintain pricing discipline.

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