Thursday, November 14, 2013

Today's Links

1---QE Whistleblower Warns "We Are Eerily Similar To 2008", zero hedge

Andrew Huszar, Bloomberg interview

2---Warning: Stock Market Margin (Borrowing) Reaches All-Time High , Testosterone Pit

3---The Day The Bubble Became Official, And Everyone Was Happy, Testosterone Pit

Back to the future2...
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.

4---Judge Rakoff Blasts Breuer, Prosecution of Companies Rather than Individuals in Bar Speech
naked capitalism
...
the Great Recession was in material part the product of intentional fraud, the failure to prosecute those responsible must be judged one of the more egregious failures of the criminal justice system in many years.
Rakoff then pointed to the fact that the FCIC and numerous government officials had discussed fraud in connection with the crisis and went further:
While officials of the Department of Justice have been more circumspect in describing the roots of the financial crisis than have the various commissions of inquiry and other government agencies, I have seen nothing to indicate their disagreement with the widespread conclusion that fraud at every level permeated the bubble in mortgage-backed securities. ...

5---Abenomics Fail: Falling growth adds to questions over Abenomics, FT
According to the breakdown of economic activity provided by the Cabinet Office, annualised growth in domestic consumer spending slowed markedly, from an average of 2.8 per cent in the first two quarters to just 0.4 per cent in the third.
Some analysts attributed the cooling to the stock market, which roared to life late last year, making at least some people feel richer, but has been feeble since May.

Foreigners were no help either. The weak yen that has been a byproduct of the looser monetary policy orchestrated by Mr Abe – indeed, some would say its primary product – has benefited big, globe-spanning manufacturers such as Toyota by increasing the yen value of their overseas sales.
But it has done little to increase the actual volume of Japanese exports. That is in part because conditions in some would-be importing countries are weaker – notably in crisis-hit Europe and in China, where growth is falling from its previously sky-high levels. It also reflects the fact that Japanese manufacturers have shifted much of their production abroad.
Even the value of exports dropped in the latest quarter, by 2.4 per cent. The cost of imports, meanwhile, jumped by a much greater amount, 9.2 per cent...
Japan’s less favourable trade position reduced its gross domestic product growth by 1.8 percentage points last quarter. Corporate capital investment was also lacklustre, increasing just 0.7 per cent, a reflection of companies’ continued reluctance to add to their domestic production capacity.
In contrast, the biggest contributors to growth, at 1.4 percentage points each, were government spending and growth in private-sector inventories – stuff that companies made but did not sell....

“If there is no acceleration in corporate spending in both capex and labour costs, we think it looks nearly impossible to sustain the solid growth beyond the consumption tax rate hike,” says Masamichi Adachi, of JPMorgan
 
 
The big mystery on Wall Street today is whether Timothy Massad will be an aggressive chairman of the Commodity Futures Trading Commission, a key financial watchdog. It really doesn't matter who runs it, though: The CFTC is so broke, even Elizabeth Warren couldn't do all that much with it.
 
 
Uh huh. And the problem is...?
 
8---The Looming Bond Fund Crash , index universe
 
The risk of large-scale bond fund runs remains. “I know first-hand that not only the buy-side but the sell-side is scared,” says Larry Tabb....
There’s a dangerous and increasing imbalance in the markets: a rising pile of debt held by funds promising instantaneous liquidity; and a bridge for those seeking to exit their positions that is capable of carrying less and less weight.
It’s hard to argue against the measures taken post-crisis to make banks safer. But the imbalance between bond fund inventory and dealer capacity is getting steadily worse. For the time being the cracks are being papered over by government intervention in the form of near-zero interest rates and quantitative easing, which keep the yield hunt going. Experience, though, tells us that when a market accident is waiting to happen it eventually does....

What concerns dealers and asset managers alike is the fact that an interest rate rise causes investors to liquidate fixed income funds…causing a flood of bonds to hit the market at a time when there is little dealer liquidity to absorb the shock.”....
 
But the infrastructure supporting bond trading has weakened. The banks that act as intermediaries between the bond market’s buyers and sellers have seen their holdings drop from $286 billion to $69 billion—by 76 percent—to levels last seen in 2002....

Lehman’s share price declined steadily over the two-year period leading up to the company’s insolvency as investors factored in its deteriorating prospects: but Lehman bondholders didn’t face up to the worst until right at the end, at which point bond prices went from 70 to near-zero in an instant.
This kind of behaviour places an automatic strain on the relationship between bond funds—which promise instant liquidity and continuous pricing—and the underlying bond asset class.
...
“The low levels of dealer capital would probably be fine if all bond inventories were held by individual investors, who are less likely to liquidate their holdings in the event of a rate rise,” say Tabb and Rhode.

“However, retail investors’ bond holdings are increasingly sitting in mutual funds and ETFs. Packaged fixed income products such as ETFs and mutual funds are perceived to be much more liquid and easy to sell than the bonds themselves. However, the truth is that redemptions will force bond managers to sell the underlying bonds….What concerns dealers and asset managers alike is the fact that an interest rate rise causes investors to liquidate fixed income funds…causing a flood of bonds to hit the market at a time when there is little dealer liquidity to absorb the shock.”

9--(archive) Defaults Account for Most of Pared Down Debt, WSJ

.08% — The annual rate at which U.S. consumers have pared down their debts since mid-2008, not counting defaults.
U.S. consumers might not be quite as virtuous as they seem.
The sharp decline in U.S. household debt over the past couple years has conjured up images of people across the country tightening their belts in order to pay down their mortgages and credit-card balances. A closer look, though, suggests a different picture: Some are defaulting, while the rest aren’t making much of a dent in their debts at all.

10---Attack on Junk-Loans Risks LBO Profits as U.S. Cracks Down, Bloomberg

Fees for bankers and payouts for leveraged-buyout funds are at risk of being crimped as federal regulators crack down on underwriting standards in the market for high-risk, high-yield loans.
The government, in an annual review of bank credit, looked at a $429 billion sample of leveraged loans and found 42 percent were “criticized,” or classified as having a deficiency that might lead to a loss. Starting in September, it sent letters demanding banks draw up plans to improve the quality of their loans and a warning that regulators will pay close attention to high-risk loan performance in stress tests. ...

We’re looking to deter the origination of criticized or below-standard loans,” Martin Pfinsgraff, senior deputy comptroller for large bank supervision at the Office of the Comptroller of the Currency, said in an interview last week. Regulators are “trying to say to the industry, ‘Look, there are certain standards that if you dive below, we will criticize.’”

The attempt to curb froth in the leveraged-loan market will test whether regulators have the tools to stop asset-price bubbles from emerging more than five years after the financial crisis triggered the worst recession since the Great Depression. Federal Reserve efforts to spur growth with near-zero interest rates and asset purchases are causing investors to rush into higher-yielding debt, undeterred by declining credit quality.

“You got a higher growth rate in high-risk assets basically because we have a rate environment that enables that,” Pfinsgraff said.

Fee Boom

The crackdown threatens to hamper a boom in fees for Wall Street. Debt-underwriting revenue at eight of the largest U.S. and European investment banks, including JPMorgan Chase & Co. (JPM) and Deutsche Bank AG, rose 19 percent in the first nine months of this year to about $14.3 billion, the most since the credit crisis, according to data compiled by Bloomberg. Much of the increase this year has been driven by leveraged finance, industry analytics firm Coalition Ltd. said in an August report.
“It would hurt the banks if you put a crimp in their business,” said Martin Fridson, chief executive officer of FridsonVision LLC, a New York research firm specializing in high-yield debt. “Leverage is getting up there,” which is a “warning sign.”

Tighter credit could also curb profits for private-equity firms, if they are forced to put up more cash for their takeovers or are restricted from piling additional debt onto their portfolio companies for purposes such as paying themselves dividends. The amount of leveraged buyouts announced this year has climbed to $118.1 billion from $91.4 billion in the same period last year, according to data compiled by Bloomberg.

11--SocGen: The Housing Market Will See A Handover From Investors To Homebuyers In The Final Stage Of The Recovery, bus insider

Utter nonsense
12---QE does not increase inflation, Bloomberg

Federal Reserve Chairman Ben S. Bernanke and his central-bank counterparts are trying to avert the deflationary danger by pumping up their economies with lower interest rates and monetary stimulus. They have bet the run-up in stock and home prices they’ve engineered would boost consumer and corporate confidence and spur faster growth and higher inflation. Now they’re having to maintain or intensify their aid -- running the risk those efforts do more harm than good by boosting equity and property prices to unsustainable levels.
“You have a wall of liquidity” that’s “leading to asset inflation and eventually to bubbles,” Nouriel Roubini, chairman of Roubini Global Economics LLC, said Nov. 7 on Bloomberg Television’s “Street Smart.” ...

The stimulus is having less effect on economic growth, with continued weakness pressuring inflation. The International Monetary Fund cut its global outlook last month to 2.9 percent this year and 3.6 percent in 2014. Both are down 0.2 percentage point from the July forecast.
The easy money lacks punch because the “pipes” that carry stimulus from financial markets to the rest of the economy are “clogged,” Mohamed El-Erian, Pimco’s chief executive officer, said in an interview.

13---Americans Are Shedding Debt, Will They Spend?, Mark Whitehouse, Bloomberg

The gigantic debt burden left over from the financial crisis has been one of the biggest obstacles to economic recovery. The latest data from the Federal Reserve suggest that U.S. consumers might finally be getting out from under it.
The aggregate assets of U.S. households stood at $88.4 trillion as of June 30, up from $69.7 trillion in the darkest days of 2009, according to the Fed's financial accounts report. Those assets are worth 6.5 times what households -- a category that includes hedge funds, private equity firms and nonprofit organizations -- owe on mortgages, credit cards and other forms of debt. The ratio of assets to liabilities is the highest since early 2002.

The rebound in the household balance sheet comes thanks to a combination of debt relief, prudence and luck. Rising stock prices and a recovering housing market made the largest contributions to the increase in assets. On the liability side, mortgage debt has fallen some 12 percent from its peak in early 2008, as banks have written off bad loans and some borrowers have paid down balances.

Whether U.S. consumers -- whose expenditures account for about two thirds of the country's gross domestic product -- will feel good enough to go out and spend again, though, remains to be seen. Growth in consumer spending has so far been much slower in this recovery than in previous ones. The job market has been horrible, and given the market gyrations of the past decade or so, consumers might see financial wealth as more ephemeral than they have in the past.

14---75 years since the Kristallnacht pogrom in Nazi Germany, wsws

Starting on the night of November 9, 1938, a total of 1,400 synagogues were set ablaze across Germany. Thousands of Jewish businesses were destroyed, homes looted, people attacked and cemeteries desecrated. Approximately 30,000 Jews were locked up in concentration camps and around 1,500 murdered.

The November pogroms did not mark the beginning of the persecution of the Jews in Nazi Germany—which began immediately after the appointment of Adolf Hitler as chancellor in January 1933—but the transition from discrimination against Jewish citizens to their systematic persecution. Three years later it culminated in their organized extermination...

At this point in time, the German population had been subjected to systematic anti-Semitic propaganda for five and a half years. In April 1933, the Nazis had organized the first nationwide boycott of Jewish businesses. In the same month, new laws were passed governing the admission of career civil servants and lawyers. Thirty-seven thousand Jews were deprived of their professional existence. Two years later the Nuremberg race laws degraded the Jews to second-class citizens. The laws forbade marriage and sexual relations between Jews and non-Jews, deprived Jews of their civil rights and excluded them from many professions.

Anyone resisting could reckon with denunciation and persecution. Parties and organizations that could organize resistance no longer existed. The only two organizations that were not completely regimented, the Protestant and Catholic Churches, either said nothing or supported the pogroms....

, anti-Semitism—like any form of racism up to this day—aimed to drive a wedge between the working class and politically backward layers of the middle classes. A master of this technique was the mayor of Vienna, Karl Lueger, one of Hitler’s most important political role models. Lueger used a combination of anti-Semitism and anti-capitalist rhetoric to gain a large following in the petty bourgeoisie and lead the Austrian capital from 1897 to 1910.

Hitler’s own anti-Semitism was coined by his hatred of the socialist labour movement. The historian Konrad Heiden has pointed out that “not Rothschild, the capitalist, but rather Karl Marx, the socialist” inspired Hitler’s anti-Semitism. Hitler did not despise the labour movement because it was led by Jews, Heiden noted, rather he despised the Jews because they led the labour movement.
The destruction of the organized labour movement was in turn a prerequisite for unleashing unmitigated anti-Semitism. In contrast to the bourgeois parties, the Marxist workers’ movement had always vigorously opposed anti-Semitism. The fate of the Jews was inextricably linked to its fate

15---Yikes! Need a corporate loan? Forget your bank - tap the shadow banking system instead , sober look

It doesn't mean however that credit to companies is not available. In fact multiple lenders have been stepping into banks' domain. BDCs, CLOs, credit/mezzanine funds, bond/loan retail funds, etc. have been providing credit to businesses in the US. That transformation to non-bank lenders over the past decade has been quite spectacular - especially in the middle market.

Source: Aranca (click to enlarge)

When you hear all the pundits talk about "shadow banking", they usually miss the fact that most corporate loans now come from outside the banking system. So the next time your medium-sized business needs some long-term financing, you may get a better answer from your not-so-local BDC than your local bank - particularly while credit markets remain hot.

16---Has QE Stimulated Credit? repeat for article, naked capitalism

17---Debt, deleveraging and the fictitious recovery, Burning Platform

18---Not quite "bubble territory" yet, prag cap

What is a “bubble”?  I define a bubble as follows:
“A bubble is an environment in which the market price of an asset has deviated from the underlying asset’s fundamentals to an extent that renders the current market price unstable relative to the underlying asset’s ability to deliver the expected result.”

19---QE has not pushed up inflation anywhere, prag cap

After several years of asset purchases by central banks, and in other ways, extremely easy monetary policy, general price levels have not shown the kind of inflation that many observers have feared. In fact, the opposite is a more potent force presently.
This Great Graphic, composed on Bloomberg shows Japanese (white), US, (yellow) and euro zone (green) inflation.
inflation
The BOJ is pursuing aggressive QE (so aggressive it is called QQE) to push inflation higher. Thus far, the increase in price pressures is a result of food and energy prices. The ECB surprised most observers with a 25 bp rate cut last week to address the disinflation, not to weaken the euro, we were told.

On Friday, the euro area will confirm the Oct inflation, likely in line with the preliminary 0.7% Japan’s Sept national CPI was 1.1% and the US Sept CPI was 1.2%. The BOJ is most adamant about pushing inflation higher. US inflation is nearly as low as Japan’s, but many expect the Fed to begin tapering as early as next month.

The euro area has the lowest inflation of the three and the 25 bp rate cut is unlikely to have much impact on arresting the disinflationary forces. The exchange rate is one channel that monetary policy can be transmitted and coming into today’s session, on a trade-weighted basis, the euro was almost 1% firmer than it was last Thursday after the ECB delivered the rate cut

20---Crackpot economist says Gov should guarantee privately-issued mortgages, (Right), WSJ

The government should provide an explicit federal guarantee of certain mortgage-backed securities in order to ensure mortgages are available “at reasonable rates in good and bad economic times,” a top White House economist said in a speech Wednesday that sketched out in greater detail the Obama administration’s aims of any replacement of Fannie Mae and Freddie Mac.
Private investors should stand at the center of a revamped housing-finance market because private sector competition can provide better prices and services for consumers, said James Stock, a member of the White House Council of Economic Advisers.

Mr. Stock said that any guarantees going forward should be explicit and that the government should charge an actuarially fair price that insurance. Most losses should be absorbed first by private investors, but during periods of catastrophic losses, government insurance could be triggered. Also, the amount of private capital needed to stand in front of those guarantees could be lowered in order to keep mortgage markets functioning and to minimize potential economic shocks.


21---U.S. Homeownership Rate Fell in Postrecession Period, WSJ

22---US Blocks Britain’s Release of Iraq War Report, antiwar


According to reports from the inquiry, Blair and Bush began plotting the Iraq War just weeks after Bush’s inauguration in 2001, and at the time the British government decided it was “illegal,” though they eventually launched the war anyhow in 2003
23---Reject blackmail by the IAM, Boeing and Democrats!, wsws

Working behind the backs of workers for months, the IAM—at both the International and District 751 level—concocted a deal with Boeing that strips workers of the right to strike, ends company-paid pensions and imposes higher health costs and inferior medical plans on workers. The deal would condemn the next generation to poverty-level wages and impose a de facto 10 percent wage cut on current workers given inflation projections until 2024.

Boeing has threatened to move production of its new 777X airliner from the Everett factory to South Carolina unless workers accept these draconian demands. In an effort to bribe workers into committing what amounts to suicide, the company and the IAM are dangling a $10,000 signing bonus in front of them.

Top management and the IAM have not even used the pretext that such concessions are necessary to rescue the company from difficult economic conditions. On the contrary, CEO Jim McNerny is boasting to investors that the company is highly profitable—with third-quarter earnings up 12 percent to $2.2 billion—and stocks have hit a record high. McNerny has certainly reaped the benefits, pocketing $27.5 million in salary and incentive pay last year, up 20 percent from 2011.
In addition to attacking workers, the company is extorting $9 billion in tax cuts from the state of Washington with the help of Governor Jay Inslee and the state legislature.

24---QM rule creates more uncertainty about borrowers ability to repay loan, DS News

Fitch will take the following into consideration for ratings: compliance procedures, due diligence results, labeling regarding QM versus non-QM, and “a confirmation of satisfactory reps and warranties in the RMBS transaction relating to compliance with the rule.”
Fitch believes higher-priced QM loans may be open to more litigation risk and longer liquidation timelines than other QM loans, which would increase loss severity on these loans. While they may be open to more litigation, Fitch “expects actual incidence of litigation may be limited.”

In part, this is due to the fact that these claims may be difficult to prove. The borrower will need to prove that “based on the information that the creditor was aware of at the time of consummation of the loan, the borrower was not left with sufficient residual income or assets to meet basic living expenses,” Fitch said.
On the other hand, non-QM loans will have greater litigation risk, despite having the same cap on damages as higher-priced QM loans because they have a lower burden of proof, according to Fitch.

25---Experts mull over housing bubble expectations, Housingwire

more nonsense

26---Foreclosure filings climb up a shocking 2%, housingwire

Foreclosure filings crept up 2% in the most recent weekly survey, but still declined 28% from year ago levels, RealtyTrac reported Thursday.
In all, the data firm recorded 133,919 filings in October.
For the 16th month in a row, judicial foreclosure auctions increased from year ago levels, with 30,023 foreclosure auctions nationwide in October, up 10% from the prior month and up 7% from last year.
Overall, there were 58,939 properties that started the foreclosure process for the first time in October, rising 2% from September, but down 34% from last year.
This marks the 15th consecutive month where foreclosure starts have declined on an annual basis, the data firm said


"Lenders are likely moving these properties more rapidly to the public auction given that there is strong demand from institutional buy-to-rent investors at the auction and that rising home prices mean more of the loan losses can be recouped, either by selling to an investor at the auction or by repossessing the property and reselling as bank owned," he added.  
Foreclosure starts were up from the previous month in 22 states, including Colorado, Florida and Illinois, which saw rises of 124%, 36% and 30%, respectively.
Meanwhile, there were a total of 37,775 bank repossessions nationwide for the month, a 1% drop from September and 29% lower than year ago levels: the 11th consecutive month where bank repossessions have decreased annually.

(Let's see: 30,023 foreclosure auctions but a total of 37,775 bank repossessions nationwide for the month..HA...more repos than auctions!)

27---Judicial Foreclosure Auctions Elevate Foreclosure Activity , DS News

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