Sunday, September 29, 2013

Today's Links

1---Consumer sentiment falls, CNBC

US consumer sentiment slid in September to its lowest in five months as consumers saw higher interest rates and sluggish economic growth ahead, a survey released on Friday showed.
The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment slipped to 77.5 in September from 82.1 in August — the lowest final reading since April

2--Housing Bubble Alert Wall Street Examiner

Earlier this month, electronic real estate broker Redfin released current contract data for August for the 19 US metro markets it covers. This includes all contracts reported to the regional MLS’s for those markets. The 19 markets are mostly in the Northeast and on the West Coast, with only four markets in the US interior hinterlands, but it’s broad enough to give us a reasonably good idea of where the market stood and was headed a month ago based on contracts signed in August.
It seems abundantly clear from that data that the US housing market is in a bubble and is a lot hotter than Case Shiller says. According to Redfin, home prices per square foot were down 0.4% month to month but were 17.7% higher than August 2012 in those markets...

Dataquick shows that as of September 26, the latest 4 weeks of reported closed sales rose 16.2% in price over the prior year period.  That is the same as the gain of 16.2% as of August 22, and better than the 15.9% gain as of August 29. The rate of price gain is steady. The total gain since the cycle low in March 2012 was 36.1%.
Dataquick reported sales volume of 256,733 properties as of the 30 days ended September 26, for an annual increase in sales volume of 17%, a minimal slowing from the 18.3% reported a month earlier....

Restricted supply appears to be the primary driver of the house price bubble. At some point, higher prices should bring forth a torrent of supply, but part of the problem is that ZIRP also  restricts supply because it renders too much of a penalty for cashing out equity. Millions of baby boomers reaching retirement age with substantial equity in their properties either opt not to sell, or if they do sell, to remain in the market as purchasers rather than renting and investing cash elsewhere. This is one reason why the percentage of all cash sales remains so high. Boomers are essentially swapping properties with one another rather than buying bank CDs and moving to Costa Rica. ZIRP not only inflates demand, it restricts supply.

This supply constraint will only be alleviated if interest rates are allowed to rise to an attractive enough level to motivate property owners to cash out. Otherwise older owners will continue to opt to hold property rather than liquidate.  ZIRP eliminates the incentive for them to do so.

3---The dirty secret of the housing market boom: Insiders are riding the low interest rate and low inventory trend. What happens when inventory and interest rates rise?, Dr Housing Bubble

4---Abenomics speeds corporate investment, but not in Japan, Reuters

Japanese Prime Minister Shinzo Abe got an early sign of how his blueprint to revive Japan's industrial vim and economic vigor was working when two of his country's biggest car makers unveiled $900 million worth of investments to boost production.
There was one drawback: the new assembly plants and expanded factories announced by Mazda Motor Corp (7261.T) and Honda Motor Co Ltd (7267.T) are not in Japan, but more than 2,000 miles away, in Thailand.

Since taking office last December, Abe's stimulus efforts have barely dented a slide in private-sector investment at home, but they have done wonders for accelerating Japanese investment elsewhere in Asia.
Capital expenditures in Japan fell 4 percent in the first six months of this year, compared with the same period of 2012. Japanese investment in Asia, meanwhile, rose 22 percent, according to the Japan External Trade Organization, or Jetro.

5---More people express uncertainty in chance to achieve the American Dream, WA Post

My dream has gone out the window,” said Edwards, 56, a former stay-at-home mom who reentered the workforce doing inventory at a firm near her home in Martinsburg, W.Va.

It’s increasingly difficult to make ends meet. Almost two-thirds of people express concerns about covering their family’s basic living expenses, compared with less than half the public four decades ago. One in three say their money worries are with them all or most of the time, and the number who say they worry “all the time” about paying the bills has doubled.....


Fear of being thrown out of work is greater than it has been in polls taken since the 1970s. More than six in 10 workers worry they will lose their jobs because of the economy. Today’s worries exceed those in 1975, at the tail end of a harsh recession marked by high unemployment and high inflation. Less than half of Americans expect to move up in their economic class over the next few years. Slightly more predict they will stay in place — or slip down a rung.

●As they struggle to keep up, a majority of people question a basic precept of the American Dream: that the next generation will enjoy a higher standard of living. While slightly more than half of respondents, 54 percent, say their standard of living is better than that of their parents, just 39 percent believe their children will have a better life than they have...

Almost eight in 10 Americans say they worry they won’t have enough saved for retirement, concerns that peak among those approaching age 65....

6---Why Have Americans' Income Expectations Declined So Sharply, Fed

In summary, the pessimism of households about their future income is deep and broad based. The large and persistent decline in income expectations in the aggregate data is evident among several different types of households. This analysis also shows that adverse experiences of households can account for half of the net decline in income expectations since 2007. Given the only modest improvement in household finances and the labor market seen in the aggregate, it is perhaps not surprising that income expectations remain downbeat. Moreover, the large, unexplained shock to income expectations might suggest a permanent change in households' views-a phenomenon that would continue to weigh against a recovery in consumer spending. Or the unwinding of this excess pessimism might provide an extra boost to spending as the economy picks up further. This article highlights some recent work on income expectations-an area of ongoing study.

7---Companies Holding Lots More Cash, WSJ

21.4%: Share of corporate cash holdings held in, well, cash.
 
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.

8---QE and the epic credit bubble, prag cap

9---More Americans Worried About Their Finances, WSJ

Americans aren’t too happy about their finances.
About 42% of Americans feel negative about their income and 51% feel negative about their savings, according to a new survey by CEB, a business advisory firm. Nearly 40% are discouraged about their progress toward financial goals.

The culprit? The erosion of real income, said CEB managing director Peter Aykens. Stagnant wages translate to weak spending power, particularly as Americans are battling high – and rising – costs for rent, groceries, gas and other basic necessities, according to the group’s latest Consumer Financial Monitor survey.

People aged 30-46 who are less affluent are feeling the most financial pressure, the report said.
That group of Americans said they’re feeling worse about their paychecks now than they were earlier this year. Only 24% felt positive about income in the third quarter, down from 38% in the first three months of the year. Confidence about paying off debt and satisfaction with credit and borrowing products also declined in the time period.
The overall negative feelings could directly influence how Americans feel about financial-services providers, even if those institutions haven’t done anything wrong, the group warned. That could spur consumers to move bank accounts or close credit cards.

The respondents that felt more positive about their incomes in the third quarter than they did in the first were young people (ages 18-29) with more than $100,000 in investable assets, and older middle-income earners (ages 47-65) with fewer assets.
The survey, which started in 2011, measures and tracks the financial sentiments and activities of consumers in 24 countries

10---QE distortions from misunderstanding?, Prag cap

 I didn’t actually say that I thought credit markets were in a bubble and if that’s the message some people got then let me be clear that I have no idea.  What I was trying to say was that QE can cause market distortions that might not be healthy and that QE is so widely misunderstood that people tend to react irrationally to it.
Personally, I think the evidence is pretty cut and dry that QE has distorting elements.  Hell, even Brian Sack, who ran the SOMA desk said one of the main goals of QE was to “keep asset prices higher than they otherwise would be”.  Do we need more confirmation that QE is actually designed to distort markets?  Anyone who doesn’t think QE is distorting the market is either not paying attention or still doesn’t understand how it works (thereby contributing to the distortion!).  Now, that doesn’t mean QE is causing bubbles everywhere or that there are even any bubbles at present, but I find it rather disturbing how some people approach QE in such a blase manner.  There are real potential risks (and benefits) to this program.  And we shouldn’t downplay them without looking at what the program has actually done and what it is intended to do and how that might influence the future economic environment

11---The class issues in the US budget crisis, wsws

What is the budget crisis really about? The threat to shut down the government is, in the first instance, yet another attempt to impose massively unpopular spending cuts by whipping up a crisis atmosphere...

The Affordable Care Act lays the groundwork for corporations and local governments to shed their insurance coverage for employees, offloading their workers onto the newly established health care exchanges, where they will be required to purchase private insurance. Today, Obama administration officials are meeting with Detroit’s emergency manager, Kevyn Orr. Along with the gutting of city workers’ pensions, Orr is proposing to eliminate health care benefits for retirees and shift them onto the exchanges or, if they are over 65, onto Medicare.

The Affordable Care Act is essentially a Democratic Party appropriation of health care “vouchers,” which Republicans have championed for decades as a means of undermining employer-provided health coverage and privatizing Medicare, the government-run program for seniors. Under Obama and the Democrats, this reactionary policy is presented as a “progressive” social reform in an attempt to fool the people and provide political cover for the trade unions and liberal and pseudo-left organizations that orbit around the Democratic Party to back it.

The entire budget “debate” takes place amid record corporate profits, soaring inequality, and a booming stock market fueled by $85 billion per month pumped into the financial system by the Federal Reserve.
The fact that under conditions of mass unemployment, growing poverty and falling wages the conflict between various sections of the political establishment is over how quickly to implement measures that will throw millions more into poverty says a great deal about the character of the US political system.

Friday, September 27, 2013

Today's Links

1---Blackstone: We're in an 'epic credit bubble', CNBC

One of the world's largest investment firms believes the financial system is overly leveraged.
"We are in the middle of an epic credit bubble, in my opinion, the likes of which I haven't seen in my career in private equity," Joseph Baratta, The Blackstone Group's global head of private equity, said Thursday night at the Dow Jones Private Equity Analyst Conference in New York City. "The cost of a high yield bond on an absolute coupon basis is as low as it's ever been."

Baratta said Blackstone is "bullish" on the U.S. economy, but the "valuations we have to pay relative to the growth prospects are out of whack right now."
Baratta said the U.S. still has "clear headwinds" and is "range bound" between 1 percent and 3 percent economic growth.

2---HSBC still laundering money for terrorist groups, says whistleblower Everett Stern, Ian Fraser

In the video interview above, former HSBC anti-money laundering compliance officer, Everett Stern, frankly describes the criminal methods used by HSBC to launder money for terrorist groups including Hamas and Hezbollah as well as for drug cartels and other criminals. Although the bank paid a $1.9 billion penalty as part of a record-breaking money laundering settlement with the U.S. authorities in December 2012, Stern claims the London-headquartered bank is still laundering money with impunity and that the much vaunted “anti-money-laundering compliance team” it put in place to assuage US regulators as part of last year’s settlement is “a sham”. Stern, unfazed by HSBC’s legal bullying, adds that people started taking him more seriously


3--Walmart Stock Slides After Report Retailer Is Cutting Orders,  HP

4--Americans Are Shedding Debt, Will They Spend?, WSJ

homeowners still have little equity in their properties, even after the recent rise in house prices. On average, equity as a share of home values stood at 49.8 percent as of June 30, up from a low of 36.7 in early 2009 but still well below the 10-year pre-crisis average of 58.3 percent. According to data provider CoreLogic, 7.1 million homes still had negative equity in the second quarter of 2013, meaning their owners owed more on mortgages than the houses were worth. If those people have been responsible enough to keep paying their mortgages, they'll probably channel any added income toward paying off debts rather than going to the mall.

More broadly, the country's finances leave much to be desired. Total credit to the private sector -- that is, to households and businesses -- stood at 156 percent of gross domestic product as of June 30. Research published by the International Monetary Fund suggests that private credit becomes a drag on economic performance when it exceeds 100 percent of GDP, because the level of debt makes the economy more vulnerable to crises. Interestingly, the U.S. crossed the 100 percent threshold in 1984, the year the government undertook what was then its largest bank bailout ever -- that of the Continental Illinois Bank and Trust Company.

5---Fixed mortgage rates fall to a nine-week low, HW
QE3 continuation caused the drop

6---Pending home sales fall 1.6 percent in August, CNBC

7---Smoke and Mirrors: The Bogus Flow of Funds Q2 Report Shows $3 Trillion in Addtional Net Household Worth Which Doesn't Exist, economic populist

8---Using the Tax Code as a Weapon, economic populist
The ultra-wealthy uses the tax code as a weapon in their class-war against the poor by paying less than their fair share of taxes, when in a progressive tax system, the most wealthy are supposed to pay a greater percentage of their incomes --- because they are more able to contribute more, which benefits the most.

For almost a century, starting with capital gains* in the Revenue Act of 1921 (near the end of the Gilded Age), the top 1% has always received most of the tax breaks; and that's because they have the means and the connections to lobby members of Congress for special tax provisions.
* The top 1% earns most of their wealth with investments in stocks. The top 10% holds about 80 percent of all stock market wealth (The stock markets have over doubled since March 2009). Those who derive income from stocks pays a capital gains tax on realized gains, just as CEOs who earned stock options as "incentive pay". After one year they pay a 23.8 percent tax rate for federal taxes, less than the top marginal rate of 39.6 percent for regular wages --- and this income is not subjected to any Social Security taxes. In 1977 the capital gains tax rate was 40 percent. Changes in the tax law that reduced the federal tax rate on capital gains income is by far the largest contributor to rising income inequality in the United States.

9---Fed’s George: Amount of Taper Less Important Than Clarity of Approach, WSJ

10---Inflation Remains Far From Fed Target, WSJ

Inflation in August remained far away from the Federal Reserve’s target, a factor that could make central bankers even more hesitant to pare back their support for the economy.
The Fed’s preferred inflation gauge, the price index personal consumption expenditures, advanced 1.2% in August from a year earlier, the Commerce Department said Friday. That was slower than July’s 1.3% annual increase and marks the first time year-over-year inflation eased since April.
Excluding volatile food and energy prices, “core” inflation also advanced just 1.2% from a year earlier. That represents a slight pickup from July’s year-over-year reading.

Inflation sitting so far below the Fed’s 2% target may make it difficult for the Fed to slow its bond purchases from its $85 billion monthly pace. The latest figure is the final one the Fed will have before its next policy meeting starts in late October. Some Fed officials say the Fed should maintain its support for the economy at its current level until inflation picks up.

Inflation remaining at a low pace for years would also complicate an eventual next step — increasing short-term interest rates later this decade. “We should be very reluctant to raise rates if inflation remains persistently below target, and that’s one of the reasons that I think we can be very patient in raising the federal funds rate,” Fed Chairman Ben Bernanke said at a press conference earlier this month.

Fed officials forecast that inflation won’t return to near their 2% target until 2015 or 2016, according to projections released this month. However, 15 of 17 participants on the central bank’s policy committee project the Fed will raise short-term interest rates no later than 2015.

11---Japan: Ending deflation? Don't bet on it, WSJ

When energy and food are excluded from core CPI – giving “core core CPI” – prices fell for the 56th straight month in August. Economists say that getting prices of everyday expenses like rent and karaoke to rise requires stimulating demand from consumers through higher wages – an unlikely prospect with Japanese companies trying to cut costs instead.
The government has pressed companies to raise wages, but politicians acknowledge there’s little they can do.
“We are a democratic country, so we cannot compel companies” to offer raises, Economy Minister Akira Amari said Friday.  But he didn’t seem to think further price rises were a lost cause.
The rise in CPI indicates “the economy is in the process of exiting deflation,” he said after the data release.

12---The Return of Insider Attacks in Afghanistan, antiwar
           Second Strike of the Week Kills One US Soldier

13---Will the Fear Trade Bubble Up?, John Hussman, prag cap

14---QE and the “Epic Credit Bubble”, prag cap

15---The Wall Street Takeover, Part 2, baseline scenario

16---The class issues in the US budget crisis, wsws

The Affordable Care Act lays the groundwork for corporations and local governments to shed their insurance coverage for employees, offloading their workers onto the newly established health care exchanges, where they will be required to purchase private insurance. Today, Obama administration officials are meeting with Detroit’s emergency manager, Kevyn Orr. Along with the gutting of city workers’ pensions, Orr is proposing to eliminate health care benefits for retirees and shift them onto the exchanges or, if they are over 65, onto Medicare.

The Affordable Care Act is essentially a Democratic Party appropriation of health care “vouchers,” which Republicans have championed for decades as a means of undermining employer-provided health coverage and privatizing Medicare, the government-run program for seniors. Under Obama and the Democrats, this reactionary policy is presented as a “progressive” social reform in an attempt to fool the people and provide political cover for the trade unions and liberal and pseudo-left organizations that orbit around the Democratic Party to back it.

The entire budget “debate” takes place amid record corporate profits, soaring inequality, and a booming stock market fueled by $85 billion per month pumped into the financial system by the Federal Reserve.
The fact that under conditions of mass unemployment, growing poverty and falling wages the conflict between various sections of the political establishment is over how quickly to implement measures that will throw millions more into poverty says a great deal about the character of the US political system.

Thursday, September 26, 2013

Today's Links

1---The Party's Over?  Chris Whalen

... the guidance from all of the big banks is decidedly negative for Q3 because of the prospective decline in revenue and transaction volumes in mortgages.  ...
A lot of analysts want to believe that the relatively modest rise in interest rates since the bottom last summer is the culprit in terms of falling mortgage loan volumes, but my view is that three factors – declining affordability, a stagnant job market and flat to down consumer income – are the structural factors behind the anemic demand for mortgage loans, particularly mortgages for home purchases...

the total retained portfolio of real estate loans held by US banks has dropped about 20% since 2007, from ~ $5 trillion to $4 trillion today...

when you consider that the ex-REO gain in Case-Shiller is about half of that 12% figure YOY and that bank credit underlying the housing market has been shrinking all the while, how does that make you feel about the future prospects for home price appreciation (HPA)?  Hold that thought. 
In terms of industry revenue and earnings, the general is more important than the particular.  For example, the increase in Q2 2013 earnings was largely driven by increases in non-interest income and reserve releases. Trading income also spiked. There is not a lot of organic revenue growth in the US banking industry today.
...

 In Q3, however, the sharp drop in mortgage volumes is going to upset the carefully scripted ballet that has kept large bank earnings within an acceptable range for the Sell Side analyst and media communities.  
Given that mortgage origination and sale has been the dominant revenue line item for many of the largest banks over the past ten years, you would think that the financial media would be all over this story....

So when we actually start the Q3 earnings cycle for financials, watch for the word “surprise” in a lot of news reports and analyst opinions

2---Wal-Mart customers clobbered by  “recovery, Testosterone Pit

Now a new email leaked out. An ordering manager at headquarters told a supplier that they were “looking at reducing inventory for Q3 and Q4.” The supplier, who’d leaked the email to Bloomberg and insisted on remaining anonymous “to protect his relationship with the company,” said that other Wal-Mart suppliers had also received messages of an order pullback. Wal-Mart was cutting orders across the range, he said, including general merchandise and apparel.

Wal-Mart apparently had underestimated just how much its customer base had gotten clobbered by this economic “recovery” that the Fed had so wisely engineered with Wall Street. As these folks are trying to make ends meet by watching what they’re spending, merchandise has piled up at Wal-Mart stores across the country, and ballooned 6.9% in the second quarter, while sales grew an anemic 2%, in line with inflation. But Wal-Mart had opened a bunch of new stores, and on a same-store basis, sales actually fell 0.3%.

“We are managing our inventory appropriately,” David Tovar, a Wal-Mart spokesman, told Bloomberg to assuage frazzled investors who’d started dumping the stock the moment the email surfaced. “We feel good about our inventory position,” he said, possibly one eye on a ShopperTrak report that forecast retail sales growth for the holiday selling season of only 2.4%, barely at the rate of inflation and nothing more. It would be the worst performance since 2009.

3--Richard Koo: The price of QE, Bus Insider

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."

Now that it's here, though, Koo writes that the Fed is facing the true cost of QE:
Given that this would never have been a problem if the central bank had not engaged in quantitative easing, I think the US is now facing the real cost of its policy decision.
Had the Fed not implemented QE, long-term rates would not have risen so early in the rebound, and the economic recovery would have proceeded smoothly. Now, any talk of ending QE pushes long-term rates higher and throws cold water on the economy, making it more difficult to discontinue the policy.
That raises the possibility that by buying longer-term securities the central banks of the US, the UK and Japan have placed themselves in a QE “trap” of their own making and will be unable to escape for many years to come. I have previously described QE as a policy that is easy to begin and hard—even scary— to end. The recent drama over tapering signals the start of the less-pleasant second part.

4--Rising Rates Seen Squeezing Swaps Income at Biggest Banks, Bloomberg-

A revenue engine that generated $42 billion for three of the biggest U.S. banks in less than five years is beginning to sputter as some borrowing costs rise.
The revenue comes from derivatives used by JPMorgan Chase & Co. (JPM), Bank of America Corp. and Wells Fargo (WFC) & Co. to protect against interest-rate swings. Most of the contracts are swaps that exchange payments tied to a floating rate for ones that are fixed. Banks that benefited from swaps guaranteeing a flat rate could see profit drop as the spread between the higher fixed and lower variable rates narrows or reverses. ...

Banks holding a receive-fixed swap “lose money on a mark-to-market basis when rates rise,” Siddhartha Jha, author of “Interest Rate Markets: A Practical Approach to Fixed Income,” said in an interview. “You are receiving a lower rate than what the market is offering.”
Losses on swaps caused by higher long-term rates can either directly hit a bank’s income statement or erode its equity before crimping future earnings, depending on how the contracts are characterized under accounting rules...

In the past four months, swaps users started bracing for higher rates. Bernanke’s May 22 comments that the Fed may slow its bond purchases used to keep long-term rates low drove the yield on the 10-year Treasury note as high as 3.005 percent on Sept. 6 from 1.61 percent on May 1.
“When, not if, interest rates rise, the banks will lose a major source of income from the carry trade they have been enjoying and the Fed has been subsidizing,” said the University of San Diego’s Partnoy. “Also the interest-rate bets that are hidden within the banks will suddenly become losing bets.”
A change in the long-term trend for interest rates, in this case heading higher after a 30-year period of declining borrowing costs, can catch lenders off guard.
....
For banks, which count interest-rate swaps and other instruments as their biggest derivatives holdings, the shock could be severe, according to Mike Mayo, an analyst at CLSA Ltd. in New York.
The notional amount of interest-rate contracts held by U.S. banks climbed to $179 trillion at the end of 2012 from $11 trillion in 1995, according to the Office of the Comptroller of the Currency. They comprised 80 percent of all derivatives held by lenders last year, the report shows. Worldwide, about $490 trillion of over-the-counter interest-rate derivatives were outstanding at the end of 2012, data from the Bank for International Settlements show.
“We’ve had a 100-year flood in credit risk,” Mayo said, referring to the 2008 financial crisis when banks lost billions of dollars on bad mortgage debt. “We haven’t had a 100-year flood in interest-rate risk.” (Just wait a while!)

5----EU lending collapse, Reuters

Lending data from the European Central Bank showed that lending to companies fell in all of the euro zone's big countries in August, highlighting the questionable strength of the currency bloc's economic recovery.

6---PCE chart, FRED

7---U.S. Government to Blame for Somalia’s Misery, antiwar

In 2008, with the help of what had been the youngest and least influential group in the ICU, al-Shabaab (“the youth”), the people of Somalia finally drove the Ethiopians out of the country after two years of fighting. At that point it appeared the Bush administration had simply run out of time, and so Secretary of State Condoleezza Rice made a deal with the old men of the ICU. The U.S. government would let them take power in Mogadishu if they would accept the form of the Transitional Federal Government the Bush administration had created. That way the Republicans could at least save a little bit of face in their failure.

The former ICU leaders took the deal. They were immediately denounced as traitors and American lackeys by the armed young men who had won the war. Al-Shabaab vowed to fight on. It was only then — years after the whole mess began — that it declared loyalty to Osama bin Laden’s al-Qaeda. It started acting like al-Qaeda too, implementing Arabian-style laws and punishments in the areas they dominated, such as cutting off the hands of those accused of stealing.

The story has been covered by few in the West. The best work has been done by intrepid investigative reporter Jeremy Scahill in his book Dirty Wars, which reveals that the U.S. government meant to keep Sheik Sharif, the former head of the ICU, all along. The whole war was launched because it was “preferable” that Sharif be “weakened,” but ultimately “co-opted.” He ended up staying in power until 2012.
Nation-building: Obama edition
Benefiting greatly from the fact that hardly anyone in the United States knows the first thing about the crisis and that even fewer care, Obama’s junta remains on the same Bush/Cheney course of stumbling blindly in vain for a policy on Somalia that will solve the problems created by their last great idea, or that will even make sense at all....

The Americans, for their part, continue to back the invading forces, as well as what passes for the “government” in Mogadishu, with hundreds of tons of weapons and tens of millions of dollars.
The CIA and military have also remained directly involved, partly by advising the politicians, police, and military in the capital, but also by firing deadly cruise missiles from submarines at thatched huts full of women and children, by mounting helicopter attacks, by launching repeated drone strikes  from a little formerly French-conquered airstrip of a country called Djibouti, and by overseeing at least two different torture dungeons; one found by Scahill and his photojournalist partner Rick Rowley, and the other by the Daily Beast’s Eli Lake (whose reporting in this instance seems credible).

8---US-backed Syrian opposition forces reject political leaders, align with Al Qaeda, wsws
 
On Tuesday, opposition militias aligned with the US-backed Free Syrian Army (FSA) joined Al Qaeda-linked forces and criminal groups to issue a statement rejecting the political leadership of the Syrian National Coalition (SNC). They pledged to unite their efforts to topple the regime of Syrian President Bashar al-Assad and impose Islamist rule.
Their joint statement declared, “All groups formed abroad without having returned to the country do not represent us.”

Thirteen militias signed the document. The first signatory was the Al Nusra Front, one of the two main Al Qaeda-allied militias in Syria, which Washington has declared a terrorist organization. Several key militias previously loyal to the FSA’s Supreme Military Council also signed, including the Liwa al-Tawhid (Monotheism Brigade), Liwa al-Islam (Islam Brigade), and the Falcons of the Levant (Suqour al-Sham) Brigade....

The various organizations set up by Washington to front for this policy—coalitions of Syrian Islamist and secular opposition politicians based in Turkey and France, such as the SNC, and loose coalitions of Syrian army deserters such as the central FSA leadership—were empty shells. They had virtually no popular support and no real influence over the far-right Islamist elements the United States and its NATO and Persian Gulf allies have been arming inside Syria.

9---Occupy QE, project syndicate

The problem continues to be the crisis-battered American consumer. In the 22 quarters since early 2008, real personal-consumption expenditure, which accounts for about 70% of US GDP, has grown at an average annual rate of just 1.1%, easily the weakest period of consumer demand in the post-World War II era. That is the main reason why the post-2008 recovery in GDP and employment has been the most anemic on record.
 
Trapped in the aftermath of a wrenching balance-sheet recession, US families remain fixated on deleveraging – paying down debt and rebuilding their income-based saving balances. Progress has been slow and limited on both counts.
 
Notwithstanding sharp reductions in debt service traceable to the Fed’s zero-interest rate subsidy, the stock of debt is still about 116% of disposable personal income, well above the 43% average in the final three decades of the twentieth century. Similarly, the personal saving rate, at 4.25% in the first half of 2013, is less than half the 9.3% norm over the 1970-1999 period.
 
This underscores yet another of QE’s inherent contradictions: its transmission effects are narrow, while the problems it is supposed to address are broad. Wealth effects that benefit a small but extremely affluent slice of the US population have done little to provide meaningful relief for most American families, who remain squeezed by lingering balance-sheet problems, weak labor markets, and anemic income growth.
 
Nor is there any reason to believe that the benefits at the top will trickle down



Wednesday, September 25, 2013

Today's Links

1--"Still in Recession": Bloomberg confirms widespread pessimism. 53 percent disapprove Obama job performance, Bloomberg

We’re still in a recession; I don’t know why they say it’s over,” says Chris Sams, 28, a disabled Navy veteran from Daingerfield, Texas. ...Fewer people anticipate improvement in the economy’s strength over the next year than in the last survey in June, with 27 percent saying the expansion will be more robust, down from 39 percent who expected improvement three months earlier

More than eight of 10 say they don’t plan to take on more debt or borrow money to make ends meet. And pluralities of 40 percent or more say they see no change in either their overall financial security, job security for members of their households, retirement savings, investments, or their ability to spend on vacations or entertainment.

Job Market

Poll respondents are less optimistic about the job market over the next year than they were in June. The percentage of those foreseeing stronger employment fell to 36 percent from 42 percent in the previous poll.

More than eight of 10 say they don’t plan to take on more debt or borrow money to make ends meet. And pluralities of 40 percent or more say they see no change in either their overall financial security, job security for members of their households, retirement savings, investments, or their ability to spend on vacations or entertainment...

Fewer Americans also forecast improvement in the housing market with 42 percent saying the situation will get better, down from 51 percent three months ago. ...

38 percent say they approve of the job Obama is doing to make people feel more economically secure while 53 percent disapprove. ...

Those making less than $50,000 a year are feeling especially strapped. Almost one-quarter say they expect to borrow money in the next year to make ends meet. That’s more than twice the percentage of those earning between $50,000 and $99,000 who plan on such borrowings.
“The economy’s going to get worse and worse,” says Renee Howard, 59, of Cincinnati. “You’re just stuck.”

2---Investors exit housing market, Testosterone Pit

We’re selling everything that’s not nailed down.” Since then, PE firms and hedge funds have sloughed off assets by any means possible, including IPOs.
The latest in the bunch: Oaktree Capital Group and its partner Carrington Mortgage Services are trying to dump a portfolio of 500 single-family homes that they’d bought out of foreclosure, Reuters reported. They’re trying to get the heck out of the hot buy-to-rent trade...

The evil combination of jumping prices, sky-high vacancy rates, and compressing rents has raised the distinct possibility that the business model of buy-to-rent might not work – and that vast amounts of capital will be destroyed as this is being sorted out. But whose capital?
The Wall-Street funded, Fed-instigated buying frenzy has turned single-family homes, the bedrock of American society, into another speculative Fed-driven asset class, where prices jump and crash erratically. And now, the smart money has decided to sell. They too see the numbers.

One of the timeliest gauges of home prices is Redfin’s Real-Time Price Tracker. It relies on sales contracts reported to the MLS data bases upon signing in the 19 metro areas where Redfin is active. Last week, it reported that in August the price per square foot – eliminates the issue of larger versus smaller homes –was up a bubbly 17.7% from last year on a 6.2% increase in volume. But on a monthly basis, prices had dropped 0.4%. The chart paints what could become the beautifully rounded top of a bubble.

3---Obamacare: It's Better Than You Think , Dean Baker

There is much real basis for criticism of the ACA. Private insurers are the sole providers of insurance. Not only are we not getting universal Medicare, we did not even get a public option, the right to purchase a Medicare-type plan that would compete with private insurers.
The drug companies and medical equipment suppliers both end up as winners under Obamacare. They will be able to secure even greater profits from their government-provided patent monopolies since the ACA does little to rein in costs.

As a result, we will still be paying close to twice as much for drugs and medical devices as people in other wealthy countries. This is a guaranteed recipe for bad health care since the enormous profits provided by these patent monopolies give drug companies an incentive to push their drugs even when they may be harmful.
And we will still be paying twice as much for our doctors as people in other wealthy countries. These failures on cost controls will add hundreds of billions of dollars to the cost of health care each year.

4---The rats flee the ship. Reuters

Oaktree Capital Group is leading an effort to put up for sale roughly 500 fully-leased homes, an indication some early investors are looking to cash-out on the recovery in U.S. housing prices, according to sources familiar with the market.
Oaktree, which manages about $76 billion, and its partner Carrington Mortgage Services are entertaining bids for the portfolio of fully-leased homes as they seek to exit from the buy-to-rent trade that has become popular the past two years with hedge funds and private equity firms.
The homes, mainly located in several western U.S. states, is being shopped to other large investors in foreclosed homes, said three sources, who asked for anonymity because they were not authorized to discuss the matter.

Oaktree, which specializes in distressed investing, and Carrington had initially planned on converting their portfolio into a real estate investment trust. But investors have now decided to simply exit the trade. Their asking price for the portfolio could not be learned.
Earlier this year, Reuters first reported that Oaktree, after partnering with Carrington in early 2012, was souring on the buy-to-rent trade after seeing returns on rents from single-family homes begin to compress. Oaktree, which had agreed to spend up to $450 million on building a portfolio, told Carrington this spring that it did not want to continue buying additional foreclosed homes.{nL2N0DN0X7}
A year ago, hedge fund Och Ziff Capital Management put its book of 300 homes in Northern California up for sale, a process it has just about completed.

5----Greece: The rape continues, naked capitalsim


One of the troika’s major demands concerns a moratorium on foreclosures. The international community wants to be able to throw Greeks out of their homes, and makes it a condition for further bailouts. All in the name of making Greek banks profitable. Which is of course just a veiled way of saying international banks want to be able to squeeze more money out of their bad and failed Greek investments.
The idea is summarized perfectly in this comment about the Greek banks: “… anything that helps them return to profitability is good…”. They mean that word for word. If it means throwing grandma out onto the street, so what? She’s not your yaya, is she (yaya is Greek for grandma)? Bloomberg:

Greeks Needing Credit Ethos Weigh Home Repossessions
Panagiota Kalapotharakou says she’s never seen such distress in her 25 years as a lawyer at the consumer-advocacy organization she helped to set up in Athens.
“If you look outside, the people are in despair,” Kalapotharakou said of the line of visitors outside her office in the rundown neighborhood of Exarchia, where most of her time is spent helping people with debts they can’t pay from Greece’s boom years. “They can’t survive. What they can pay is much smaller than what the banks are asking for.”....
 
The troika of Greece’s creditors on Monday exercised strong pressure on the state privatization fund (TAIPED) to speed up the country’s sell-off projects.
During a meeting at TAIPED’s headquarters, the mission chiefs of the European Central Bank, the European Commission and the International Monetary Fund called for more action so that this year’s revenue shortfall, amounting to €1 billion, can be covered in 2014.
At the troika’s focus were the privatizations of ports, water and sewage companies, and Hellenic Post. According to plans drawn up in January, these sell-off projects should have started in the second quarter of the year, while the aim now is for them to get started in the last quarter, given that the third will be over in a week’s time

6---What do CLO managers and retail investors have in common? sober look (Bernanke's low rates push investors into risky trades)
 
The answer is, they both love senior leveraged loans...

The amount of US leveraged senior secured debt outstanding has risen sharply this year. According to LCD this market is now some $630bn in size.

Source: LCD
(the fluctuations include new loans/refinancings as well as partial or full prepayments)
Yet that doesn't seem to be enough. While the M&A activity has picked up this year (Heinz, Dell - see story), the volumes are not nearly sufficient to feed retail investors and CLO managers.
Reuters: - Retail money keeps flooding into loan funds, marking 66 straight weeks of heavy inflows, according to Lipper data. Loan funds pulled in $1.3 billion in the week ended September 18, during which the Fed surprised the markets with its plan to keep on buying $85 billion of bonds weekly to keep rates low and boost economic growth.

Loan fund inflows accelerated over the summer on expectations that the U.S. central bank was about to reduce those bond purchases this month, keeping interest rates rising. Issuance of collateralized loan obligations (CLO), another key source of demand for leveraged loans, at $57 billion so far this year already topped last year's issuance.
This demand continues to keep loan valuations elevated. In spite of the recent selloff across fixed income markets, the leveraged loan index has been pushed to new highs.
 
7---Obama at the UN: A defense of unilateral aggression, wsws
 
The United States of America is prepared to use all elements of our power, including military force, to secure our core interests in the region,” he said. First and foremost among these interests was “the free flow of energy from the region.” He also listed terrorism and weapons of mass destruction—the phony pretexts for the US invasion of Iraq—adding that “wherever possible” Washington would “respect the sovereignty of nations,” and wherever not, “we will take direct action.”
 
That Washington’s militarist policy is stated so nakedly before the United Nations is one more indication of the uncontrolled eruption of American imperialism and the growing danger that US threats against Syria and Iran could turn into a regional war and even a global conflagration. .....
 
Now, America’s “exceptionalism” is invoked not to praise American wealth and democratic institutions, but to justify American militarism—the means by which US imperialism increasingly seeks to offset its relative economic decline. This testifies to the depth of its political crisis, and the revolutionary implications of the sweeping changes in social relations during the past 35 years, which have turned the US into one of the most socially unequal nations on the planet......
 
The US president’s emergence as “assassin-in-chief,” ordering remote-control murders, is the starkest manifestation of US imperialism’s global criminality......He boasted that his administration had “limited the use of drones so they target only those who pose a continuing imminent threat” and to where “there’s a near-certainty of no civilian casualties.” This is nonsense. In Pakistan alone, it is estimated that more than 2,500 people have been killed in drone strikes, most of them civilians and the vast majority under Obama.....
 
Today, jobs are being created, global financial systems have stabilized and people are once again being lifted out of poverty,” he proclaimed.In fact, the current “recovery” is a success largely for the top 1 percent, which according to a recent report accounted for 95 percent of all increases in income between 2009 and 2012. At the same time, the latest Census survey shows average household incomes falling to the lowest level in a quarter of a century. Fully one-third of the American population fell into poverty at some point during the same period.

8---Toronto's condo crash, greater fool

there’s a shocking number of new, unoccupied or unsold units languishing on the market. In Toronto alone this equals 7,247 low-rise homes and 21,028 condos. At current absorption rates, that’s a whopping 3-year supply of high-rise units – with more new condos churned out daily.
The laws of economics tell you supply has already overwhelmed demand, which means prices have only one direction in which to travel – notwithstanding realtor Ryan’s desperate attempts to pitch these empty boxes as investment vehicles. Which they decidedly are not.
Speaking of demand, it’s collapsed. Look at this chart (which I ripped off from that irritating Canadian Watchdog guy, and sexed-up a bit):
New condo sales GTA
Buyers for new condos are evaporating in the country’s largest market. So far this year sales have crashed 50% from 2011 levels, and are down 25% from last year, Overall, new housing deals last month were 18% fewer than the previous August and currently sit at the lowest point in 10 years. Meanwhile the gap between condo and low-rise prices has yawned to historic proportions as land prices, government levies and construction costs spiral out of sight

9---Americans Turn on Washington, 68% Say Wrong Track in Poll, Bloomberg

Obama’s 45 percent job-approval rating is the lowest since September 2011, a month after a partisan showdown over lifting the debt ceiling brought the U.S. to the brink of default.
Americans also are pessimistic about the course of the country, with 68 percent saying it’s headed in the wrong direction, the most in two years, according to the poll of 1,000 adults conducted Sept. 20-23...

Obama’s handling of the situation in Syria is overwhelmingly unpopular, with Americans disapproving by 53 percent versus 31 percent approving. While foreign affairs has been a strength of his presidency, Americans disapprove of his management of the U.S. reputation in the world, 51 percent to 43 percent.
The slip in Obama’s job approval crosses a spectrum of issues. Approval of his handling of the economy at 38 percent is the lowest level since September 2011. Support for Obama’s handling of the budget has dropped to a new low of 29 percent
 
 

Tuesday, September 24, 2013

Today's Links

1---Wall Street jumps ship (on housing, that is), Testosterone Pit

The evil combination of jumping prices, sky-high vacancy rates, and compressing rents has raised the distinct possibility that the business model of buy-to-rent might not work – and that vast amounts of capital will be destroyed as this is being sorted out. But whose capital?

The Wall-Street funded, Fed-instigated buying frenzy has turned single-family homes, the bedrock of American society, into another speculative Fed-driven asset class, where prices jump and crash erratically. And now, the smart money has decided to sell. They too see the numbers.
One of the timeliest gauges of home prices is Redfin’s Real-Time Price Tracker. It relies on sales contracts reported to the MLS data bases upon signing in the 19 metro areas where Redfin is active. Last week, it reported that in August the price per square foot – eliminates the issue of larger versus smaller homes –was up a bubbly 17.7% from last year on a 6.2% increase in volume. But on a monthly basis, prices had dropped 0.4%. The chart paints what could become the beautifully rounded top of a bubble.  ...

Price increases per square foot have been dizzying. Year over year, Las Vegas is up 38%, Los Angeles 25.5%, Phoenix 24.7%, Riverside 31.2%, Sacramento 37.8%.... But on a monthly basis, prices in August have turned around in some of the hottest markets, including San Francisco (-2.5%), San Jose (-0.7%), Seattle (-1.1%), and Washington (-0.5%).
There were other indications of trouble: volume dropped “uncharacteristically” by 4.3% from July’s four-year high; normally volume rises, often strongly, in August. And of the active listings, 26% had their prices lowered, a four-year high – up from 11% in December....

So, in this market where first-time buyers have become rare – down to 29% instead of the 40% in a healthy market – and where mortgage rates and prices have jumped, pushing these homes beyond the reach of many strung-out consumers, how can big investors dump hundreds or even thousands of homes at a time? They’d have trouble selling them to people who’d actually live in them. They can only Wall-Street engineer their way out of them. And that’s what they’re doing. Because someone’s capital is going to be destroyed, and they don’t want it to be theirs.

2---Housing Smoke and Mirrors, GEI

The July Fannie Mae National Housing Survey, signalled that the Taper talk, instigated by Bernanke back in April, has had the desired outcome of raising interest rate expectations without significantly lowering economic performance expectations....

Despite inflammatory headlines to the contrary, the Fed’s Communication Policy is working......
Behind this increase in supply and falling prices, there has finally appeared a rise in delinquencies. It now remains to be seen, if this correction has been engineered by the Fed; or whether it is a systemic problem developing again that the Fed will ultimately have to apply even more of the balance sheet solution too in the future. Political ineptitude is also evident, as it was in 2008; but the Fed has stared into this void before and has seen a way through it.

Blackrock has been observed, subtly shifting its housing risk position away from direct home ownership towards lending exposure to the rental sector; as the dynamics of the sector and the economy slow. In Housing Smoke and Mirrors “Dude Where’s My Housing Recovery?” this situation was observed as follows:
In Housing Smoke and Mirrors “Style Drift” the strategy of the Blackstone Group was seen drifting, away from property ownership, towards lending against rental property assets[xiii]. This style drift has continued, with Blackstone Group now signalling its intentions to issue a covered bond against its rental property portfolio. Blackstone is hedging itself against a rise in interest rates that will reduce its profit margins; by effectively locking in its borrowing costs and maintaining the option on raising rents. Blackstone is not exiting the sector, so clearly it still believes in the early bubble thesis; it is however positioning for rising inflation and rising interest rates.

3---More Manufacturing Coming Back to the U.S., NYT

 the leading advantages include competitive labor rates, proximity to customers, product quality, skilled labor and transportation costs

4---Brazil's Rousseff to UN: US surveillance an 'affront', RT

“I would like to announce that we are preparing a lawsuit against Barack Obama to condemn him for crimes against humanity,” President Morales told reporters Friday in the Bolivian city of Santa Cruz. He branded the US president as a “criminal” who had violated international law.

5---Did the Fed just pop the stock market bubble?, CNBC

6---Banks find appalling new way to cheat homeowners, Salon

7--Consumer confidence slips, WSJ

8---Home Prices Rising at Fastest Pace Since Start of Bubble, WSJ

So much for the National Mortgage Settlement. Homeowners are now getting foreclosed on without their knowledge!

9---Foreign Investors Cut U.S. Treasury Holdings, WSJ

Overseas private investors cut their holdings of U.S. Treasurys for the first time in more than three years during the second quarter of 2013, likely a reflection of uncertainty surrounding the nation’s monetary and fiscal policies as well as expectations of stronger global growth.
Foreign private investors reduced their Treasury holdings by 2.4%, or $39.62 billion, to $1.591 trillion from the first three months of the year, the Commerce Department said Tuesday. That was the first time private investors trimmed Treasury holdings from the prior quarter since the end of 2009.
Overseas governments and related institutions pared Treasury holdings by about 2%, or $81.56 billion, to $4.009 trillion. Foreign official holdings of U.S. Treasurys hadn’t declined since the end of 2011.
The moves come against a backdrop of unorthodox policies at the Federal Reserve, political stalemate in Congress and signs that the worst of Europe’s debt crisis has passed.
Investors have been awaiting the Fed’s next steps for its $85 billion-a-month bond-buying program, which has held down yields on Treasurys. The Fed surprised markets last week when it said it wasn’t ready to start winding down the purchases

10---Gauging the trajectory of the US housing market, sober look

One reason to think that the jump in existing home sales is transient is the decline we've seen in new home sales - which most are attributing to higher rates. The divergence shown below is unlikely to be sustainable.


The August number for new home sales (to be released this Wednesday, 10AM ET) will be critical to gauge the trajectory of the US housing market. On Thursday we will also be getting the pending home sales index that should provide a glimpse into sales going forward.

11--Various items: NSA stories around the world, Greenwald

12---Lobbying frenzy in run-up to US health care exchange launch, wsws

13---The 161 people who own the world, info clearinghouse

14---Housing Market Slowing in All Categories, DS News

The U.S. housing market may be starting to taper off in comparison to the strong growth of the last several months, according to a new survey by Campbell/Inside Mortgage Financing HousingPulse. The survey involves approximately 2,000 real estate agents nationwide.

The data showed a slower growth rate in all categories of home sales: first-time homebuyers, current homeowners, and investors. Investors fared the worst, with their business traffic registering below what the survey considers a “flat” level. Investors appear to be fueling a slide in the sale of distressed properties as well.

“The HousingPulse Distressed Property Index, a measure of distressed properties as a share of total home purchase transactions, fell to 25.4 percent in August, based on the three-month moving average,” the report said. “That was not only down from a distressed property share of 35.8 percent seen as recently as last March, but also the lowest level ever recorded by the HousingPulse survey.

“The market is slowing dramatically following the increase in interest rates. Numbers in October/November will start to show the price plateau and sales volume decline,” reported one real estate agent from California.

Monday, September 23, 2013

Extra Monday Links

1---If the Economy Is Improving, Why Is This Happening? , Testosterone Pit 
While the media and politicians tell us we’re in an economic recovery… I keep writing about the slowdown we’re heading towards. How can I say that?
 
First, take out the stock buyback programs, and you’ll see that U.S. companies are seeing their earnings and revenues grow this year at their slowest pace since 2009. (More on that in today’s “Michael’s Personal Notes” column below.)
 
From an economic point of view: When a country experiences economic growth, industrial production of electricity and gas utilities pick up as factories and consumers use more electricity and other utilities. This is not happening in the U.S. economy. As a matter of fact, industrial production is contracting!
 
An index tracking industrial production of electric and gas utilities has declined almost eight percent since this past March. It stood at 103.76 then; in August, it stood at 95.62. (Source: Federal Reserve Bank of St. Louis web site, last accessed September 19, 2013.)
But it doesn’t end there.
 
Another key indicator of economic growth known as “capacity utilization” shows companies in the U.S. economy are operating below their historical norm. In August, the capacity utilization in the U.S. economy was 77.8%, three full percentage points below the historical average from 1972 to 2012. (Source: Federal Reserve, September 16, 2013.)
 
And we are seeing layoffs and discharges in the manufacturing sector accelerate in the U.S. economy. In March, there were 83,000 layoffs and discharges in manufacturing. In August, that number rose to 91,000—an increase of almost 10%. (Source: Federal Reserve Bank of St. Louis web site, last accessed September 19, 2013.)
 
When we look at the underemployment rate in the U.S. (that includes people who have given up looking for work and those who have part-time work but want full-time work), it’s been stubbornly around the 14% mark since 2009!
 
The fact that money printing in the U.S. economy has gone on for so long now is masking the real health of the economy. The U.S. economy is so weak, the Federal Reserve couldn’t even pull off a minor pullback of its $85.0 billion a month in new paper money printing last week!
 
I stay pessimistic on the economy. Take the stock market out of the equation (after all, only a very small portion of the U.S. population actually owns stocks) and the economic picture is not pretty! We have the Federal Reserve essentially printing money since 2008 to “help” the economy, but those trillions of dollars in new money have benefited the stock market and big banks the most.
Key economic indicators are issuing warnings of trouble ahead for the U.S. economy—warnings smart investors shouldn’t discount....
 
As I have recently written, it’s not just corporate earnings growth that’s the problem—revenue growth is also lacking. Companies in key stock indices enjoyed double-digit (or close to it) earnings growth in 2009, 2010, and 2011, as they recovered from the recession and the credit crisis. But today, take away the stock buyback programs and cost-cutting, and these companies are barely growing earnings or revenues.
As this disparity continues—key stock indices climb higher and corporate earnings growth becomes tricky to achieve—the risk for the stock market only rises. The market knows companies can’t deliver on earnings and revenue growth, hence the dependence on money printing now to drive key stock indices higher. How sad.
 
 
 
According to an editorial in last Saturday’s Financial Times: “A sudden end to quantitative easing could imperil the recovery, especially if asset prices fell quickly enough to produce widespread insolvencies. Yet if a gradual end is announced, a more sudden one will automatically ensue.”
The editorial went on to warn that the Fed could not pursue its policies by “stealth,” and that if markets were “kept in the dark, their behaviour will become dangerously unpredictable.” But an increase in such volatility is a direct consequence of the Fed’s surprise announcement. The Fed had claimed that it was carrying out its policies with “forward guidance” by alerting financial markets as to its intentions. But having signalled a move to taper and then retreating, it has created a new source of turbulence
 
The decision last week by the US Federal Reserve Board not to begin reducing its $85 billion-a-month bond-buying program has again underscored the dependence of the global financial system on the continued injection of ultra-cheap money.
It also revealed that, far from having been resolved, the crisis that erupted with the collapse of Lehman Brothers five years ago is deepening, as the policies of the Fed and other central banks create the conditions for another financial disaster, potentially on an even bigger scale than that of 2008-2009....

Announcing its decision, the Fed pointed to the “tightening of financial conditions observed in recent months [which], if sustained, could slow the pace of improvement in the economy and labor market.”
Since “tapering” was first mooted by Fed chairman Ben Bernanke in May, interest rates on ten-year US treasury bonds, regarded as a central foundation of the global financial system, have increased from 1.56 percent to nearly 3 percent.
While couching its decision in terms of the need to bring down unemployment, the central concern of the Fed is not the real economy and the worsening conditions faced by hundreds of millions of working people, but the need to maintain the inflation of asset prices, thereby benefiting the corporate and financial elites.
There is widespread acknowledgement in financial circles that the quantitative easing policies of the Fed and other central banks have done virtually nothing to boost investment, jobs or economic expansion, but are aimed at financing speculation at the expense of the mass of the population...

Analysing the dynamics of capital accumulation, Marx pointed out that in its most basic form its driving force was the transformation of money into an even greater quantity of money, with the process of production appearing simply as a “necessary evil for the purpose of money-making.” This explained, Engels noted, why all capitalist nations are periodically “seized by fits of giddiness in which they try to accomplish money-making without the mediation of the production process.”
What was a “fit” in the days of Marx and Engels has now become a permanent condition of the global capitalist economy.
The crisis of 2008 was an initial expression of this historic transformation. But the measures undertaken since then have only exacerbated the contradictions that exploded to the surface in the financial meltdown.

Through its program of quantitative easing, the Fed has expanded its asset base from under $1 trillion in 2007 to more than $4 trillion today, equivalent to about one quarter of US gross domestic product.
This asset-buying program, unprecedented in economic history, signifies that instead of standing to some extent outside of financial markets as a lender of last resort, as they did in 2008, the Fed and other central banks are themselves now deeply integrated into the operations of the markets. This means that the next financial crisis, the conditions for which are well advanced, will involve the central banks themselves, posing the complete collapse of the financial system.

Today's links

1---Lehman Was Not Alone – Measuring System Risk in the 2008 Crisis, Institute Blog

On September 15, 2008, Lehman Brothers filed for bankruptcy and ushered in the worst part of the recent financial crisis. Today, we still discuss whether taxpayer money should have been used to rescue Lehman. My colleagues at NYU and I have developed measures of systemic risk, and this fifth anniversary affords us a good opportunity to look at what these measures would have indicated to Treasury Secretary Paulsen if they had been available at that time.
The answer is quite surprising.
 
We estimate the amount of capital that a financial institution would have to raise in order to continue to function normally if we have another financial crisis like the one in 2008. This is interpreted as a capital cushion to protect against a decline of 40% in the broad equity market over the six months after this occurs. The rationale is that if all financial firms have an adequate capital cushion there cannot be a financial crisis. If one firm needs to raise capital under such circumstances, it is likely that the market can provide it or competitors can absorb its market share. But if many firms try to raise capital in the middle of a financial crisis, there is no source except the government.
 
We call this measure SRISK. We compute it weekly and post it on the website systemicrisk. The estimation uses equity prices with methods that are extensions of the volatility models that formed the basis for my Nobel Prize. SRISK combines information on size, leverage, and risk to indicate how serious a default would be.
 
On the website, you can go back to August 29, 2008, to see the ranking of U.S. firms based on SRISK.  . Was Lehman at the top of the list in 2008? No. In fact, it was Number 11. The top of the list was Citigroup, which was estimated to need $139 billion. Following Citi, in order, were JPMorgan Chase, Bank of America, Morgan Stanley, Merrill Lynch, Freddie Mac, AIG, Fannie Mae, Goldman Sachs, and Wachovia. Interestingly, all of these institutions were either nationalized or rescued, with the arguable exception of JPMorgan Chase.
We estimate that the first ten firms, excluding JP Morgan, needed about $700 billion in capital, which is the precise amount of the TARP request. At Number 11, the estimate is that Lehman would have needed $48 billion in capital. And it was allowed to go under. Interestingly, Washington Mutual, at Number 14, also was allowed to fail. 
 
 
Bill Gross has a wonky column in the FT, saying that setting interest rates at zero doesn’t boost economic growth:
With policy rates at or approaching zero yields and QE facing political limits in almost all developed economies, it is appropriate to question not only the effectiveness of historical conceptual models but entertain the possibility that they may, counterintuitively, be hazardous to an economy’s health.
Certainly the record will show that countries with persistently low interest rates tend to have sluggish growth, and although the obvious causality there runs the other way — central banks cut rates in response to slow growth — it’s never been clearer than it is now that such policies don’t always work.
Gross’s point is that zero rates, far from encouraging people to borrow more, actually encourage deleveraging instead, at both the short and the long end of the curve.
.....
The question is whether reducing interest rates actually boosts demand for credit, at the margin. Certainly it does in normal times, when central banks cut rates from, say, 6% to 5.25%. But borrower calculus is different when rates get cut from 1% to 0.25%. If a semi-permanent ZIRP is a sign of a country in a prolonged economic slump, then one can see how it could act to discourage potential borrowers rather than get them flocking to their banks to demand credit...
 
When the financial system can no longer find outlets for the credit it creates,” says Gross, “then it de-levers”. And deleveraging tends to cause economic contraction
 
3---The good and bad of zirp, smart investor
 
ZIRP is good. It stimulates business investment. ZIRP enables consumers to better finance expensive items such as cars, boats and homes. It creates more demand for goods and services which creates earnings for companies and the need to hire employees and lower unemployment.
 
Or maybe ZIRP is bad. ZIRP provides poorly run banks with reserves at a low cost, enabling them to avoid failure and continue with policies that are damaging and should be abandoned. It robs responsible savers from the interest they should be earning in their savings accounts and forces them to take more risk to get returns that can provide a decent lifestyle. ZIRP also creates inflation, so while earning nothing at the bank, the cost of goods and services rise. ZIRP encourages government borrowing, spending and expansion.
 
 
Government spending at all levels is far below the level of any other recent recovery. Sixteen quarters after the end of the recession, spending during past recoveries has been 7-15 percent higher than it was at the start. This time it's 7 percent lower, despite the fact that the 2008-09 recession was the deepest of the bunch. Reagan, Clinton, and Bush all benefited from rising spending during the economic recoveries on their watches. Only Obama has been forced to manage a recovery while government spending has plummeted.
And there's no end in sight. Ted Cruz will lose his battle to defund Obamacare. But the tea partiers have already won their battle to cripple the American economy and Obama's presidency with it.
 
 
 
 
In  a world in which all the matters is "scale", the ability to Martingale down on losing bets as close to infinity as possible (something which JPMorgan learned with the London Whale may not be the best strategy especially when one can't print money out of thin air), and being as close to the Fed's Heidelberg rotary printer as possible, it was expected that that "expert" of government backstops and bailouts, the Octogenarian of Omaha, Warren Buffett, would have only kind words for Ben Bernanke. But not even we predicted that Buffett would explicitly admit what we have only tongue-in-cheek joked about in the past, namely that the Fed is the world's greatest (and most profitable) hedge fund. Which is precisely what he did: "Billionaire investor Warren Buffett compared the U.S. Federal Reserve to a hedge fund because of the central bank’s ability to profit from bond purchases while accumulating a balance sheet of more than $3 trillion. "The Fed is the greatest hedge fund in history,” Buffett told students yesterday at Georgetown University in Washington. It’s generating “$80 billion or $90 billion a year probably” in revenue for the U.S. government, he said. From Buffett's presentation at Georgetown last week:
The Fed remitted $88.4 billion to the U.S. Treasury Department last year. The payments have ballooned as the central bank built its balance sheet during the past five years.

The Fed “is under no pressure, none whatsoever to have to deleverage,” Buffett said. “So it can pick its time, and if you have somebody wise there -- and I think Bernanke is wise, and I certainly expect his successor to be -- it can be handled. But it is something that’s never quite been done on this scale. It will be interesting to watch.

7---Signs of an easing of credit requirements are surfacing , LA Time s

8---After a Financial Flood, Pipes Are Still Broken, NYT

9--Global warming on fasttrack, Guardian

10--Lavrov: US pressuring Russia into passing UN resolution on Syria allowing military force, RT

11---Better lock in your mortgage rate. Now!, CNBC

12---The days of easy money may be over, marketwatch
Commentary: New indicator says the time to sell is here

13---Let’s get this straight: Lehman did not cause the financial crisis, WA Post


14---Ruffer: The end game, in his view, is “absolutely obvious. It’s going to be high inflation, with interest rates well below the rate of inflation, independent investor

Ruffer believes that the defining condition of the current investment scene is monetary instability, as the world teeters back and forth between the twin threats of deflation, induced by excessive debt, and renewed inflationary pressures, arising from the unprecedented monetary stimulus policymakers are committing to try and forestall the first threat. The end game, in his view, is “absolutely obvious. It’s going to be high inflation, with interest rates well below the rate of inflation”. In other words, with their wealth eroding in real terms, virtuous savers will once again be required to pick up the bill for the excesses of the past decade, just as they did in the 1970s. “That (outcome) is as strikingly and simply obvious as the credit crunch, but the difficulty is when that is going to happen, and the fact that, between now and then, we might well be looking at teetering over the deflationary edge”.

15---The deflation/inflation conundrum, economist

Henry Maxey, a fund manager at Ruffer Investment Management, has an interesting explanation in his latest review; he puts it all down to the actions and rhetoric of the Japanese, US and Chinese central banks. It all starts with the Japanese and the Abenomics pledge to do a lot of quantitative easing. Maxey writes that
by pledging to double the monetary base, the Bank of Japan managed to engineer a massive foreign investor driven currency depreciation under the guise of domestic monetary stimulus. However, by front loading the effect of QE into weakening the currency, the first impact on the world was disinflationary because a weaker yen exports deflation to the rest of the world by making Japanese goods and services cheaper.

This impact was exacerbated by the actions of Japanese banks, Maxey says.
the commercial banks immediately started selling bonds, aggressively causing a violent rise in yields and interest rate volatility. In reflationary terms, this was the equivalent of stepping on the clutch just as you rev the engine; a lot of noise but not much traction.
Meanwhile, with the yen no longer seen as a hard currency, plenty of worries about the euro and the Swiss capping the franc, the dollar became the major currency of choice. As we noted recently, a strong dollar is not helpful for emerging markets. Maxey writes that
A stronger dollar has the effect of sucking liquidity out of emerging markets, most of which have explicit or implicit dollar ties. Declining liquidity in emerging markets has revealed their individual structural weaknesses while also reducing their demand for, and hence the price of, commodities.
The next link in the chain is the Fed. Ben Bernanke is worried, Maxey argues, by previous instances when policy was tightened; 1937, 1994 and 2004. But he is also worried that easy policy will create asset bubbles.
By introducing the concept of tapering to the market, Bernanke hoped to introduce volatility to interest rate markets but without significant impact on the level of interest rates themselves. Like the dodgy rock band which doesn't understand the sensitivity and feedback loops of its sound system, Bernanke tapped the microphone and the amplifiers blew up. Long term real rates rose by 1%.

16---What Shadow Banking Can Tell Us About The Fed's "Exit-Path" Dead End, zero hedge
Most credit in the US is created by nonbanks; virtually all bank lending is funded by the creation of liabilities that are not subject to reserve requirements, and central banks do not ration reserves. In fact they take great pains to provide banks with the amount of reserves they desire. Central banks influence credit not by rationing the quantity of reserves but by altering the interest rate that banks must pay to obtain the quantity of reserves they desire....

What is the rough magnitude of the task if the Fed balance sheet were to remain at its current size?

  • In the two weeks ending 27 August 2008, average daily reserves held by depository institutions (banks) were $46.1 billion; required reserves were $ 44.1 billion.12 Of this, vault-cash used to satisfy required reserves was $36.4 billion and reserve balances held at FRB were $9.7 billion.
  • In the two weeks ending 21 August 2013, average daily reserves held by banks were $2.2 trillion – that’s trillion with a ‘t’; required reserves were $115 billion – that’s billion with a ‘b’. Of this, vault cash used to satisfy required reserves was $53.4 billion and reserve balances held at FRB were $2.1 trillion.
  • Thus bank excess reserves rose by $2.123 trillion during the last five years

  • Today, credit creation in general and money creation in particular are no longer tied to the stock of reserves (i.e. the stock of banks’ deposits at the Fed).

Today, bank deposits at the Fed have only one real role – to facilitate management of the payments system. They are used to settle transactions among banks.

The Federal Reserve balance sheet is much simpler than at the height of the crisis.

  • If Rip Van Winkle awoke today after a five-year nap, he would see only one key development in the Fed’s balance sheet – securities holdings higher by $2.9 trillion and deposits of depository institutions (banks) higher by $ 2.2 trillion.2

If he asked how this happened, Rip would be given a very simple answer.

  • The Fed bought securities to lower interest rates; it paid for them by creating bank reserves.

That is, the Fed credited the securities seller’s commercial bank with a deposit at one of the 12 Federal Reserve Banks, and the commercial bank then credited the seller’s account. On net, privately held securities were exchanged for Fed deposits.

If pressed further as to why banks are holding enormous reserves at the Fed, Rip would get an equally simple answer: Banks have no choice.

  • It is – for all intents and purposes – technically and legally impossible for a bank to transfer deposits at a Federal Reserve Bank to a nonbank ...
  • To make it all crystal clear, we present Exhibit A: a chart showing total loans and deposits at US commercial banks (local and foreign) just after the failure of Lehman, compared to their balance sheet as of the most recent week (as reported by the Fed's H.8 statement).
    What it shows is the following:

    This is perhaps the one chart that explains not only all that is wrong with US banks currently, but also why the US stock market is where it is.
    It shows, among other things, that while over the past five years, total loans and leases in US commercial banks have not increased by one dollar, total deposits have risen by $2.2 trillion to $9.5 trillion. Why is this important? This is what Singh had to say about deposits:
    When central banks buy securities, one of the immediate effects is to increase bank deposits, which adds to M2 (in the U.S., practically the Fed has bought from nonbanks, not banks). Whether banks maintain those added deposits as deposits, or convert them into other liabilities (or, by calling in loans, reducing or moderating the growth of their balance sheets), is an open question.
     
  • Sure enough, as the chart above shows, the total loan hole resulting from the increase in deposits was plugged by none other than the Fed, which over the past 5 years has injected $2.2 trillion in securities into commercial banks, leading to the observed increase in total deposits to nearly $10 trillion.
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  • 17---Why suicide rate among veterans may be more than 22 a day, CNN