Wednesday, January 15, 2014

Today's Links

Today's quote: “A bubble is a bull market in which you don’t have a position.” Eddy Elfenbein,   (Twitter)

Justin Fox, “Bubbles arise if the price far exceeds the asset’s fundamental value, to the point that no plausible future income scenario can justify the price.”  (HBR)

1---“Leveraged loans hit an all-time high in 2013 of $1.14 trillion, Testosterone Pit

There was more excitement fermenting beneath the surface. It was all about “leveraged loans.” They’d hit an all-time high in 2013 of $1.14 trillion, and market participants are exuberant about 2014, according to Thomson Reuters’s Quarterly Lender Survey. Alas, in its minutes of the December meeting, the Fed had named leveraged loans and their deteriorating underwriting standards as one of the four threats to “financial stability.”  They’re issued to highly leveraged companies with dubious prospects and junk credit ratings. And many of them are going to blow up once the mania fizzles out.

But not yet. Everyone is counting on rock-bottom interest rates to persist, and on desperate investors who’re chasing yield when there is none in reasonable places, and so they take on risks, any risks, and they hold their noses and swallow covenant-lite junk debt that gives them few rights once there is a problem. In 2013, $311 billion in covenant-lite loans were issued, more than triple the prior all-time high. And everyone is hoping that this year will set another record. After us the deluge.

Did a company have problems servicing its debt or did it threaten to default? A replacement leveraged loan would be offered with better terms. Extend and pretend.... Last year, about 70% of the leveraged loans were issued to reprice and refinance existing debt.

2---Are Banks About Win on Commodities Trading After Their Success in Watering Down Basel III Capital Rules?, naked capitalism

JPMorgan Chase, Goldman Sachs and Morgan Stanley now are among the nation’s biggest suppliers of energy, according to industry rankings and federal data. Over the last several years, the three banks were among a group of select financial institutions to broaden their physical commodities activities as the sector promised substantial revenues that, coupled with the banks’ traditionally low cost of financing, guaranteed steady and at times enormous profits.

Yet again, it’s important for members of the public to demand that banks operate in the public interest, not for their own outsized enrichment. Being able to use their weight to move commodities markets is one of the a clear-cut transfer from the productive economy to the Wall Street casino. The Fed’s complacency is proof yet again of whose interest it really cares about.

3---Banks counting on Watt to loosen lending standards, NYT

Even as the housing market improves, new home loans are still scarce as interest rates have started to creep up — a situation that was starkly underlined in the two banks’ results on Tuesday. The nation’s biggest mortgage lender, Wells Fargo, extended $50 billion in mortgages in the fourth quarter, down 60 percent from a year ago.

The nation’s largest bank, JPMorgan, for its part, extended $23 billion in mortgages, down 55 percent from a year ago. The declines reflected the waning of the refinancing boom prompted by record low interest rates. Without substantial income from refinancing, the banks’ mortgage businesses will now depend on making fresh loans to purchase houses, a business that, despite some revival, remains tepid....

It’s a very small market,” JPMorgan’s chief financial officer, Marianne Lake, said in a conference call on Tuesday. “One we haven’t seen the likes of since the year 2000.”...

some bankers say, they have to navigate new mortgage rules that were set up in the aftermath of the crisis to promote safer loans. To spur lending, the government entities that backstop the most mortgages may also have to expand the range of mortgages they guarantee.
Until then, a significant amount of borrowers with less-than-perfect credit scores remain largely shut out of the market.(Huh???)...

some mortgage experts say they see signs of a thaw in the mortgage market that might loosen the loan spigot a bit. A potential catalyst, they say, is the appointment of Melvin L. Watt as the director of the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, the entities that guarantee most of the country’s mortgages. Mr. Watt, according to some mortgage analysts, may decide to approve small but important changes that result in Fannie and Freddie’s guaranteeing a wider swath of mortgages. Ms. Gordon, for instance, suggested that Fannie and Freddie could backstop more loans in rural areas and guarantee a larger number of smaller loans. “We are not talking about subprime lending or lowering existing standards,” she said....

some mortgage experts are skeptical that the current policy makers can engineer a sensible middle path when they try to expand the availability of credit.
The danger of overshooting, and repeating the subprime excesses, is high, they say. One big temptation will be to lend to borrowers who only make small down payments, they argue.
“If we go back to a world where we do low- or no-down-payment lending for subprime-quality borrowers, we will back in a mess,” Mark A. Calabria, a director at the Cato Institute, said. “There is a way to do this right, and the question is whether we’ll do it right.”

4--Higher rates have hurt housing demand, Mark Gongloff

The mortgage market cratered in the fourth quarter of 2013, Wells Fargo and JPMorgan Chase reported on Tuesday, as higher interest rates all but murdered demand for mortgage refinancing.

The nation's biggest mortgage lender, Wells Fargo, said its mortgage volume tumbled to $50 billion in the quarter, down 60 percent from $125 billion a year ago. The second-biggest lender, JPMorgan Chase, said its mortgage originations, that includes new home purchases and refinancings, fell 54 percent to $23.3 billion from $51.2 billion a year ago. (Story continues after chart of ugliness.)

5---Sharpening Abenomics’ third arrow: Labour-market reform in Japan, vox

The share of non-regular workers in Japan, which was below 20% before the burst of the bubble in the early 1990s, has now reached 35%....

Despite these positive aspects, international evidence and macroeconomic studies suggest that the overall impact of excessive labour-market duality on total factor productivity (TFP) and growth is likely to be negative (for example, Dolado and others 2011 and Damiani and others 2011). This negative effect is probably magnified by working involuntarily as a non-regular employee, which can adversely affect morale and job effort, thus lowering labour productivity. In this regard, Fukao and others (2007) estimate that Japanese part-time workers are 75% less productive than full-time ones...

As stressed in the last IMF Article IV Report on Japan, the labour market reforms aimed at reducing duality discussed in this article should be a key component of Japan’s strategy to revive growth and exit deflation

6---Fed Student-Loan Focus Recognizes Threat to U.S. Economy, Bloomberg

Borrowers already have a harder time with repayments. About one in seven, or 14.7 percent, of students defaulted on federal loans in the first three years they are required to make payments, according to Education Department data released in September. The rate was was 13.4 percent a year earlier.
While the New York Fed and CFPB data “have their limitations,” they are “helping to flesh out the clearer picture and key dynamics,” said the Oakland nonprofit’s Asher.

‘More Opaque’

“Compared to other financial products, performance data on student loans is much more opaque,” Chopra said. Given that the market has grown so rapidly, “financial regulators must significantly increase the level of monitoring.”
“Our job is to really understand what’s happening in the financial system,” and the “very rapid rise in student-loan debt over the last few years” can “actually have some pretty significant consequences to the economic outlook,” New York Fed President William C. Dudley said at a Nov. 20 briefing with reporters at the district bank.

“People can have trouble with the student-loan debt burden -- unable to buy cars, unable to buy homes -- and so it can really delay the cycle.”

Tiffany Roberson now is looking for a third job, partly because rising interest rates have increased her debt to about $72,000 in federal loans and $102,000 in private loans. She pays almost $1,000 a month on the latter and about $33 on the federal loan through a program based on her income.
“These payments eat up my paycheck,” she said. “It puts a huge drain on living the American dream

7---World Bank View on Global Growth, across the curve
This was out yesterday and I did not see it. The World Bank is forecasting that the global economy is finally emerging from the financial torpor which followed the financial crisis and the Bank forecast global growth of 3.2 percent in 2014 versus 2.4 percent in 2013

7---Research by the New York Fed in 2012 indicated more than 1 in 5 borrowers whose loans had come due were delinquent, oc housing

8--Who's next? --What country will experience the next financial crisis, marginal revolution

9---Big Banks Launder Hundreds of Billions of Illegal Drug Cartel Money … But Refuse to Provide Services for Legal Marijuana, WA blog

10---"People who paid attention to the housing market over the last decade generally think of homebuying as a way to make the financial sector rich. Its benefits to homeowners are far more questionable", Dean Baker

11---Growth in loans at US banks continues to weaken, sober look
Loan growth in the US continues to slow. Credit expansion is certainly not nearly as bad as what has transpired in the Eurozone (discussed here), but the slowing trend is unmistakable. The current rate of loan growth is now significantly below the nominal GDP expansion.

Source: FRB (adjusted for the FASB 140 accounting change)

One exception may be the corporate sector, where loan growth has been robust (see story). But as percentage of banks' total balance sheets, business loans are not growing. In fact much of the corporate debt growth is actually coming from outside the banking system (see post on shadow banking).

Many expect that bank balance sheets will remain constrained by the new regulatory framework (Basel II, etc.), with loan growth continuing to stay weak. As a result, the increases in US broad money supply (M2) have slowed as well.

This is one of the reasons inflation in the US has been subdued in spite of massive injections of liquidity by the Fed.

12---The West Virginia chemical disaster, wsws

The last three years have seen a string of catastrophes, including the April 2011 explosion of the Deepwater Horizon oil rig in the Gulf of Mexico, which killed 11 workers and resulted in the largest environmental disaster in US history; the April 2013 West Texas fertilizer factory explosion that killed 15 and injured 150; and a series of oil train derailments and explosions in North Dakota and Alabama.

This is the inevitable result of corporate deregulation over decades that has reached its culmination in the Obama administration, which has done everything in its power to get rid of any meaningful restrictions on corporations, while shielding companies such as BP, Massey, and the Wall Street banks responsible for the 2008 crash from prosecution.

In his 2012 State of the Union address, Obama boasted that, “I’ve approved fewer regulations in the first three years of my presidency than my Republican predecessor did in his.” Between the Occupational Safety and Health Administration (OSHA) and state agencies, there are only 2,200 inspectors responsible for enforcing the safety of 130 million workers in America. This translates to about one inspector for every 59,000 workers. As a result of the bipartisan “sequester” cuts the number of OSHA inspectors is scheduled to fall even further.

13---US Congress unveils austerity budget as Senate delays extension of jobless benefits, wsws

Far from opposing inequality, everything the Obama administration has done since coming to office—from bank bailouts and wage-cutting attacks on auto workers and teachers, to the fueling of the stock market bubble and supporting the bankruptcy of Detroit—has served to affect a massive transfer of wealth from the bottom to the top of US society.....

Crucially, the budget leaves in place automatic across-the-board cuts in domestic spending implemented under “the sequester,” which have already reduced social spending by more than 8.8 percent over the course of two years, former investment banker and Obama administration insider Steven Rattner told the New York Times. If fully implemented, the cuts enacted through sequestration and continued in the bipartisan budget deal will reduce social spending to levels that existed before Johnson’s War on Poverty program 50 years ago.

In two separate votes on Tuesday, US Senators blocked legislation from coming to the floor, which would have approved an emergency extension of long term unemployment benefits for 1.3 million Americans. The first vote, on a Democratic proposal to extend benefits for 11 months, was defeated 52 to 48. The second Republican-backed vote, which proposed a three-month extension of benefits tied to a continuation of the sequester cuts through 2024, lost by a vote of 55 to 45. Congress allowed the benefits to expire last year on December 28, leaving millions of unemployed workers and their families in the lurch....

This comes in the wake of the latest maneuvers in Obama’s phony campaign against inequality. In a speech from the White House last week, the president touted plans for “economic promise zones,” which will offer large tax breaks to businesses and accelerate the spread of charter schools, and vowed to lead a renewed fight against inequality in the US.

Taken together, these developments illustrate the determination of the entire political establishment to forge ahead with far-reaching austerity measures.

14---Fisher goes on to confirm Peter Boockvar's "QE puts beer goggles on investors, zero hedge

In the parlance of central banking, the “exit” challenge we now face is somewhat daunting: How do we pass a camel fattened by trillions of dollars of longer-term, less-liquid purchases through the eye of the needle of getting back to a “normalized” balance sheet so as to keep inflation under wraps and yet provide the right amount of monetary impetus for the economy to keep growing and expanding?

15, zero hedge

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