Monday, January 27, 2014

Today's links

Today's quote:   "The mainstream will always choose the explanation that attributes problems to an unpredictable and unique “shock” rather than explanations that see problems as emerging organically from the fundamental nature of capitalist finance." Dan Kervick, comments, naked capitalism

1---"It takes six years to resolve defaulted loans made to the least creditworthy borrowers before the real-estate crash.(subprime), Bloomberg

Investors including Blackstone Group LP and Colony Capital LLC have been central to the rebound, buying more than 366,200 single-family homes in cities such as Phoenix, Las Vegas and Atlanta, since January 2011 to turn into rentals, according to Port Street Realty and RealtyTrac data. Federal Reserve policies that reduced borrowing costs and increased homeowner refinancing also lifted the market. ...

These properties are rotting away,” Gundlach, 54, said last week on a conference call with investors, about homes stuck in foreclosure pipelines, adding that it could take six years to resolve defaulted loans made to the least creditworthy borrowers before the real-estate crash.

While rising prices, and an improving economy have resulted in a steep drop in foreclosures, there are more than 1.2 million properties in the repossession process or owned by banks that the market is absorbing, according to RealtyTrac. ...

There are about 8 million borrowers still underwater, who owe more on their mortgages than their homes are worth, which increases the probability of default, Deutsche Bank AG wrote in a report this month. Florida and California have the highest concentration, each with more than one million single-family houses in negative equity....

Subprime and option adjustable-rate mortgages originated at the peak of the market, with weaker underwriting standards, have the highest exposure to negative equity, Deutsche Bank analysts led by Steven Abrahams wrote in the report.

Loss severities on subprime debt, tied to risky mortgages that inflated the housing bubble, increased to 75.9 percent from 74.1 in the last three months of the year. The severities -- a measure of losses suffered on a liquidated loan -- peaked at 77.1 percent in early 2012 from 12.8 percent at the end of 2006, during the property boom.

2----High P/E ratio signals crash, (16.3 trillion dollars in bailouts, down the tubes) , counterpunch

The most basic measure of a stock, or the stock markets as a whole, is the “price/earnings ratio.” The P/E ratio is a company’s yearly profit divided by the price of one share. As of January 22, the P/E ratio for the S&P 500, the standard barometer, was at about 19.6 and has been rising steadily the past couple of years. A handful of times in history, the P/E ratio has risen above 20, only to crash each time. The historical average is 14.5 — meaning that stocks are currently overvalued.
Stock prices have become unmoored from underlying economic conditions — and are frequently pure speculation.
The top one percent has captured almost all of the “recovery,” which is why the corporate media continues to peddle its mantra. Emmanuel Saez, an economist at the University of California, calculates that 95 percent of all U.S. income gains from 2009 to 2012 went to the top one percent. That result is an intensification of a pattern — Professor Saez calculates that 68 percent of all income gains for the longer period of 1993 to 2012 went to the top one percent....

The largesse of the Federal Reserve over the past five years has amounted to one of the largest ever subsidies to the American wealthy — fueling record fortunes, record numbers of new millionaires and billionaires, and an unprecedented shopping spree for everything from Ferraris to Francis Bacon paintings. The prices of the assets owned by the wealthy, and the things they buy, have gone parabolic, bearing little relationship to the weak, broader economy. …

How much could these enormous sums of money have benefited working people had this money instead been used to create jobs directly or for productive social investment? And these barrels of money thrown to financiers are merely the latest tranches — the U.S., E.U., Japan and China committed 16.3 trillion dollars in 2008 and 2009 alone on bailouts of the financiers who brought down the global economy and, to a far smaller extent, for economic stimulus. For the rest of us, it’s been austerity and mounting inequality.

3---The real origins of the crisis, (shadow banking, large complex financial institutions (LCFIs), and "gross debt-financing flows", naked capitalism

According to this view, the financial crisis was triggered by an external and exogenous shock that resulted from excess saving in emerging market countries, not the shadow banking system in advanced countries which was the epicenter of the financial crisis. Instead, we argue that a key cause of the global financial crisis was the dynamic expansion of balance sheets at large complex financial institutions (LCFIs) (Borio and Disyatat [2011] and Shin [2012]), driven by the endogenously elastic finance of global dollar funding in the global shadow banking system....

The majority of gross capital flows were conducted by a handful of large, complex financial institutions (LCFIs) at the center of the global financial system.[5] The process of financial deregulation and consolidations among financial conglomerates spurred a growing convergence between the activities of the banks and the other financial institutions since the 1990s. The development led to the emergence of LCFIs in the U.S. and Europe, which dominate the global financial markets for debt and equity securities, syndicated loans, securitizations, structured-finance products and OTC derivatives.[6] Our analysis will suggest how gross capital flows had expanded in the 2000s, emphasizing the key role of the US dollar, as LCFIs increased their balance sheet on a global scale before the financial crisis

4---Emerging-market stocks have had the worst start to a year since 2009 , Bloomberg

Emerging-market stocks have had the worst start to a year since 2009 and currencies from Turkey to South Korea tumbled amid signs growth is slowing in China as the Federal Reserve prepared to review further stimulus cuts this week. ....

The speed at which markets have declined is a surprise,” said Adrian Zuercher, a Hong Kong-based global strategist at Credit Suisse Hong Kong Ltd., part of the asset-management unit that manages about $400 billion. “The emerging-market story of the past 10 years as we knew it is over. Fed tapering will reduce global liquidity and now is the time to differentiate.”

More than $995 billion has been erased from the value of emerging-market equities since the Fed signaled in May that it could start scaling back asset purchases. Fed policy makers meet Jan. 28-29 and will probably cut another $10 billion from their monthly bond-buying program, according to the median estimate of economists surveyed by Bloomberg this month.

5---QE's Impact: The jury is still out, Stephen Williamson's blogspot

With QE, I think the jury is still out. Whether this has quantitatively significant effects or not, a key question is whether it is appropriate for the central bank to be engaging in debt management, which has traditionally been the province of the fiscal authority. Indeed, while QE was taking place, with the Fed acting to reduce the duration of the outstanding consolidated government debt, the Treasury was issuing debt with a longer average duration. It seems certain that, once QE is phased out, the Fed will claim that these programs were a success, and put QE away in the box of good tools, for later use. If the maturity structure of the outstanding consolidated government debt is so important, then there should be a public discussion of who is to determine it. If it's determined that the Fed should be managing the government debt, then the Federal Reserve Act should be amended to accommodate those responsibilities.

Finally, perhaps the most important lasting change in policy that comes out of the Bernanke era is a greater tendency of the Fed to focus on short-run goals rather than long-run goals. Indeed, the Fed's concern with the state of the labor market seems to have evolved into a belief that the Fed can have long-run effects on labor force participation and the employment/population ratio. That belief appears to be unsupported by theory or empirical evidence. Further, FOMC members do not appear to understand that two or three more years with the Fed's policy interest rate close to the zero lower bound will not help to fix whatever ails the labor market, nor will it increase the inflation rate. If the Fed falls well short of its 2% inflation goal for some period of time, it's not obvious that would be so harmful, but at the minimum it harms the Fed's credibility.

6---Investors Have Been Bailing Out Of The Emerging Markets For The Last 13 Straight Weeks, B Insider

Almost no currency was safe in last week's emerging market bloodbath.

Investors appear to be increasingly concerned that the eventual normalization of monetary policy in the U.S. means higher interest rates and a stronger dollar, which is bad news for emerging market countries that rely heavily on external financing.

7---Growing doubts over Abenomics, WSJ

The yen has fallen 18% against the U.S. dollar since Mr. Abe’s election in December 2012. But that has failed to light the expected fire under exports — trade by volume has remained stagnant — while it has boosted the cost of imports.
Add it up and Japan just recorded its third straight trade deficit in 2013, including its second straight record deficit.
Some economists say it may be time to rethink Abenomics’ emphasis on a weak yen, or at least to ask if yen weakness has gone too far. But Japanese officials aren’t quite there yet.

There are other dangers as well: If the trade deficit persists it could throw into question Japan’s ability to buy the food, oil and natural resources it needs. It also would make it more likely that the government would eventually have to borrow from overseas to fund its massive debt load, potentially leaving it at the mercy of foreign investors.

8---Emerging markets turmoil intensifies, FT

9--Contrary to Obama's promises, the US military still permits torture, guardian

The Obama administration has replaced the use of brutal torture techniques with those that emphasize psychological torture, guardian

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