Wednesday, January 29, 2014

Today's Links

Today's quotes: "50 years on I can safely state that the War on Poverty has been won. The poor have been defeated, the middle class conquered." Yves Smith, naked capitalism

"Will the political class ever admit that a permanently shrunken labor force is an elite policy goal that Obama has successfully achieved?" Yves Smith, naked capitalism

1---U.S. banking regulator, fearing loan bubble, warns funds, Reuters

Regulators are most alarmed about leveraged loans to companies with the poorest credit quality. Many of the loans helped to finance buyouts and to fund payouts to private equity firms in the form of dividends...

A U.S. bank regulator is warning about the dangers of banks and alternative asset managers working together to do risky deals and get around rules amid concerns about a possible bubble in junk-rated loans to companies.
The Office of the Comptroller of the Currency has already told banks to avoid some of the riskiest junk loans to companies, but is alarmed that banks may still do such deals by sharing some of the risk with asset managers.

"We do not see any benefit to banks working with alternative asset managers or shadow banks to skirt the regulation and continue to have weak deals flooding markets," said Martin Pfinsgraff, senior deputy comptroller for large bank supervision at the OCC, in a statement in response to questions from Reuters.

Among the investors in alternative asset managers are pension funds that have funding issues of their own, he said.
"Transferring future losses from banks to pension funds does not aid long-term financial stability for the U.S. economy," he added...

That may be happening with leveraged loan issuance, which hit a record $1.14 trillion in the U.S. in 2013, up 72 percent from the year before, according to Thomson Reuters Loan Pricing Corp (LPC)....

But regulators are no more sanguine with asset managers taking on this risk given their investors include underfunded public pension plans....Regulators are most alarmed about leveraged loans to companies with the poorest credit quality. Many of the loans helped to finance buyouts and to fund payouts to private equity firms in the form of dividends....

Lenders want to pass interest-rate risk on to unsuspecting borrowers while working within the confines of the new qualified mortgage rules. Although some borrowers claim to understand the risks, if their bets prove wrong, most will petition for bailouts, and they have every reason to expect to get one.

2---We have a cancer (and ) it is killing us. Yves Smith, naked capitalism (The real state of the union)

Financial terrorism is infinitely more destructive than al Qaeda, infinitely better paying, and can be practiced with impunity. As for ordinary Americans, they face a militarized police and a Dickensian legal system.

At the same time, we are seeing our Constitutional rights bulldozed in the construction of a surveillance state, a euphemism for a police state. This is a state, totalitarian in its nature and ambitions, which, on the one hand, operates in the greatest secrecy with zero public accountability and makes war on anyone who seeks to expose its workings and, on the other, tells us we have nothing to worry about if we have nothing to hide. It targets us yet tells us we are not its targets. This state, or rather those who control it, can know everything about us, but we can know nothing about it or them. Its justification is that it is only after the bad guys, but this state with all its vast spying programs and resources has never actually caught any “bad guys”, certainly none to justify its enormous budgets and unchecked powers.

The wealth and the health of this country is based on the people. The value of the dollar is not based on gold or the ability to tax but on us. Yet we have been looted for decades by predatory elites and the rich. Our lives are made poorer, shorter, more pain- and anxiety-filled by them. And our country is made weaker. Education through debt and lack of opportunity is discouraged. Skills are thrown away as jobs are shipped abroad. On-the-job training has become a dirty word. We are being hollowed out both as a country and a people. Our state is this: We have a cancer. It is feeding on us. It is killing us. Our cancer tells us that without it, we cannot survive. The truth is we have no hope of survival, indeed no hope of anything, unless we cut it out. Liberal, conservative, or indifferent, Tea Party, progressive, or independent, this is the choice we are all faced with, not just for ourselves but each other. If we are to act and if we are to be successful, then we must act together. That is where we are. The choice is yours

3---Fewer Americans Than Ever Think They're Middle-Class , Huff Post

Just 44 percent of Americans say they identify as “middle-class,” the lowest share on record, according to a survey released Monday by the Pew Research Center. That’s down from 53 percent in 2008, during the first few months of the Great Recession.
On the flip side, as the chart shows, the percentage of Americans who see themselves as "lower-class" has surged 60 percent in the past six years...

Even as the share of Americans actually earning middle-income wages has been on a steady decline for the past few decades, a large swath of Americans have continued to view themselves as middle class.
That’s because as New York Times columnist Paul Krugman notes, whether you see yourself as middle-class often has little to do with income. Instead, it’s more about markers like whether you have a stable job and income, whether you’re protected from a financial emergency and whether through your hard work you can give your kids a better life.

For many Americans, the Great Recession and its subsequent slow recovery has thrown all of those things into question. Nearly half of the jobs lost during the recession paid middle-income wages and about the same share of new jobs created during the recovery were low wage, according to a 2012 analysis from the National Employment Law Project, a left-leaning think tank. Nearly half of Americans are one financial emergency from financial disaster, according to a 2013 report from Corporation for Enterprise Development. Student loan debt topped $1 trillion in 2012.

4---Study Debunks Classic Argument About Low-Wage Workers , Huff Post

Turns out that more education does not necessarily mean more pay.
Low-wage workers are a lot more educated than they were nearly 50 years ago, but they are making much less, according to a new study by the Economic Policy Institute, a left-leaning think tank.

5---The rich are different. They're assholes. naked capitalism

? As it happens, we have polling data! The Daily Beast (of all places) summarizes: “The rich really are as selfish as you think” [complete study (PDF)]:
According to [a new study by political scientists Benjamin Page, Larry Bartels, and Jason Seawright]—which surveyed a sampling of the richest 1 percent of Americans—the wealthy are almost categorically opposed to efforts to reduce inequality and improve material conditions for working- and middle-class** people. 
Among these Americans, just 40 percent support an increase to the minimum wage, just 13 percent support an expansion of the Earned Income Tax Credit, just 8 percent support a government jobs program for the unemployed, just 32 percent support universal health insurance, and only 30 percent support expanded worker training programs. By contrast, the general public is more supportive of all of these positions. 
What the rich do support, however, are policies that would shift burdens to individuals, or introduce some nebulous “competition” into public goods. That includes charter schools (90 percent support), vouchers (55 percent), Social Security privatization (55 percent), and merit pay for teachers (93 percent). 
If this agenda looks familiar, it’s because it’s basically identical to the one pushed by “centrist” deficit hawks in Washington, who have devoted themselves to the consensus positions of business and other economic elites. For them, deficit reduction—through substantial cuts to the welfare state—is more vital than efforts to reduce unemployment or strengthen the social safety net.

6---US economy headed towards permanent stagnation...the New Normal, NYT

We look back upon the Great Depression as a discrete event with a beginning and an end; a long and profound economic shock but one that turned out to be nonetheless temporary. In the 1930s, however, many feared that what John Maynard Keynes clinically called “equilibrium at less than full employment” might, in fact, be the new normal — forever.

There is a lesson here for us, somewhere. In hindsight, the Depression suggests our era will, too, eventually emerge from its economic morass. Yet we should hardly let optimism carry us away....

Broader measures of joblessness paint a bleak picture. As Lawrence Summers, President Obama’s former top economic adviser, noted in a speech at the International Monetary Fund in November, “the share of men or women or adults in the United States who are working today is essentially the same as it was four years ago.”

Today, the American economy is still roughly 8 percent smaller than it would be if it had followed the path the Congressional Budget Office forecast in August 2007. That’s a gap of $1.5 trillion, or almost $5,000 for every person in the country.
The failure to rebound has revived the old, recurring fear: Is stagnation inevitable? Has the economy — has the job market — become stuck for good? ...

The Obama administration’s boldest propositions are sensible, from raising the minimum wage to $10.10 to extending emergency unemployment insurance. But they are not quite on the scale of a trillion dollars’ worth of lost gross domestic product....

Mr. Summers proposed a list of factors that could be holding the economy back. A slowdown in the expansion of the labor force and weaker productivity growth might be restraining investment, he suggested. The concentration of income among the very richest could be curbing consumer spending.
Importantly, he has noted that the forces restraining growth preceded the crisis. “Even a great bubble wasn’t enough to produce any excess in aggregate demand,” Mr. Summers said in his November speech. Whatever is wrong with the United States economy has been wrong for a while.
There are potentially great benefits to government investments in public works at a time like this. ...

Our current path — set by the Federal Reserve’s huge stimulus to encourage lending — seems dangerously similar to the wanton credit expansion that led to the crisis of a few years ago. Trusting it any further appears foolhardy.

It would be better to rely on fiscal policy, but the path favored by many Republicans in the House seems even worse. To slash government spending and let the economy run its bedraggled course would probably transform our economic emergency from a painful though temporary setback into a permanent feature called stagnation.
And yet this is essentially the policy the nation is following.

7---Bernanke's Legacy? " Has the economy downshifted to some slower pace of growth that the Fed can’t change? ", Bloomberg

Extraordinary Actions

The crisis response also transformed the institution in ways that defy any near-term conclusion because nobody knows whether extraordinary actions, like purchasing $1.5 trillion in mortgage debt or creating $2.4 trillion in excess bank reserves, can be retracted, shrunk and unwound successfully.
The Fed is more extended politically as it engages in policies such as suppressing mortgage rates, and the size and influence of its open-market operations have involved it in financial markets as never before.
“The legacy is still open,” said Vincent Reinhart, a former top Fed official and now chief U.S. economist at Morgan Stanley in New York. “We survived. The question is what are the consequences?” ...

“I think it is very intrusive,” Tad Rivelle, who oversees about $84 billion as chief investment officer for U.S. fixed-income securities at TCW Group in Los Angeles, said of the Fed’s operations under Bernanke. The outgoing chairman’s legacy “will ultimately be negative” as policies used during the crisis and slow recovery lead to future instability, he said.

Social Instability

That instability may be social and political as well as financial, he said. Banks are still wary lenders, so the Fed’s low-rate policies are providing what Rivelle calls “preferential access” to a privileged group of borrowers: the government, corporations and consumers with the highest credit scores.

The bond-buying policy, known as quantitative easing, has helped boost asset prices. The Standard and Poor’s 500 stock index rose 30 percent last year, and home prices rose a projected 11.5 percent in 2013, according to an index tracked by CoreLogic, an Irvine, California, data and analytics company. Yet earnings per hour for private-sector workers have climbed just 2 percent a year on average since 2011 compared with a 3.2 percent gain in 2007, the last year of the previous expansion. Adjusted for inflation, they’ve barely grown at all.

The 2010 Dodd-Frank Act, the most sweeping rewrite of financial rules since the 1930s, contains the phrase “to end too-big-to-fail” in its preamble, a message to regulators that no bank should be so big and risky that it would have to be saved again. To put a point on it, Congress limited the Fed’s power to lend emergency funds to non-bank corporations to a broad-based facility that could only be accessed by several institutions. The message was that singular bailouts of firms such as Bear Stearns were over. ...

Among the unresolved questions as Bernanke exits: Can the Fed operate indefinitely with a multi-trillion-dollar balance sheet? Is the flow of credit to the economy constricted with the banking system under intense regulatory scrutiny? Has the economy downshifted to some slower pace of growth that the Fed can’t change?

“This is a Fed that’s intervening in the yield curve, it’s intervening in liquidity markets, it’s intervening in many asset classes,” said Julia Coronado, a former Fed board staff economist who is now chief economist for North America at BNP Paribas in New York.
“The book is still open, the last chapters have yet to be written, and it’s way too soon to say, ‘Ah, this is his legacy,’ because history is the judge, and there’s still a lot of risk.”
Meanwhile, the Fed’s retreat from quantitative easing is slowing capital flows to emerging markets, roiling local stock markets. The MSCI Emerging Markets Index is down 6.8 percent year-to-date

8---The Housing Slowdown Has Already Begun,  New Deal Democrat

The simple fact is that the housing market follows interest rates usually with a six to nine month lag....

The data that we have seen in December confirms that in 2013 we already have seen a slowdown, and is in accord with my forecast that at some point this year, we will see a YoY change of -100,000 in permits and/or starts. Could it be different this time? Of course, but history is on my side....

9---American "exceptionalism"?, RT

RT: The American President claimed that, quote "No other country in the world does what we do." Is he once again back on his "US exceptionalism" hobbyhorse?
EP: I think he certainly is, though he is right on the one hand, because no one does as the US does in terms of spying on the people of the world, launching drone strikes and other military actions and things of that nature, and attempt to dominate the world with this massive military machine and in unprecedented fashion. So in that sense he is right. His attempt to whip up the American patriotism by saying “We are the greatest country” to the exclusion of all others, I think, it's odious and it’s not something that would bring more cooperation among people in the world.

10--"A nauseating ritual"---Obama's SOTU speech: Pro-business nostrums, militarist jingoism and a jumble of penny-ante proposals by the president, who has done more than any of his predecessors to funnel money into Wall Street, wsws

US President Barack Obama’s State of the Union address Tuesday was, perhaps even more than his previous addresses, a cynical and reactionary charade. Empty rhetoric was combined with a complete disconnect from the reality confronting millions of people and an assertion of executive power.
The thrust of the speech was a mixture of pro-business nostrums, militarist jingoism and a jumble of penny-ante proposals. The media’s attempt to promote the speech as a major address on inequality was a deliberate falsification aimed at drumming up interest among a generally indifferent and hostile population.

Instead it was a threadbare attempt to cover over the reality of the past year, a year in which the mask fell off a society riven by historically unprecedented levels of social inequality and mass poverty, overseen by a vast police-state spying apparatus, on the verge of another global war of incalculable consequences and presided over by the most right-wing administration in US history...

The president, who has done more than any of his predecessors to funnel money into Wall Street, acknowledged that “corporate profits and stock prices have rarely been higher, and those at the top have never done better,” as if the policies of his own administration had nothing to do with it. He quickly claimed, however, that the American people “don’t resent those who, by virtue of their efforts, achieve incredible success.”...

Obama made as brief a reference as possible to the fact that at the end of last year, due to the actions of Democrats and Republicans, 1.6 million people were cut off of extended unemployment benefits. At the same time, he called for “reforming unemployment insurance so that it’s more effective in today’s economy,” which could only mean introducing greater restrictions on eligibility.
The president was also silent on the Democrats and Republicans having just agreed to slash $8.7 billion from food stamps, only the second cut in the program since it was founded (the first coming just a few months ago).

11---A second bite of the apple? Hedge Funds See Cheap Homes With Soured Loans: Mortgages. Bloomberg

“The supply of NPLs is going to be very substantial for the next several years,” said Michael Vranos, Chief Executive Officer of Ellington, which oversees $6 billion. “Until last year, with the heavy supply of distressed securities, but only light supply of NPLs, we saw much better value in securities.” ..

HUD offers the loans at a significant discount to the unpaid principal balance with the expectation that buyers will try to modify the loan terms or take other actions to prevent neighborhoods from being swamped with vacant homes. Homeowners have a better chance of keeping their properties if the loans are sold because FHA’s rules prevent borrower-aid tactics available to private investors, such as reductions to principal balances.

There are about 1.3 million properties in the U.S. tied to loans at least 90 days late and not yet in foreclosure, according to Black Knight Financial Services. Another 4.5 million borrowers are at least 30 days delinquent or in the repossession process, according to a report released today. ...

Values increased as the economy strengthened and firms led by Blackstone bought more than 366,200 single-family homes in cities such as Phoenix and Atlanta since January 2011 to turn into rentals, according to Port Street Realty and RealtyTrac data. That’s made delinquent loans a relatively cheaper way to acquire real estate or profit by working with borrowers who are behind on mortgage payments. ....

Ellington considers delinquent loans as one of the biggest opportunities this year, said Vranos. The firm weighs buying soured debt or foreclosed homes to turn into rentals depending on the location.
“There are certain areas where we may might want to buy a house, where we may not be able to necessarily get the NPL,” said Vranos, who founded Ellington in 1994. The firm expects to see strong home price appreciation continue in several parts of Florida, including Punta Gorda and Miami, as well as Las Vegas.
Ashish Pandey, CEO of Altisource Residential Corp. (RESI), said at a conference in Las Vegas last week that he expects as many as 500,000 non-performing loans to sell in 2014.
“Banks have made a decision internally that a delinquent borrower is not a core customer,” said Pandey, whose firm had 6,300 delinquent loans as of the third quarter of 2013. Altisource rose 0.6 percent to $30.67 today, and has gained 94 percent since 2012

12---America’s False Dawn, Stephen Roach, Project Syndicate available on Businessday

Financial markets and the so-called Davos consensus are in broad agreement that something close to a classic cyclical revival may finally be at hand for the US. But is it?
At first blush, the celebration seems warranted. Growth in real GDP appears to have averaged close to 4% in the second half of 2013, nearly double the 2.2% pace of the preceding four years. The unemployment rate has finally fallen below the 7% threshold. And the Federal Reserve has validated this seemingly uplifting scenario by starting to taper its purchases of long-term assets.

But my advice is to keep the champagne on ice. Two quarters of strengthening GDP growth hardly indicates a breakout from an anemic recovery. The same thing has happened twice since the end of the Great Recession in mid-2009 – a 3.4% average annualized gain in the second and third quarters of 2010 and a 4.3% average increase in the fourth quarter of 2011 and the first quarter of 2012. In both cases, the uptick proved to be short-lived.

A similar outcome this time would not be surprising. Indeed, much of the acceleration in GDP growth has been bloated by an unsustainable surge of restocking. Over the first three quarters of 2013, rising inventory investment accounted for fully 38% of the 2.6% increase in total GDP. Excluding this inventory swing, annualized growth in “final sales” to consumers, businesses, and the government averaged a tepid 1.6%. With inventory investment unlikely to keep accelerating at anything close to its recent rate, overall GDP growth can be expected to converge on this more subdued pace of final demand.

That gets to the toughest issue of all – the ongoing balance-sheet recession that continues to stifle the American consumer. Accounting for 69% of the economy, consumer demand holds the key to America’s post-crisis malaise. In the 17 quarters since “recovery” began, annualized growth in real personal consumption expenditures has averaged just 2.2%, compared to a pre-crisis trend of 3.6% from 1996 to 2007.

To be sure, there were indications of a temporary pick-up in annual consumption growth to nearly 4% in the fourth quarter of 2013. Yet that is reminiscent of a comparable 4.3% spurt in the fourth quarter of 2010, an upturn that quickly faded.
The lackluster trend in consumption is all the more pronounced when judged against the unprecedented decline that occurred in the depths of the Great Recession. From the first quarter of 2008 through the second quarter of 2009, real consumer spending plunged at a 1.8% average annual rate. In the past, when discretionary spending on items such as motor vehicles, furniture, appliances, and travel was deferred, a surge of “pent-up demand” quickly followed.
Not this time. The record plunge in consumer demand during the Great Recession has been followed by persistently subpar consumption growth.

This should not be surprising. The American consumer was, in effect, ground zero in this horrific crisis. Far too many US households made enormous bets on the property bubble, believing that their paper gains were permanent substitutes for stagnant labor income. They then used these gains to support a record consumption binge. Compounding the problem, they drew freely on a monstrous credit bubble to finance the gap between spending and income-based saving.
When both bubbles burst – first housing, and then credit – asset-dependent US consumers were exposed to the American strain of the Japanese disease first diagnosed by Nomura economist Richard Koo.

Koo has stressed the lingering perils of a balance-sheet recession centered on the corporate sector of the Japanese economy; but the analysis is equally applicable to bubble-dependent US consumers. When the collateral that underpins excess leverage comes under severe pressure – as was the case for Japanese businesses in the early 1990’s and American consumers in the mid 2000’s – what Koo calls the “debt rejection” motive of deleveraging takes precedence over discretionary spending.

The Japanese parallels do not stop there. As research by the economists Richard Caballero, Takeo Hoshi, and Anil Kashyap has shown, Japan’s corporate “zombies” – rendered essentially lifeless by their balance-sheet problems – ended up damaging the healthier parts of the economy. Until balance sheets are repaired, such “zombie congestion” restrains aggregate demand. Japan’s lost decades are an outgrowth of this phenomenon; the US is now halfway through the first lost decade of its own.
Indicators of US balance-sheet repair hardly signal the onset of the more vigorous cyclical revival that many believe is at hand. The debt/income ratio for American households is now down to 109% – well below the peak of 135% reached in late 2007, but still 35 percentage points above the average over the final three decades of the twentieth century.

Similarly, the personal saving rate stood at 4.9% in late 2013, up sharply from the low of 2.3% in the third quarter of 2005; but it remains 4.4 percentage points below the average recorded from 1970 to 1999. By these measures, American consumers’ balance-sheet repair is, at best, only about half-finished.
Optimists see it differently. Encouraged by sharp reductions in households’ debt-service costs and a surprisingly steep fall in unemployment, they argue that the long nightmare has finally ended.
That may be wishful thinking. Plunging debt service is largely an outgrowth of the Fed’s unprecedented zero-interest-rate policy. As long as the stock of debt remains excessive, consumers will dismiss the reduction in interest expenses as nothing more than a temporary subsidy from the Fed.

Moreover, the decline in unemployment largely reflects persistently grim labor-market conditions, which have discouraged many workers from remaining in the labor force. If the labor-force participation rate was 66%, as it was in early 2008, rather than 62.8%, as it was in December 2013, the unemployment rate would be just over 11%, not 6.7%.
Yes, there has been some progress on the road to recovery. But, as Carmen Reinhart and Ken Rogoff have long documented, post-crisis healing is typically slow and painful. Notwithstanding the Fed’s claims that its unconventional policies have been the elixir of economic renewal in the US, the healing process still has years to go.

A similar outcome this time would not be surprising. Indeed, much of the acceleration in GDP growth has been bloated by an unsustainable surge of restocking. Over the first three quarters of 2013, rising inventory investment accounted for fully 38% of the 2.6% increase in total GDP. Excluding this inventory swing, annualized growth in “final sales” to consumers, businesses, and the government averaged a tepid 1.6%. With inventory investment unlikely to keep accelerating at anything close to its recent rate, overall GDP growth can be expected to converge on this more subdued pace of final demand.

No comments:

Post a Comment