Sunday, February 2, 2014

Today's links

1---The Deepening Crisis, naked capitalism

Emerging Market Rout May Signal ‘Sudden Stop’ (Bloomberg)
Brazil, South Africa, Turkey and Ukraine are the emerging markets most at risk of a “sudden stop,” in the view of Morgan Stanley. 

That’s defined as a halt or even a reversal in capital flows into a country, slashing access to international financial markets for an extended period and weakening the economy. The term is often linked to 1995 work by Rudi Dornbusch, the late international economics professor at the Massachusetts Institute of Technology in Cambridge. 
Mexico, Indonesia, India and Thailand are also in some jeopardy of such a phenomenon as investors turn sour on emerging markets, London-based economists Manoj Pradhan and Patryk Drozdzik said in two reports to clients over the past week. They wrote as central banks in India, Turkey and South Africa raised interest rates to shore up confidence in their currencies. 
The Morgan Stanley authors evaluated the risk by looking at factors such as the reliance on capital inflows and credit, the size of the current account deficit, the legroom for policy and exposure to China. In the case of Brazil, for example, capital inflows account for almost half the money entering the country, total external debt is more than the size of foreign exchange reserves, the current account shortfall is almost 4% of gross domestic product, inflation is around 6% and government debt is about 70% of GDP.
 The countries most in danger now face questions over how they will fund their budget and trade gaps and whether they can pivot to new sources of expansion, the economists said. Investors should monitor the processes of reducing debt and political splits. Ukraine, Turkey and Thailand have all witnessed social unrest...

Currency devaluation ‘easy’ answer to emerging market crisis (RT)
The emerging market currency crisis is being propelled by policymakers who are “seeking the easy answer” by devaluing their currency, which is an unsustainable global model, Saxo Bank CEO Steen Jacobsen told RT. The spectacular loss of value in emerging market currencies – the South African rand, the Russian ruble, the Indian rupee, and the Turkish lira- is a result of government’s tightening monetary policy, which has even further driven down the value against the euro and dollar. 

Governments face huge monetary policy decisions in the third and final stage of the global financial crisis which kicked off in 2008 with America’s sub-prime mortgage crisis and spilled into Europe, but simultaneous devaluation of currencies in the hope of driving up exports can’t be universally applied, says the Saxo Bank chief. “We are in the final part of this cycle. Which comes next is probably the mandate for change. We all need to change, the export-driven business model isn’t sustainable,” Jacobsen told RT in an interview at his Moscow office. [..] 
“Policymakers are always seeking the easy answer, and the easy answer right now is weakening the currency. But by doing that you have to remember that the only reason anyone buys into an emerging market is because you expect the currency to appreciate. Pursuing devaluation long term will hurt the appetite of long term .....

(On Abenomics)...
rising energy import costs and growing public liabilities totaling more than 1 quadrillion yen are increasing the nation’s default risk. Japan’s debt load is the world’s largest as a proportion of gross domestic product at 244%, according to an International Monetary Fund estimate. Credit-default swaps on JGBs have risen 13 basis points this month, the most among the 22 sovereigns tracked by Bloomberg.

The effects of PM Abe’s all or nothing gamble will come knocking big time this spring. In April the new sales tax. Hopefully for Abe, rising wages before then. But it doesn’t look good. Japan has deflation because the velocity of money -spending – is way down. How that could revive in this economy is hard to see investors,” Jacobsen explained.

(On growth in the USA)---When I saw Amazon’s disappointing numbers yesterday and the subsequent drop in its shares by 10% at one point, my first thought was: how does that fit in with the official US 3.2% GDP growth number? Holiday sales are a large part of Q4 consumer spending, which is responsible for 70% of GDP, and store sales were definitely “disappointing”. Now we see Amazon didn’t make up for the loss of sales in physical stores, and Amazon is huge in online sales. So is that 3.2% number perhaps a little exaggerated? A few hours later I saw that Megan McArdle had similar reflections: Inc.’s shares fell almost 10% a few minutes past 4 p.m., after the company dropped some disappointing earnings news. The title of the company’s news release is cheerily optimistic: “ Announces Fourth Quarter Sales up 20% to $25.59 Billion.” And its operating income actually beat estimates — $510 million, compared with $489.9 million. But fourth-quarter sales of $25.6 billion were considerably below estimates of $26.08 billion, and earnings per share were 51 cents instead of the 69 cents that analysts had been expecting.

That’s not just disappointing for Amazon; it’s also not great news for the U.S. economy. When retail foot traffic and sales were disappointing in December, the standard explanation was that people must be moving their purchases online. Obviously, they weren’t — at least, not nearly as much as analysts expected. Given how dominant Amazon is in e-commerce, this should cause most of us to revise our expectations of fourth-quarter retail sales, as well as growth in gross domestic product. And not in a good direction.

2---Home-Selling Speeds Down in December, DS News

3---Homeownership Ticks Down in Fourth Quarter, DS News

4---Food Stamp Cuts So Devastating Even Walmart Is Too Expensive, HP

Walmart struggled at the end of last year. But according to the retailer's new estimations, it wasn’t because people didn’t want to buy. It was because they couldn’t.
The retail giant warned Friday that the effect of last year's national food stamp cuts on its bottom line will likely be deeper than the company previously estimated. As a result its comparable same-store sales -- a retail metric that measures how stores are doing year over year -- will likely be slightly down for the fourth quarter.

“The sales impact from the reduction in SNAP [the U.S. government Supplemental Nutrition Assistance Program] benefits that went into effect Nov. 1 is greater than we expected,” Walmart’s Chief Financial Officer Charles Holley said in a news release Friday. “And, second, eight named winter storms resulted in store closures that impacted traffic throughout the quarter...

the poorest Americans are so pinched they can’t even afford to shop at the cheapest retailers. Family Dollar, another typical destination for Americans in a squeeze, also reported disappointing earnings earlier this month, which they blamed on factors including food stamp cuts, high unemployment and the payroll tax increase.

5---Is California built out? Privately owned housing starts remain all-time record lows. Affordability continues to crush home buying but signs of lower prices loom., Dr Housing Bubble

Privately owned housing starts have fallen 78 percent since 2005.  Are we not adding more people?  Didn’t home prices surge by 20 to 30 percent in California in various markets?  The problem with the current boom is that it is based on manipulated supply, artificially low rates, and massive demand from investors.  Take one or two of these items away and the market slows down.  It has and we have proof with the modest rise in interest rates from last summer.  Now we are seeing what happens when some investors begin to pullback....

Existing home sales:  Existing home sales are falling strongly.  A 20 percent year-over-year drop when prices are up tells you something is changing.

Median home price:  A near 20 percent year-over-year gain in home prices with no real income gains is telling.  Speculation is at play here.  This time it isn’t small time players going in with NINJA loans but big Wall Street banks leveraging the Fed’s low rate environment to snag real property.

Traditional housing affordability:  This has dropped by 17 percent in one year largely because of price gains and interest rate moves.  Only 32 percent of families in California can actually afford a median priced home.

30-year fixed rate mortgage:  A 4.46 percent mortgage is still a steal.  But this is a 33 percent move up from the lows reached last year.  Since many Californians live by an “all hat and no cattle” philosophy many now cannot afford to buy (hence the drop in existing sales as investors also wane).
Investors have had a good run at it since 2008.  Yet their game is one of margin and gains are now harder to make.  You need additional suckers to unload to.  Regular households are largely unable to save a good portion of money and even households with good incomes have bad spending habits.

  Just look at the number of leased foreign cars on the freeways.  The stock market is also modestly correcting but you see how quickly things can change because people assume the current situation is normal.  Nothing is normal about 20 percent annual price increases when incomes remain stagnant.

6---(Video included) Prof Robert Hockett: Need Eminent Domain to Break Securitization Suicide Pact Killing Recovery – A Mandelman Matters Podcast, mandleman

Professor Hockett’s premise is simple: underwater mortgage loans and the ongoing foreclosures they create are most significant impediment to our economic recovery. Ergo, the only true solution is to reduce principal balances for those who owe far more than their homes are worth.

He also explains that the problem is that the Pooling & Servicing Agreements (“PSAs”) that govern when and how securitized mortgages may be handled in terms of modifications and principal reductions were not written to take into account the situation we face today, and have been facing since at least 2008.  He sees them as “suicide pacts” that are at this point not only preventing our economic recovery, but on a course to cause irrevocable harm to investors and homeowners as well.

And he says cities need to employ the power of eminent domain to break the suicide pact and provide for the writing down of mortgage balances before it’s too late.  It’s a plan he and his colleagues have been discussing for roughly six years… and theirs is a group of very smart guys.....

As Hockett says in the paper’s abstract, written in June of 2012:
“Respected real estate analysts now forecast that the U.S. is poised to experience a renewed round of home mortgage foreclosures over the coming 6 years. Up to 11 million underwater mortgages will be affected. Neither our families, our neighborhoods, nor our state and national economies can bear a resumption of crisis on this order of magnitude.”

7---Are we in the 9th inning for foreclosures? No, mandleman

Sending out fewer NODs, for example, only means that servicers sent out fewer NODs… it means nothing as far as assessing which inning of the crisis we’re in or not in....

Signs of a coming mortgage collapse are ubiquitous. Some banks are exiting the mortgage business simply because home mortgage origination — and refinancing — have fallen off a cliff recently as interest rates have gone up.  Firms have cut tens of thousands of jobs… the sector announced 57,591 layoffs since January of 2013, according to a report from Challenger Gray & Christmas.
Regardless of what RealtyTrac would have us believe, the mortgage slowdown is already showing up in the housing data.  October marks the fifth month that pending home sales have fallen. The National Association of Realtors says low inventory and affordability are to blame… and those are certainly two of the factors involved.....

Historically, investors have represented 10 percent of home sales, but last year, states like California, Arizona and Nevada saw investors pick up half of all the homes sold.  Who’s going to step in to pick up that demand?   What would last year’s housing market have looked like without those investors bidding up and buying?....

8--Eminent Domain: An idea whose time has come?, mandleman

9---Dark Side of Capital in Emerging Markets, NYT

Not that long ago, Turkey seemed to be a rousing economic success story. Economic growth was impressive and foreign capital was coming in rapidly. Now inflation seems to have taken off, and the Turkish lira is down about 20 percent since the end of 2012. The Turkish stock market has lost a third of its value in lira since last spring.
The widespread worry about emerging markets — investors are also nervous about Brazil, India, Indonesia, Thailand, Taiwan and Malaysia, to name a few — can in some ways be traced to the fact that they did remarkably well during the credit crisis that began in 2008. Many of them had hefty foreign currency reserves, and their growth attracted foreign investment.

That investment helped to push up local asset prices, which intensified the boom and brought in more capital. Eventually, money flowed in from investors chasing performance, a sort of “What goes up must keep going up” attitude. The currencies appreciated, and countries began to buy more things from abroad while their industries were losing competitiveness. Current-account deficits began to soar, but that did not immediately matter because the capital was still coming in.

When the cycle turns, as it eventually must, investors who were clamoring to invest can suddenly demand to get out. How much a country is hurt may depend on what form that capital infusion took. Foreign direct investment, like building plants or buying local companies, cannot be quickly or easily reversed. But bank loans can fade away, and those who bought stocks on the local market can sell quickly. The worst problem can come from short-term debt to foreigners, who can get cold feet at the worst possible time.
That is why capital controls can make sense when times are good. ....

Morgan Stanley warns of a possible “suddEM stop” for one or more economies, a play on the abbreviation for emerging markets. But even if you are sure that is going to happen, forecasting the timing is far from easy.

Early in 1994, Rudi Dornbusch, an M.I.T. economist, wrote a prescient paper arguing that the Mexican peso would have to be substantially devalued. But the peso held its own until December, only to lose a quarter of its value in a few days. “The crisis takes a much longer time coming than you think,” he later said, “and then it happens much faster than you would have thought, and that’s sort of exactly the Mexican story. It took forever and then it took a night.”

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