Friday, March 28, 2014

Today' Links

1---Bank of America to Pay $9.5 Billion Over Mortgage Bonds, Truthdig

The largest losses were on bonds sold as backed by high-quality mortgages but in reality stuffed with dodgy subprime home loans that went into default by the millions

While US regulators have successfully recovered billions in civil payments from the banks, some critics have said the Department of Justice has failed in its duty to enforce the law by not criminally prosecuting senior bank executives for their roles in promoting investments that ultimately led to the biggest financial crisis since the depression.
In a recent op-ed column, US District Judge Jed Rakoff said the absence of high-level convictions for the mortgage debacle likely "bespeaks weaknesses in our prosecutorial system that need to be addressed."...

Bank of America will pay $9.5 billion to settle US charges that it sold bad mortgage-backed securities to mortgage giants Freddie Mac and Fannie Mae ahead of the housing bust.
The settlement, arranged with the Federal Housing Finance Agency, which oversees Fannie and Freddie, involves securities sold by BofA as well as by Countrywide and Merrill Lynch, which were acquired by the bank.
The agreement covers four lawsuits alleging the BofA entities misled the two US mortgage giants about the quality of the underlying mortgages tied to $57.5 billion in securities sold to Freddie and Fannie....

After-tax profits for American corporations hit another record high last year, rising to $1.68 trillion.
As this chart from Quartz shows, profits have been on a roll for some time, more than fully recovering what was lost during the recession:
us-after-tax-corporate-profits-are-still-on-the-rise-total-corporate-profits-domestic-corporate-profits-world-corporate-profits_chartbuilder (1)
CREDIT: Quartz
The profits have helped boost CEO pay: Among 50 public companies, they saw a 4.1 percent increase in pay at the median last year, netting $9.8 million at that mark. That’s after average CEO pay hit a record high in 2012.

But this wealth hasn’t trickled much further down. Despite the fact that workers have been increasing their productivity — helping to drive those corporate profits — they haven’t seen much of a reward. Wages are growing at the slowest rate since the 1960s, only just barely outpacing inflation. They have actually declined since 2007, and the trend extends back even further: American workers have experienced a “lost decade” of wage growth, as their pay stayed flat or declined between 2000 and 2012, despite a 25 percent bump in productivity. On the whole, corporate profits have grown 20 times faster than workers’ incomes since 2008.

3---Record margin debt poses risk for bull market, USA Today

The amount of money investors borrowed from Wall Street brokers to buy stocks rose for a seventh straight month in January to a record $451.3 billion, a potential warning sign that in the past has coincided with irrational exuberance and stock market tops.

Borrowing money or using leverage to buy a house or a car is a sign of confidence. But getting a loan from a broker to finance stock purchases might be a sign of overconfidence in the outlook for the market, especially one trading in record-high territory, as is the current Wall Street bull.
"One characteristic of getting closer to a market top is a major expansion in margin debt," says Gary Kaltbaum, president of Kaltbaum Capital Management. "Expanding market debt fuels the bull market and is an investors' best friend when stocks are rising. The problem is when the market turns (lower), it is the market's worst enemy.

4---Get ready for stocks to drop 25 percent: Pro, cnbc

Jay Jordan, founder of the Jordan Company, issued the dire warning during an interview on CNBC's "Squawk Box," saying a 25 percent drop could extend to all asset classes. He blames the monetary policies of former Fed chair Ben Bernanke for artificially inflating asset prices through super-low interest rates.

5---It Is Informed Optimism To Wait For The Rain  , John P. Hussman, Ph.D.

Based on valuation metrics that have demonstrated a near-90% correlation with subsequent 10-year S&P 500 total returns, not only historically but also in recent decades, we estimate that U.S. equities are more than 100% above the level that would be associated with historically normal future returns. We presently estimate 10-year nominal total returns for the S&P 500 averaging just 2.2% annually over the coming decade, with zero or negative nominal total returns on every horizon of less than 7 years. Regardless of very short-term market direction, it is urgent for investors to understand where the equity markets are positioned in the context of the full cycle.

February home sales figures reached their lowest level since 2009

The Federal Reserve directly controls the short-term interest rate. But what it really tries to target is inflation and its expectations. The Fed’s goal is to achieve the target of 2% inflation in the long-term, and its preferred price index is the core personal consumption expenditure price index that excludes the volatile food and energy sectors (or core PCE for short). So how has the Fed performed in achieving its target of 2% inflation in the past 15 years?
The chart above plots the implied core PCE index if inflation had met its 2% target (red line), and the actual core PCE index (blue line) starting from 1999.  The blue line is consistently below the red line, the gap has only diverged further since the Great Recession. The cumulative effect is that today the price level is 4.7% below what it should have been had the Fed achieved its long-run target.

The divergence between target and actual inflation is all the more striking given the elevated rate of unemployment during the sample period. We have discussed in a previous post how the post-2001 and post-2009 recoveries were “jobless” – a recovery in output but not much in employment. The Fed has a dual mandate – inflation targeting and maximizing employment. It is traditionally believed that there is a trade-off between the two and a higher level of unemployment permits the Fed to go beyond its 2% inflation target (this is the famous Taylor rule). Yet the Fed has failed to achieve its target inflation despite high unemployment rates.

It is hard to fault the Fed for not trying – it brought short term rates to zero for an extended period of time, and bought trillions of dollars in bonds. Yet the gap between the red and blue lines continued to diverge.

The Fed’s difficulty in maintaining a 2% target is not just about the Great Recession. The divergence started in the 2000′s despite the Fed keeping nominal rates quite low by historical standards. In fact the only period when the blue line runs parallel to the red (implying a 2% rate of inflation for a while) is the 2004-2006 period when the economy witnessed an unprecedented growth in credit.
In ordinary times we should have seen run-away inflation given the rate of credit extension and spending against it (more on this soon). But we do not live in ordinary times anymore.
What we are witnessing is the limit of what monetary policy alone can do. Sometimes there is a tendency to assume that the Fed can “target” any inflation rate it wishes, or that it can target the overall price level – the so-called nominal GDP targeting. The evidence suggests that the Fed may not be so omnipotent.

The problems relating to below-target inflation are deeper and more structural. We discuss these issue in more detail in one of the chapters of our forthcoming book.

8---Expect Surge in Temp Jobs to Continue , wsj

9--Obama Administration Faces Diplomatic Isolation in Latin America on Venezuela, mark weisbrot Oliver Stone

10---Home sales fall for 8th-straight month in February, cnbc

11--Greece on Steroids: Ukraine’s IMF Deal, counterpunch

To summarize, the IMF deal of March 27 calls for paying western banks and lenders $6.5 billion over the next two years in debt servicing payments. It additionally requires the reduction of household gas subsidies by another $13 billion plus the total phase out of gas subsidies. And it indirectly calls for the Ukrainian government to cut spending by at least $8 billion (2.5% of GDP) over the next two years—in the form of cuts in government jobs, wage cuts for government workers, and pension payment reductions of a likely 50% for retirees in general.
Add all that up, and not surprisingly it’s around $27 billion. That’s $27 billion of economic spending and stimulus taken out of the Ukrainian real economy per the IMF deal. In other words, just about the $27 billion that the IMF purportedly will provide to the GDP per the March 27 announcement.  Which means Ukrainian households will pay for the IMF’s $27 billion package with higher gas prices, elimination of gas subsidies, government job and wage cuts, and big pension payment reductions.

But $27 billion is not really an ‘even trade off’. It’s really a net negative stimulus for Ukraine due to the composition of the IMF deal. Keep in mind, the $6.2 billion in debt servicing payments outflow to the west will have absolutely no positive impact on Ukraine’s GDP. So, first of all, it’s really only the IMF net $21 billion ‘’in” vs. the Ukrainian $27 billion taken “out” of the economy per IMF requirements.  But even $21 billion ‘in’ vs. $27 billion ‘out’ is not the true net estimate.

The $27 billion taken out reflects a household consumer spending ‘multiplier effect’ that is much larger than the $21 billion net domestic Ukraine injection by the IMF.  If one assumes a conservative 1.5 multiplier effect, the amount taken out of the Ukrainian economy is more like $40 billion over the next two years—a massive sum given that the Ukraine’s GDP in 2012 was no more than $175 and was flat to stagnant in 2013.  Of course, the $40 billion ‘out’ is adjusted by the $21 billion ‘in’ and its multiplier effect.  But while the $40 billion ‘out’ will definitely occur, there is no guarantee the full $21 billion IMF injection “in” will actually happen in turn

The $27 billion total is well in excess of the $15 billion that was being talked about in prior weeks by the public press and more than the $20 billion Ukraine had asked the IMF for at the end of 2013—an indication that the economy has been deteriorating more rapidly than reported since the beginning of 2014.
In previous articles on the Ukraine economic situation a few weeks ago, this writer estimated that at least $50 billion would be needed to stabilize the Ukraine’s economy over the next two years. That figure may even rise by 2015.

12---Fuel imports take UK back to dark days of 1984 as refineries close, Telegraph
Britain now dependent on imports of oil products such as diesel for first time in 30 years

13---Spending logs surprise fall as price pressures rise, Japan Times

                Consumers unexpectedly cut back on spending two months before the first sales tax increase since 1997, in a potential sign that emerging inflationary pressures are undermining purchasing power.

Household spending fell 2.5 percent in February from a year earlier, the first drop in six months, the government said Friday, compared with a median estimate of economists for a 0.1 percent rise.
Retail sales slowed, while a measure of inflation that strips out energy and fresh food increased the most since 1998.

While the data, which include a measure of demand for workers approaching a two-decade high, offer policymakers confidence that their drive to end deflation is working, they also flash a warning sign. Without wage gains, the danger is that the end of 15 years of sustained price declines will damage the economy.
“Households are suffering from inflation as their incomes haven’t grown much,” said Naoki Iizuka, an economist at Citigroup Inc. in Tokyo. “People are purchasing durable goods to save money before the sales tax hike, so they have to cut back on non-durables.”

The splurge on hard goods comes despite their prices rising in February at the fastest pace since April 1980. Prime Minister Shinzo Abe said Thursday that the economy has reached a stage that cannot be called deflation....

Household spending on clothing and footwear fell 9.2 percent from a year earlier. Outlays on furniture and household goods soared 25.4 percent.
Finance Minister Taro Aso said Friday that the administration will front-load spending in the budget for the fiscal year starting Tuesday, adding that the fall in consumer spending is a problem.
Japan is set for a one-quarter contraction in the next three months as spending slows after the consumption tax rise to 8 percent on Tuesday. Abe has to steer the nation through the aftermath, and the Bank of Japan may decide by May whether to add to unprecedented stimulus.

“The BOJ should start thinking about adding more stimulus in early June,” said Takuji Okubo, chief economist at Japan Macro Advisors.
Junko Nishioka, chief economist at Royal Bank of Scotland Group in Tokyo, said core inflation will probably settle around 1.2 percent or 1.3 percent over the next six months.

14--Hidden tax hike surprises await unwary consumers, JT

More gouging workers at every opportunity

15---What way forward for workers in Ukraine?, wsws

Based on discussions with the International Monetary Fund (IMF), Prime Minister Arseniy Yatseniuk said yesterday that he would lay off 10 percent of Ukraine’s civil service—24,000 workers—and impose a 50 percent increase in natural gas prices. This price hike, dismantling subsidies that survived the restoration of capitalism in the USSR, will have a devastating impact on the living conditions of millions of Ukrainians.
These measures are only a foretaste of the offensive being prepared by European and US finance capital. After elections are held, the puppet government in Kiev will implement even more onerous austerity measures.
The EU and especially German imperialism view Ukraine not only as a critical staging ground for future operations against Russia, but also an important source of cheap labor. In a revealing comment, Germany’s Finance Minister Wolfgang Schäuble said yesterday: “If we were ever to reach a situation in which we had to stabilize Ukraine, we would have many experiences in Greece [to draw on].”
Workers are being brought face to face with the disastrous social and geo-strategic consequences of the dissolution of the USSR in 1991. The policy of the imperialist powers is to transform Ukraine and the other ex-Soviet republics into impoverished, neo-colonial outposts for reckless diplomatic and military provocations against Russia that threaten war

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