Wednesday, March 12, 2014

Today's Links

1--Impending doom in the EMs: When the reserves run low, the "Runs on wholesale corporate deposits from the domestic banking sector become likely", house of debt

His analysis points to the inherent dangers of debt in emerging markets. A reliance on debt – especially debt denominated in foreign currency (i.e. dollars) – exposes emerging market economies to run risk. We typically associate such run risk with leveraged financial institutions, but Shin is arguing that bond managers may also run if things go sour. The dangers of debt are, of course, the focus of our book due out in May.

2---A Relentless Widening of Disparity in Wealth, NYT

(Soak the rich...Please)

Glancing back across history from the present-day United States, it looks as if Kuznets’s curve swerved way off target. Wages have been depressed for years. Profits account for the largest share of national income since the 1930s. The richest 10 percent of Americans take a larger slice of the economic pie than they did in 1913, at the peak of the Gilded Age....

During the Gilded Age — a period of enormous concentration of income and wealth — the stock of the world’s privately held capital amounted to some five years’ worth of global income, by Professor Piketty’s estimate. By 1950, it had fallen to below three, but by 2010, it was back at four. And by the end of this century, Mr. Piketty projects, it will amount to almost seven....

Painstakingly assembling data from tax returns, Mr. Kuznets estimated that between 1913, when the income tax was first introduced in the United States, and shortly after the end of World War II in 1948, the slice of the nation’s income absorbed by the richest 10 percent of Americans declined sharply, to about a third, from a little under half.

3---Senate votes to provide gov back up for private mortgages, CEPR

While Fannie and Freddie did help to inflate the bubble and got stuck ensuring many bad loans, the worst mortgages were securitized by private investment banks like Goldman Sachs and Citigroup. This point is important not only as a matter of historical accuracy, but it also is central to the problem with the new system being proposed.
In effect the new system would allow Goldman and Citi to issue subprime mortgage backed securities (MBS) with a government guarantee. They obviously had no problem selling MBS composed of junk mortgages with no guarantee. Under the new system they would be able to tell investors that in a worse case scenario they would lose no more than 10 percent of their investment.

This creates a moral hazard problem that virtually guarantees future problems. As happened in the bubble years, the issuers can make large profits by securitizing garbage and then leaving the government with the overwhelming majority of the risk.
At one point the piece quotes Senator Tim Johnson, the chair of the banking committee:
"There is near unanimous agreement that our current housing finance system is not sustainable in the long term and reform is necessary."

It would have been worth pointing out that such an agreement reflects the politics on the issue, not the economics. The United States saw a boom in homeownership over the three decades from when Fannie Mae was created in 1938 to when it was privatized in 1968. There is no economic reason that Fannie and Freddie could not be run as public companies indefinitely. However the financial industry sees securitizing mortgages as a huge source of potential profits. The fact that the financial industry is a powerful political force and a large contributor to political campaigns is the basis for the near unanimous agreement on privatizing Fannie and Freddie, it has little to do with the merits of the new system. 

4---"Be Careful":  Housing market history is littered with instances of investors and first-time buyers flooding into the housing market all at once on some sort of catalyst, only to leave all at once, over a very short period of time, mark hanson

Bottom line: It’s very easy for a demand cohort — as flush with easy liquidity as this era’s all-cash cohort — to push national house prices well above what the average end-user can pay. And that’s exactly what’s happened over the past two years and why in leading indicating regions, in which new-era investors flocked first, demand is plunging and supply surging. Just like in 2007.

4) All-Cash buyer demand

This chart from Black Knight (formerly LPS) says it all…the all cash cohort — without a “mortgage-loan, house-price governor” — has been fully in control of the US housing market for a long time. It’s very easy for a demand cohort — as large as this era’s all-cash cohort — to push national house prices well above what the average end-user can pay.

Housing market history is littered with instances of investors and first-time buyers flooding into the housing market all at once on some sort of catalyst, only to leave all at once, over a very short period of time. In ‘this’ housing market, however, first-time buyers are not a presence. This in itself, should be a huge red flag to anybody analyzing this sector. But, if the all-cash buyer cohort has finally eaten it’s fill and it’s demand drops back to historical levels, there is not another demand cohort to pick up the ball and run with it. In other words, if the all-cash speculators leave — or even downshift a bit — I am worried that certain housing market regions all over the nation — particularly the ones that have experienced a parabola in house prices over the past two years — could have substantial house price downside ahead.

Why we are in a housing bubble1

5) House prices are more expensive today than in 2006 on a monthly payment basis using the popular loans of each era… a true apples to apples comparison

Those looking at “house prices” — especially relative to 2006 — for signs of a “bubble” are looking at the wrong thing. That’s because to the end-user, the monthly payment is generally more important than the price. As such, when comparing the ‘cost’ of houses today vs 2006 one has to normalize the data for a true apples to apples comparison.

On an absolute basis, investors have significantly lightened up their purchases in all of the leading indicating regions I track so closely. This paradigm shift from an “investor-driven market” to an “end-user driven market” is causing considerable consternation.

That’s because when all cash investors, without a “mortgage-loan, house-price governor”, hand the market off to the end-user cohort with a fully functioning mortgage-loan, house price governor a “demand void” can appear. Not necessarily because the demand isn’t there. Rather, because average house prices are too high for the average, fundamentally-driven end-user to afford. This is what’s happening now. And based on how expensive houses are today relative to 2006, this should prevent any further upside this spring and summer, especially with rates up 100bps from a year ago. In fact, we are seeing seasonal weakness in offer prices much further into the year than typical meaning house prices have a strong chance of going negative YoY in the summer...

Bottom line, in the first ‘results’ column, house prices in 2013 were 11% lower than in 2006 yet the monthly payment was 35% higher and the monthly payment needed to qualify was 29% greater. Taken one step further, see the second “results’ column to the far right. That is, to buy the 2006 bubble priced house using today’s mortgage finance vs the popular loans of the 2006 era, the monthly payment is 54% higher and the monthly income needed to qualify 44% greater.

Every time I review these data after updating prices in our database each month, I am amazed. I ask myself, “if 2006 was a bubble then based on the data below if if costs more per month to buy today’s average house why isn’t the sector in a bubble again?”

Affordability Comps 2

In closing, I do think higher house prices are mostly always good. That’s of course unless the reason for the
I am not calling for another house price crash even though I think that housing is back in a bubble based on the monthly payment comparisons between now and 2006
Be careful..

5---WSJ/NBC News Poll: Obama's Approval Rating Hits New Low, WSJ

Marks Could Be Hurdle for Democrats in November Amid Broad Dissatisfaction...

Mr. Obama's job approval ticked down to 41% in March from 43% in January, marking a new low. Some 54% disapproved of the job he is doing, matching a previous high from December, when the botched rollout of his signature health law played prominently in the news. The latest survey also showed the lowest-ever approval in Journal/NBC polling for Mr. Obama's handling of foreign policy....

Sixty-five percent of those polled said the country is on the wrong track, compared with the 26% who said it was on the right one, a wider spread than in the midterm-election years of 2006 and 2010. Roughly one-quarter of the respondents think the economy will improve over the next year, while 57% believe the U.S. is still in a recession, despite years of modest economic growth and robust stock-market gains.....

Obama's support is softening among blacks, Hispanics and women....

6---Worse than Subprime: Traitors an scumbags in the Senate, senate supports guarantees for bank originated garbage mortgages, WSJ

 . The Obama administration also has been closely involved in the negotiations on the bill, which reflects key principles it set forward last August. "We support this effort and believe it is a workable bipartisan approach to complete the biggest remaining piece of post-recession financial reform," said Bobby Whithorne, a White House spokesman.
Fannie and Freddie, which don't make loans but instead buy them from lenders, were taken over by the U.S. during the 2008 financial crisis, with the Treasury providing nearly unlimited support. As the housing market has rebounded and reversed losses, the firms have become very profitable. The companies have sent more than $185 billion to the Treasury as dividend payments, and the White House budget office said Monday that the firms could return an additional $181.5 billion over the next 10 years...

The forthcoming bill is modeled on a proposal last year by Sens. Bob Corker (R., Tenn.) and Mark Warner (D., Va.) that had attracted support from eight other committee members. Mr. Corker predicted Tuesday that the latest bill would be "solidly supported" in the committee.
Messrs. Johnson and Crapo didn't say how their bill would treat the company's private shareholders. The Corker-Warner proposal leaves little for those investors, and Mr. Corker said Tuesday that he believed the forthcoming bill wouldn't be any different....

Any bipartisan measure is likely to emerge from the Senate because House Republicans, without support from Democrats, have passed a separate proposal that would largely remove government-loan backstops...

The Senate framework would allow private entities to purchase an explicit government guarantee to cover catastrophic losses on mortgages issued as bonds from a new guarantor, similar to how the Federal Deposit Insurance Corp. regulates banks and provides deposit insurance to minimize bank runs. Rather than issuing separate securities with an implied federal guarantee as Fannie and Freddie did, the new system would see multiple firms issue a common security in which the government would stand behind the payment of principal and interest to bondholders, preserving the deep and liquid markets created over the last 30 years by Fannie and Freddie.
The bill included a provision for federal insurance to extend to loans with down payments as low as 5% and to 3.5% for first time buyers, and to maintain current loan limits that rise to as high as $625,500 in high-cost housing markets. Those provisions could be crucial to gaining support from powerful real-estate groups such as the National Association of Realtors.

now Russia cannot tell millions of Russians in Ukraine that it doesn't care or won't offer any protection. The time has come. The Russian President, for his part, can see hundreds of thousands rallying across Russia and saying, "We must protect the Russians, and we cannot leave them to their own devices!" We felt that genocide was looming and the ban on the Russian language would be soon followed by the slogan "Ukraine for Ukrainians" brought to life. That would mean lots of refugees coming to Russia. We don't want this to happen! We would like all ethnicities, including Russians, to co-exist peacefully in Ukraine.

So when Crimeans learnt that the militants were about to come to Crimea and start another Maidan-like massacre right next to the Russian Black Sea Fleet, which has been based there for 220 years under an international agreement - do you think we should have waited for the first drop of blood to fall

8---Mortgage Applications down 17% Y-o-Y, HW

9--More Americans Worse Off Financially Than a Year Ago, gallup

10--A "No Brainer": USA, world's greatest threat to peace, guardian

Why is the west seen as the greatest threat? From Asia, the answer's clear
An international survey on the greatest threat to world peace points west. Here are four examples of how moral authority has been sabotaged...

A recent Gallup survey of respondents from 65 countries suggests that America is now seen as the country that poses the "greatest threat to world peace today". In fact, more people picked the US than Afghanistan, Iran, North Korea and Pakistan combined.

11--On the wrong track, Mreport

Gauging consumer attitudes about the economy, Fannie Mae found Americans were considerably more downbeat than they have been recently. Thirty-five percent of respondents said they believe the economy is on the right track—down 4 percentage points—while 57 percent say it’s on the wrong track, a small bounce after four straight months of declines.

Twenty-four percent of consumers said their household income is significantly higher than it was 12 months ago, an increase of 2 percentage points. Meanwhile, 36 percent said their expenses have grown substantially, an increase of 4 percentage points.

12---Obama’s Growth Forecast Bullish, Wall Street Exuberant, Corporate Insiders Freak-Out Bearish , Testosterone Pit

Seyhun’s adjusted sell-to-buy ratio is now once again at the same extreme bearish level as in the summer of 2007, and as in 2011 just before the 20% market plunge, Hulbert reported. The executives and directors as a group knew when to get out back then. And they’re once again quietly dumping the shares of their companies, acting on their boots-on-the-ground knowledge of things to come, and trying to get out before the shares of their companies – and the markets overall – once again swoon.

13---Global economic slowdown, Reuters


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