Wednesday, March 19, 2014

Today's Links



"This is the life of men on earth:
Out of darkness we come at birth
Into a lamplit room, and then –
Go forward into dark again."     Kurt Weill







1--Credit expansion underway:  bank credit (loans and securities) has increased at a compound annual growth rate (CAGR) of 6.2%, Paul Kasriel, Big Picture


Upon awakening from my winter hibernation way up here in beautiful northeastern Wisconsin, I have noticed that bank asset managers have been anything but hibernating. Rather, they have been quite busy expanding their loans and securities. As shown in Chart 1, bank credit (loans and securities) has increased at a compound annual growth rate (CAGR) of 6.2% in the three months ended February 2014. Since the beginning of the current economic recovery/expansion, this is the fastest 3-month growth in bank credit since the 6.1% in the three months ended November 2011. Year-over-year, of course, growth in bank credit is considerably more subdued, but it has accelerated from 0.9% in the 12 months ended December 2013 to 1.6% in the 12 months ended February 2014 (see Chart 1).
 the rise in stock market margin debt through January 2014 indicates that some of the increased bank credit was used to purchase equities....


 given the strong growth in the sum of Fed securities and bank credit in recent months and the likely continued strong growth in this credit sum until the fourth quarter of this year, I expect that growth in nominal domestic spending is going to accelerate significantly in the second and third quarters of 2014. Barring safe-haven buying of Treasury securities due to geo-political events (Russia? Iran?), investment-grade bond yields will rise, with the yield on the 10-year Treasury approaching 3%. Fed hawks will start displaying their talons. Despite “forward guidance” to the contrary by Fed doves, short-term interest rates also will rise as the market expectations regarding the first Fed rate hike will be brought forward. The higher interest rate structure will offer resistance to the equity markets. But I believe equity prices can still move higher, albeit at a subdued pace, with the help of continued strong growth in thin-air credit and strengthening domestic demand for goods and services....


Things get dicier, however, toward the end of 2014 and into 2015 as the full effects of Fed tapering come into play. Plotted in Chart 5 are the year-over-year percent changes of monthly observations of the sum of Fed securities holdings (outright and repurchase agreements) and commercial bank credit. Actual historical data are plotted through February 2014, projections thereafter. There are two scenarios in the projection plots. Scenario I assumes that bank credit continues to grow at its current three-month CAGR of 6.2% and the Fed tapers its securities purchases such that net purchases are zero in December 2014 and remain so through 2015. Scenario II is the same as Scenario I except that starting in January 2015, the Fed increases its securities holdings every month at a CAGR of 7.0% — the median Q4/Q4 percent change in Fed securities holdings (outright and repurchase agreements) from 1954 through 2006. So, the two scenarios are identical until January 2015.....


One last point. Sustained annualized growth in the sum of Fed securities holdings and bank credit at 9-1/2% is bubblicious. This is what brought us the NASDAQ bubble of the late 1990s and the housing bubble of mid 2000s, also what I call “Greenspan’s legacy”. In order to avoid yet another bubble (yes, I know, the nattering nabobs of negativism who are disappointed we did not relive the Great Depression think we already are in a new bubble economy), it is entirely proper that growth in thin-air credit slow in 2014. If growth in bank credit is accelerating, then growth in Fed credit needs to decelerate in order to bring down the growth in the sum of Fed and bank credit to a less bubblicious rate. If only the Fed would take Milton Friedman’s advice to abandon its obsession with targeting the price of thin-air credit and adopt a policy of targeting/controlling the quantity of thin-air credit, then we could avoid asset-price bubbles and bouts of consumer inflation or deflation.


2--Real signs of recovery?  What's behind the sudden improvement in US loan growth? , sober look
Credit growth in the US seems to have stabilized and may be on the rise


Why is corporate America increasing its borrowing all of a sudden? The most likely answer is the improvement in capital expenditures (capex), which is evidenced by firmer capital goods spending by US companies. We saw initial signs of that improvement back in February (see story). There were other indications as well. ISI's latest corporate survey provides further support to this thesis.
ISI Research: - Survey strengthened over the past two weeks with U.S. orders now a solid 61.5. Areas of strength include equipment tied to trucks, rail, aerospace, and construction.
Whether using their massive cash reserves or tapping bank credit facilities (increasing bank loan balances), the time has come for higher capital expenditures by US firms. Here is why.
Barron's: - Capital expenditures [have been] just 46% of operating cash flow for nonfinancial companies in the S&P 500. The average since 1989 is 57%. Capex can't remain low forever. Already, the average age of U.S. structures is the highest it has been since 1964. Equipment hasn't been this old since 1995, and intellectual-property products, like software, since 1983. In a report issued this past week, Bank of America Merrill Lynch predicts U.S. capex growth will more than double over two years, to 5.7% in 2015, from 2.6% last year. Beyond mounting cash and aging plants and equipment, it cites some new factors. Economic growth is picking up, giving business managers more confidence and less spare capacity. Congress even passed a budget this year—one less thing for business leaders to worry about.
Barron's goes on to say that many shareholders are now pushing firms to increase capital expenditures. Much of the capex spending behavior in the post-recession era has been driven by uncertainty. Recently in the US we've had two major sources of such uncertainty: the Fed's taper and the federal government budget/debt ceiling. Both of these macro risks frightened corporate management enough to hold back on capex. The Fed's taper however is now on a slow, fairly predictable "autopilot" and as Barron's points out, the budget deal has removed the risk of a near-term federal impasse. As far as corporate CEO's are concerned, the major uncertainties related to the US federal government have clearly receded - for now.

Thus the similarities in timing of the bottoming of loan growth in the US and the start of Fed's taper may not be a coincidence after all.
Corporate loan growth rate YoY



3---Subprime auto buyers load on the debt: Americans borrowing record amount to buy cars, cnbc


A combination of higher prices for new cars and relatively low rates for auto loans means Americans are borrowing a record amount to pay for their new rides.
According to Experian Automotive, which tracks millions of auto loans written each quarter, the average amount borrowed by car buyers last quarter climbed above $27,000 for the first time ever
 
According to Experian, the average auto loan in fourth quarter 2013 was $27,430—an increase of $739 compared with the same period of 2012. The average used car loan was $345 higher, coming in at $17,974.
(Read more: And the February auto sales winners are...)
Those with non-prime credit ratings—or credit scores between 620 and 679—had the highest average auto loan. For these borrowers, the average new car loan rose more than $1,500, to a new high of $29,385.


And as their loans rise, keeping the monthly payment as low as possible has become more of a challenge—even as car buyers stretch their loans over longer periods of time. According to Experian, the average monthly payment for a new car auto loan rose $11 to $471 in the fourth quarter; the average monthly payment for a used car loan edged $4 higher, to $352.


Not surprisingly, those with subprime credit ratings—credit scores between 550 and 619—had the highest average monthly payment, of $499.
"I expect that monthly payment to continue rising and go above $500," Zabritski said. "There's always a tipping point where buyers say, 'I can't pay that much every month.' So far, we haven't seen the flashing lights go off indicating buyers are at a tipping point."


The payments are rising despite an increasing number of car buyers opting to stretch their loans over six or seven years. According to Experian, a record 20 percent of all new car auto loans in the fourth quarter were more than six years in length


4---Fitch lays groundwork for next wave of bad mortgages , HW


Fitch Ratings finalized criteria for analyzing qualified mortgages for securitization.
This also included loans originated after January 10, when the rules came into effect, which also meet ability-to-repay standards.
The criteria help lay the groundwork for the eventual issuance of these residential-mortgage backed securities.
The released criteria offer insight into the standards necessary to achieve the much-desired triple-A rating.


The assumptions reflect a low probability/high severity scenario.
"We expect some defaulted borrowers will likely challenge the Rule," said Senior Director Suzanne Mistretta, "but a lack of legal precedent could make the first few cases high profile and prone to significant legal costs."
Cost related to the above will be include in any forthcoming Fitch analysis of said deals, the credit ratings agency noted.


Fitch will make upward adjustments to its credit enhancement calculations if the originator designates the loan as higher-priced QM or non-QM, said Fitch in a statement.
Loans identified by the lender and confirmed by third party due diligence as safe harbor QM will not receive an adjustment.


5--Dr Copper rushed to ER---Copper Plunges To Fresh 5-Year Low, zero hedge


6---Retirement: A third have less than $1,000 put away, USA Today


About 36% of workers have less than $1,000 in savings and investments that could be used for retirement, not counting their primary residence or defined benefits plans such as traditional pensions, and 60% of workers have less than $25,000, according to a telephone survey of 1,000 workers and 501 retirees from the non-profit Employee Benefit Research Institute and Greenwald and Associates.


7---The Dominoes Begin To Fall In China, zero hedge


Consider this: in the last five years, the Chinese created $16 TRILLION in credit that is now circulating in the economy… financing ghost cities and useless infrastructure projects.”


8---Banks Still Don’t Have Willing and Able Customers, DS News


Bank credit and money growth both exhibit typical patterns in the post-Great Recession era; however, the change over the time period is consistent with the pace of a subpar recovery.
This revelation was reported by the Wells Fargo Economics Group in a release Monday, highlighting the two factors as reasons for caution among both businesses and bank lenders....


Another cautious signal provided by the group’s report is the loan-to-deposit ratio.
Typically, banks will increase the turnover of deposits as the economic expansion grows older, and banks will seek new lending opportunities. Deposits are squeezed down to generate loans, and “thereby increase the credit multiplier in the economy for any given growth in deposits.”
However, banks have been more cautious of using deposit growth, and have retained a higher level of deposits relative to loans than in the past.


The Wells Fargo Economics Group notes that banks remain cautious despite the ample supply of liquidity provided by the Federal Reserve—Fed liquidity has grown by 20 to 40 percent at times during the economic expansion.
The report found, “All three measures reviewed in this note suggest a rather disciplined public and banking system in their deployment of Fed liquidity in the economy.”


9--California Home Sales Down, Inventory Up, Mreport


“With the interest rate difference alone, home buyers this year would have to pay $150 more per month on their mortgage payment than last year, a substantial amount for many would-be home buyers trying to get into the market,” Brown said.
Statewide, the median price of an existing, single-family home last month was $404,250, a decline of 1.6 percent from January’s $410,990. Annually, February’s median price improved 21.3 percent, marking two full years of consecutive yearly home price increases and the 20th straight month of double-digit gains.


10--The NSA records “every single” phone call in a targeted country, wsws


11--Poland to push for missile defense, wsws


Writing in Forbes, Loren Thompson noted the key geo-strategic significance of Poland, a NATO member since 2004 with a population of 38 million that “shares borders with three former Soviet republics and the Russian enclave at Kaliningrad on the Baltic Sea.”
He wrote that Poland was now intent on renewing its earlier abortive effort to acquire a missile defence system, Polish Shield, which was rejected in 2009 by Obama due to Russian opposition. Costing at least $43 billion, it will operate in conjunction with “land-and sea-based defences the US is deploying to the region.”


The plan is to purchase the Medium Extended Air Defense System, or MEADS, from the US. Thompson noted that the Obama administration “late last week gave prime contractor Lockheed Martin permission to offer” MEADS to Warsaw.
Poland has announced plans to form a multinational military brigade with the Caucasian states, Ukraine and Lithuania. The proposal was first made in 2009, but defence ministers will meet this week to form a brigade that the Daily Telegraph said “would straddle NATO’s eastern border and bring Ukraine’s armed forces closer to the Western fold.” Last week, Ukraine’s deputy defence minister visited NATO headquarters to discuss the move.


12--The drive to war accompanied by collapse of social order, wsws


Once again, the American people are faced with a full-scale propaganda drive for war. ....
Over the past 25 years, the United States has been engaged in a campaign of global militarist violence that has taken on an increasingly reckless and unrestrained character. The collapse of the Soviet Union in 1991, accompanied by proclamations of the “end of history,” has been followed by a string of military interventions, from bombings and drone attacks to outright invasions: Panama, Iraq, Haiti, Somalia, Sudan, Serbia, Afghanistan, Iraq again, Yemen, Pakistan and Libya.


An unending “war on terror” proclaimed after the 9/11 attacks has been used to justify constant scare-mongering and the erection of the framework of a police state.
The scenario, with minor variations, has been repeated again and again: A hyperventilating media demonizes the latest incarnation of Hitler; there are manufactured pretexts and hypocritical denunciations from the president; a string of congressmen demand more aggressive measures. Any sliver of information that calls into question the official narrative—such as the fact that the US is working with fascistic and anti-Semitic forces in Ukraine—is ignored...


Wages of American workers have been under sustained attack for decades, and the share of the national income going to labor has declined steadily. Consumers confront surging prices for basic commodities. Families are saddled with unsustainable levels of debt from credit cards (averaging $15,252 per indebted household), student loans ($32,986) and mortgages ($152,209).


The ruling class has exploited the economic crisis to carry out a vast redistribution of wealth from the bottom to the top. Corporate profits are at record highs, as is the stock market. The richest 400 individuals now possess $2.2 trillion in wealth, an increase of $500 billion from 2012 to 2013 alone. The top one percent has received 95 percent of all income gains since 2009.
In domestic policy as in foreign policy, the past five years represent an escalation of processes that have deeper roots. For four decades the ruling class has been engaged in a systematic effort to reverse all previous social reforms and regulatory restrictions on business, engineering a historic retrogression in the living standards of the majority of the population.


The ruling class itself has taken on an increasingly criminal character, amassing its fortune through fraud, speculation and theft. The depraved social physiognomy of the corporate-financial elite finds expression in both foreign and domestic policy—in war, social counterrevolution and the dismantling of democratic rights.


The tremendous social tensions built up through this restructuring of class relations find no political expression, let alone progressive outlet. The state and its auxiliary organizations, including the media, function as wholly-owned subsidiaries of a ruthless and increasingly criminal financial oligarchy.
Military actions, whatever their geopolitical aims, serve to divert and regulate class antagonisms. The ferocity of American militarism is an expression of the depth and insoluble character of the crisis of American capitalism. It points to the inevitability and necessity of its opposite—social revolution.


13---Troubling Trends in Housing Market -Black Knight, mortgage news daily


Overall originations were down almost 60 percent year-over-year, with HARP volumes (according to the most recent FHFA report) down 70 percent over the same period. These declines are largely tied to the increased mortgage interest rate environment, which is having a significant impact on the number of borrowers with incentive to refinance. A high-level view of this refinancible population shows a decline of about 13 percent just over the last two months



US Weekly Sales and Prices History

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