Thursday, March 20, 2014

Today's Links

1---US home resales drop 0.4% to 19-month low, cnbc

2---The great corporate cash-hoarding crisis, al Jazeera

My analysis of the latest data from the Federal Reserve, the IRS and corporate reports shows that American businesses last year held almost $7.9 trillion of liquid assets worldwide

Companies are sitting on mountains of liquidity, thanks to government policies; the losers are the economy and all of us....

A troubling change is taking place in American business, one that explains why nearly five years after the Great Recession officially ended so many people cannot find work and the economy remains frail.
The biggest American corporations are reporting record profits, official data shows. But the companies are not investing their windfalls in business expansion, which would mean jobs. Nor are they paying profits out to shareholders as dividends.

Instead, the biggest companies are putting profits into the corporate equivalent of a mattress. They are hoarding what just a few years ago would have been considered unimaginable pools of cash and buying risk-free securities that can be instantly converted to cash, which together are known in accounting parlance as liquid assets.

This is just one of many signs that America’s chief executive officers, chief financial officers and corporate boards are behaving fearfully...

Those who follow the news may be surprised, because the figure that’s been mentioned lately has been just under $2 billion. That figure, which comes from the Federal Reserve, is only for domestic cash. The Fed makes its calculations (from the latest Flow of Funds report) using IRS worldwide data after subtracting offshore money.

My estimate is conservative. I did not count cash due to American companies from their offshore subsidiaries as accounts receivable because the IRS does not provide fine details on these additional trillions of dollars.

But even my $7.9 trillion estimate is so huge that it may be difficult to understand, so let’s review some ways to put it in perspective.
Consider the debate over federal spending. Uncle Sam spent $3.5 trillion in fiscal 2013. Corporations hold liquid assets equal to all the money the federal government spent that year plus 2012 and three months of 2011.

3---The bubble in junk, bloomberg

Junk bonds, which have returned 148 percent since the end of 2008, are showing signs of froth as five years of easy-money policies by central banks caused investors to pour unprecedented amounts of money into the high-yield market. That’s helped push the amount of junk bonds worldwide to $1.97 trillion from less than $1 trillion in March 2009, Bank of America Merrill Lynch index data show. ...

Investors have deposited more than $27 billion into U.S. funds that buy junk bonds since 2009, according to TrimTabs Investment Research. Even after the inflows slowed last year to the weakest pace during that period, they’ve bounced back this year. After pulling $1.2 billion out in December and January, investors have since funneled $1.4 billion back into the funds, the data show. ...

Junk-rated companies have issued $59 billion this year, after a record $380.2 billion last year, according to data compiled by Bloomberg

4---Wealth concentration: The rich own it all, House of Debt

One aspect of the debate that is often over-looked is the concentration of financial asset holdings in the U.S. economy. Who owns financial assets such as stocks and bonds in corporations tells us who has a direct claim to the income generated by capital. Here is the distribution of financial asset holdings across the wealth distribution. This is from the 2010 Survey of Consumer Finances:

The top 20% of the wealth distribution holds over 85% of the financial assets in the economy. So it is clear that the direct income from capital goes to the wealthiest American households. For more evidence on this pattern through history, see the working paper by Edward Wolff. He shows that the share of financial assets held by the top 20% of the wealth distribution has been increasing since 1983.

5--Free higher education: An idea whose time has come, HP

6--Attack of the zombie foreclosures, marketplace

New foreclosure filings are down to pre-recession levels. But the blight of abandoned homes in foreclosure — so-called 'zombie properties' — hasn’t improved. According to data released by RealtyTrac, 21 percent of homes in foreclosure nationwide in February had been vacated by the owner—unchanged from one year earlier. The rate was 30 percent or higher in distressed real estate markets in states such as Michigan, Nevada and Alabama. The average amount of time nationwide that an owner-abandonned home sits in the foreclosure process—without being repaired, put on the market and resold—was 1,031 days, or nearly three years.

"They're sitting vacant," said RealtyTrac vice president Daren Blomquist of these so-called zombie properties. "The bank is not claiming responsibility, the homeowner is not claiming responsibility, the property is falling into disrepair. The property taxes aren't being paid. So it's causing an eyesore in the community, and also potentially dragging down home values of surrounding properties."

7---Mortgage Purchase Applications Running Out Of Time, dshort

8---/China's Minsky Moment is here, macrobusiness

Based on our analysis, our baseline case is that China may slow from the current level of 7.7% Gross Domestic Product (GDP) growth to 5.0% over the next two years. A disorderly unwind could take Chinese growth down to 4% in a shorter time frame with potentially disastrous consequences for levered Chinese assets (banks, property) and the entire commodity supply chain (commodity stocks, equipment stocks, commodity-sensitive countries and their currencies)...... one of the more controversial conclusions of our analysis is that global economic growth could be impacted severely enough to cause a global earnings recession.

9---Chinese real estate developer on brink of collapse, wsws

Premier Li Keqiang admitted last week that “isolated cases of default may be unavoidable.” Any financial crisis is likely to be very difficult to contain, however. Over the past five years credit growth has increased by an average of 20 percent per year in China, more than double the rate of economic growth over the same period.

Credit has grown by $14 trillion over that period—an amount equivalent to the size of the US banking system. Fitch Ratings estimated that the ratio of debt to gross domestic product (GDP) will be 270 percent by 2017, with interest payments equivalent to 20 percent of GDP by that time.

Commenting on the Xingrun default, Credit Agricole senior economist and strategist Dariusz Kowalkczyk told CNBC: “As demand slows, more and more developers will feel financial strain. I’m concerned the default will trigger a string of similar distressed situations across weaker companies in the property sector.”

Zhiwei Zhang, the chief China economist at the major Japanese financial corporation Nomura, said: “This news supports our view that property sector over-investment is currently China’s top risk. As far as we know, this is the largest property developer in recent years that is at the risk of bankruptcy.”.....

The property market is not the only cause for concern. Overcapacity is emerging throughout China’s industrial sectors, especially steel, where Haixin Steel has already defaulted on loan repayments and is looking for a bailout.
If the yuan (renminbi) continues to fall, as it has in past months, and reaches a level of 6.20 to the dollar, major losses on hedging products may result. The danger arises from “targeted redemption forwards” (TRFs)—complex products anticipating a rise in the value of the Chinese currency.
Making money that way seemed
certain when funds moved out of other “emerging markets” into China on the basis that the yuan would continue to rise. However, a decline in China’s exports and slower economic growth, coupled with a decision of the central bank to widen the daily trading band of the currency from 1 percent to 2 percent, means that the fund movements could reverse.

Morgan Stanley estimates that the potential losses to TRF holders could total $200 million a month for every 0.1 fall in the Yuan’s value beyond the 6.20 level. This would amount to $5 billion if the low rate were sustained over the 24-month period of a TRF contract.

Such is the interconnectedness of financial markets that major turbulence in Chinese markets will feed into the global financial system. It is increasingly clear that the financial markets boom, which has poured billions of dollars into the hands of the ultra-wealthy around the world as a result of the “quantitative easing” program of the US Federal Reserve and other central banks, cannot go on indefinitely.

Writing in the Financial Times last week, Miles Johnson cited a letter by Seth Karman, the manager of a $27 billion hedge fund, to his clients, saying investors may wake up to find they were living in a “Truman Show market”. (In the late 1990s movie The Truman Show, the central character gradually discovers that his pleasant world of suburbia is in fact the film set for a “reality” television show.)

“All the Trumans—the economists, fund managers, traders, market pundits—know at some level the environment in which they operate is not what it seems on the surface,” Klarman wrote. “But the zeitgeist is so damn pleasant, the days so resplendent, the mood so euphoric, the returns so irresistible, that no one wants it to end.”

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