Thursday, April 3, 2014

Today's Links

Today's quote: 
 "The fundamental driving force of the police-state buildup is the colossal growth of social inequality. In the final analysis, a relative handful of multi-millionaires and billionaires can maintain their wealth and privileged position against the masses only through methods of political dictatorship and state repression"  Patrick Martin, WSWS




1---Resolution of Failed Banks, NY Fed


2---The Perpetual Bubble Economy, NYT


Want a thriving labor market? Blow a bubble.
That’s one implication of a theory about the contemporary American economy developed by Lawrence H. Summers, the former Treasury secretary and prominent public intellectual
....
The big idea is that — absent extraordinary intervention in the economy through fiscal policy, monetary policy or both — growth and employment will prove lackluster.



“A strategy that relies on interest rates significantly below growth rates for long periods of time virtually guarantees the emergence of substantial bubbles and dangerous build-ups in leverage,” Mr. Summers wrote recently. “The idea that regulation can allow the growth benefits of easy credit to come without the costs is a chimera.”

, the economic expansion of the Bush years. The government ran deficits, a product of an increase in spending and steep tax cuts. The Fed kept interest rates low, fueling what Mr. Summers described as the “mother of all credit bubbles.” With fiscal and monetary policy pushing on the accelerator, we got decent employment and growth as well as declining median wages, and inflation generally remained under 4 percent....


I asked Mr. Summers what was behind secular stagnation, and he said he was still thinking through all of its causes. But globalization, automation, income inequality and changes in corporate finance might be important factors, he said.


Mr. Summers looked at those snapshots and saw something very troubling: an economy that will not — perhaps cannot — achieve strong growth and full employment on its own. It is a sorry state of affairs, one that economists refer to as “secular stagnation.”
What’s a government to do? Well, the Fed could keep its easy monetary policy indefinitely and watch the bubbles form, like the dot-com bubble of the late 1990s or the housing bubble of the mid-2000s. But, Mr. Summers pointed out, bubbles burst, with hugely destructive consequences.

3---The Capex Comeback – Still Just Talk, Josh Brown

4---A Pivotal Financial Crisis Case, Ending With a Whimper, NYT

Merrill’s fourth-quarter loss would eventually be more than $15.8 billion, and Merrill paid more than $3.6 billion in bonuses.
It is a crime to knowingly deceive shareholders about the financial condition of your company. Top officers of Bank of America knew about giant, surprising Merrill losses but did not disclose them promptly or precisely to the board or shareholders. They took steps to cut out people who advocated disclosing the information. That sure seems like a lot of smoke.
At least one regulator thought it merited a criminal investigation.
....
Here’s a “Where Are They Now?” roster. Mr. Lohier was appointed by President Obama to be a judge on the United States Court of Appeals for the Second Circuit. Mr. Mayopoulos became the chief executive of Fannie Mae. Mr. Cuomo became governor of New York.
Then there is Mr. Lewis’s high-priced lawyer. The lawyer issued a scathing assessment of the case initially. Mr. Cuomo’s decision to sue was “a badly misguided decision without support in the facts or the law,” this lawyer said. There is “not a shred of objective evidence” to support the case.
Who was this zealous advocate? One Mary Jo White. You may recall her from such roles as the current chairwoman of the Securities and Exchange Commission.
And the public? We got as much justice as we have come to expect.

5---Lenders Are Taking More Risk, House of Debt

But the microeconomic evidence suggests that the opposite is true: much of the growth in auto and credit card debt is among individuals most prone to default. We can see this using zip code level data.
We split up zip codes in the United States into four groups based on their 2009 default rate. The groups each contain 25% of the population. The highest default rate zip codes tend to be those with the lowest credit scores. Lending in these areas is almost by definition more risky. The lowest default rate zip codes are the safest. We then track the growth in auto debt and credit card debt originations in the riskiest and safest zip codes.
Here is the chart for auto debt:
 houseofdebt_20140402_1
Auto debt originations have increased by almost 70% from 2010 to 2013 in the riskiest zip codes. They have increased by only 30% in the safest zip codes. The difference is especially pronounced in 2012 and 2013. Lenders are extending much more credit in the riskiest areas.

We see the exact same pattern in credit card originations:
houseofdebt_20140402_2
Credit card originations increased strongly in 2011. But after 2011, they more or less leveled out for zip codes with a low default rate in 2009. Instead, they continued to grow strongly in 2012 and 2013 in the riskiest zip codes.
This evidence is consistent with the view that lenders are taking on more risk in search for yield and earnings. Some, such as the Federal Reserve Governor Jeremy Stein, have openly worried about easy monetary policy lowering the risk premium too far

Should we worry about this credit expansion? Some would say this is a sign of a healthy credit market, returning to normalcy. Others would say that another unsustainable credit boom is in the works.
In our view, the critical question is: do the income prospects of individuals in riskier areas of the country warrant an increase in borrowing? Will they be able to pay back the debt when it comes due? During the subprime mortgage boom, our research shows that the answer to this question was clearly no. But what about now?


The common thread between these fresh assaults on the Irish and the Greek people, is the European Central Bank; the truly guilty party here. In Ireland’s case, the ECB imposed further losses on the Irish by forcing Ireland’s Central Bank to sell (at a discount) government bonds that should be held to maturity so as to minimise the cost to the Irish people. In Greece’s case, the ECB allowed for (and, indeed, encouraged) a change in the rules of bank re-capitalisation that increase the effective transfer of wealth from the exhausted Greek public to the bankrupt and corrupt bankers (who, in turn, back Greece’s political and media establishment).


Why is the ECB doing this? There are two main reasons. One is ideological, fundamentalist, pig-headedness. The other is cynicism. The fundamentalist dimension has to do with a pathological fear of debt monetisation (in the case of the Irish Central Bank) and of public ownership of banks (in Greece’s case). Turning now to cynicism, the fact is that the ECB (following the so-called ‘banking union) knows that it will have (from next November) to evaluate the assets of these banks, in the full knowledge that: (a) they are bankrupt, and (b) the ECB cannot say that they are bankrupt as it lacks the capacity to recapitalise them (i.e. it is not like the Fed that can call the FDIC in). So, in order to allow itself room to pretend that the banks of Ireland and Greece are not insolvent, it is pressurizing Dublin and Athens to transfer additional wealth to the bankers. It is that simple


7---Galbraith on inequality, naked capitalism


Galbraith and his team, on the other hand, point to something that should be intuitively obvious to anyone following political and economic events in the past decade; namely, finance.
It is new types of income that are tied to asset price valuations that are important to explain rising inequalities. Galbraith makes this clear when he writes that what is really at issue today is a rise in rents. Piketty remains blind to this because he has a fairly woolly notion of what exactly constitutes ‘capital’ (the start of Galbraith’s piece discusses the implications of some aspects of the Capital Controversies).
If Piketty had distinguished between earned and unearned income — between income generated as a result of productive physical plant and income generated from financial assets — he would have been able to discuss his findings much more consistently. But unfortunately he does not and this, to Galbraith, renders his analysis confused.
Galbraith also makes clear that Piketty’s policy proposals — mostly dealing with higher taxes on the rich — are probably not fit for purpose in a globalised, financialised economy. Rather Galbraith asks us to consider alternative approaches.
If the heart of the problem is a rate of return on private assets that is too high, the better solution is to lower that rate of return. How? Raise minimum wages! That lowers the return on capital that relies on low-wage labor. Support unions! Tax corporate profits and personal capital gains, including dividends! Lower the interest rate actually required of businesses! Do this by creating new public and cooperative lenders to replace today’s zombie mega-banks. And if one is concerned about the monopoly rights granted by law and trade agreements to Big Pharma, Big Media, lawyers, doctors, and so forth, there is always the possibility (as Dean Baker reminds us) of introducing more competition.
I think that Galbraith is on the right track here. More importantly from my perspective, however, is that Galbraith’s analysis provides us with a much more immediate way of focusing the discussion. In order to get people to understand what is going on in the economy these days we need to point the finger time and again at the financial sector. The general public already sense that the main purpose of Big Finance is to redistribute income and this needs to be supported by the opinions of those who claim to be experts.


8--Chris Whalen, advice to bankers, oc housing


If you actually know the world of distressed servicing, there are three golden rules when it comes to a non-performing loan.
First is keep the owner in the house.
Second is protect the asset and make sure that maintenance, taxes and insurance are current. And third is to preserve the cash flow of the loan via loan modification, if possible.
Keeping the family in the house and protecting the asset and cash flow, even with a substantial modification, is always better for the note holder, whether that is Uncle Sam or a private investor.
Notice the focus is on protecting cashflow. Compassion for the plight of borrowers is not on the agenda.

9---Turns Out, Even The Price of Beer Is Rigged , Testosterone Pit

The investigation proved, according to Cartel Office President Andreas Mundt, that the companies had entered into price-fixing agreements via personal and telephone contacts. In 2006 and 2008, they agreed on price increases for keg beer of €5 to €7 per hectoliter (1 hectoliter = 26.4 gallons). In 2008, they also agreed to raise the price of bottled beer by €1 per case.
                        
Everything is rigged. That’s what we have found out over the last two years. Stock markets, forex, interest rates, the price of gold, oil, aluminum.... After battling that rigged world all day, you finally get home or rest your elbows on the bar of a watering hole, and all you want is chill out, go back to basics, and take that first big gulp of your favorite beer. It would heal the wounds of the day, and you’d feel good, knowing that it’s the one thing left in this world – something so fundamental to life that it goes back thousands of years – that hasn’t been rigged against you yet.


Or so you’d think. Turns out, in Germany, where beer belongs to the basics of life itself, the price of beer has been rigged for years. This time the perpetrators weren’t Deutsche Bank and Goldman Sachs or any of the usual suspects, but beer brewers. Not your small craft brewers, but large brewers, including subsidiaries of the largest global brewing mega-outfits in the world.


On Wednesday, the German Federal Cartel Office announced that it had concluded its investigation and proceedings into beer price fixing and had imposed fines of €338 million ($466 million) on 11 brewers that account for over half of Germany’s €7 billion in beer sales. It also hit a regional brewers’ association and 14 individuals. It was a two-step procedure: 6 brewers, 7 individuals, and €231.1 million in fines today; and 5 brewers, 7 individuals, and €106.5 million in fines in January


10--Banks in U.S. increase lending, Fed says, marketwatch


- Banks experienced stronger demand for loans over the past three months as companies took advantage of easier lending terms, according to a Federal Reserve survey issued Monday. The quarterly poll of 75 domestic and 21 foreign banks operating in the U.S. found that businesses showed greater appetite for loans compared to the last Fed report in November. Yet demand for home-mortgage loans softened for the second straight quarter, the Fed said, as higher rates discouraged would-be buyers. Larger banks eased standards for mortgages but smaller banks tightened them. Banks also said they eased standards for credit cards, auto and other goods as consumers appeared more willing to take on debt.


11---Banks Lending Like It’s 2007 Belied by $10 Trillion Hoard, Bloomberg


The amount of speculative-grade or leveraged-loans made last year in the U.S. exceeded $1 trillion, the most on record, according to data compiled by Bloomberg. Issuance of covenant-light loans which lack typical lender protections, rose to $311.4 billion in 2013 from $105.7 billion in 2012, the data show. ...
(high-yield lending, ....boosted borrowings to riskier companies...default risk increases)


For all the warnings from the Federal Reserve over excessive risk-taking as loan growth soars to levels last seen just before the crisis, bankers still have 10 trillion reasons to lend.
That’s the dollar amount that banks hold in deposits in the U.S., which exceeded the value of all loans by a record $2.5 trillion last month. Banks are amassing more cash even as lending to U.S. companies this quarter is poised to increase by the most since 2007, according to data compiled by the Fed.

The lending surge reflects confidence among the nation’s banks to extend credit as the Fed scales back its monetary support of the U.S. economy, while the cash cushion may temper the concerns of regulators who in recent months have warned that excesses may be emerging in riskier parts of the loan markets. Seven years ago, when banks were making loans at a faster pace, the amount that was lent outstripped cash deposits.
“Banks are not exhibiting anywhere close to the kind of excess we saw leading up to the crisis despite the growth in loans,” John Lonski, the chief economist at Moody’s Capital Markets Research Group, said in a telephone interview from New York. “They have a lot of lending capacity and they believe business conditions will remain good enough that borrowers will be able to meet their obligations.”

Record Deposits

Cash deposited at banks increased to the record level through the week ended March 12, compared with loan assets of $7.5 trillion, the Fed data showed. This is a reversal from October 2008 when loans exceeded deposits by $205 billion.


The more than $68 billion jump in commercial and industrial loans made by banks to U.S. companies brings corporate borrowings to $1.7 trillion.
Known in the industry as C&I loans, they are one of the major components of the “loans and leases” that banks report. Other borrowings include those secured by real estate and debt extended to individuals such as credit cards. The expansion of C&I loans by $38.3 billion in February was also the biggest monthly increase since 2008.


Banks eased their lending policies for C&I loans to companies of all sizes as demand increased, according to the Fed’s last senior loan officer opinion survey on lending practices in January. The lowering of standards included cutting spreads on C&I loan rates, reducing the cost of credit lines, decreasing the use of interest rate floors and easing covenants, the survey showed.
The decline in quality has prompted warnings from regulators. Last year, the Fed and the Office of the Comptroller of the Currency told some of the biggest banks to improve underwriting standards for non-investment-grade or leveraged loans


12--As Business Lending Rises, Concerns Emerge About Profit, NYT (2013)


The concern is that banks are making loans to businesses at rates that are so low that they may end up being unprofitable. A recent survey by the Federal Reserve shows that American banks are charging an average of just 2.83 percent on so-called commercial and industrial loans. That’s down from 3.4 percent a year earlier.


13---West Coast Home Sales Hit Lowest Point in Five Years, Redfin


Home sales in Redfin’s 11 West Coast markets fell 13.4 percent in February from the year before, hitting a five-year low in the first two months of the year, and steep price increases are likely to blame.
Sales fell the most in Las Vegas (-22.7%), Sacramento (-21.8%) and Ventura, Calif. (-20.8%). But most West Coast markets have more inventory than this time last year and aren’t hampered by bad weather as many East Coast areas have been, which leaves affordability as the likely culprit for the sales slump. In February, the West saw prices increase 19.1 percent from the year before, compared with a 7.4 percent increase in Redfin’s other markets. The biggest jumps were in Las Vegas (25%), Sacramento (22.2%), and Riverside, Calif. (21.7%).


The combination of steep price appreciation and rising mortgage rates is likely coming as a shock to many prospective buyers, particularly first-timers. As of early March, the average 30-year fixed mortgage rate was 4.28 percent, compared with 3.52 percent a year ago.
As Redfin Phoenix agent Marcus Fleming puts it, “This year, most of our clients are focused on finding a really great deal. The problem is, there aren’t many great deals left. Buyers are facing a painful adjustment period as they realize their money won’t go as far as they had hoped.”
West coast
*Redfin’s West Coast markets include Las Vegas, Los Angeles, Phoenix, Portland, Riverside, Calif., Sacramento, San Diego, San Francisco, San Jose, Seattle and Ventura, Calif.


14--Some Americans Paid Off Credit Cards While Waiting for Foreclosure , WSJ


15---Corporate Capex Fallacies and Why You Shouldn’t Rely on CNBC, cyniconomics


 In “What Needs To Happen Before We See a Big Recovery,” we listed four reasons to doubt the capex boom that many pundits predict: ample unused capacity, tepid overseas growth, growing financial risks and President Obama’s bumbling incursions into private markets.


16---We are even less concerned now having just read an FT piece forecasting that "capital spending by US companies is expected to grow this year at its slowest pace for four years, in a sign of corporate caution over the outlook for global demand."...


As for what to expect, here it is:


Total capital expenditure by the non-financial companies in the S&P 500 index is forecast to rise by just 1.2 per cent in the 12 months to October, according to Factset, a market data company that compiles a consensus of analysts’ forecasts.

Strong corporate balance sheets, rising business confidence and signs of stronger growth in the US economy have encouraged hopes of an acceleration in capital spending by American companies.

Yet while some, including Microsoft, Ford Motor, and Phillips 66 plan increased capital spending, others including Chevron, Intel and General Motors have indicated they expect to spend about the same this year as in 2013.

In aggregate, analysts’ forecasts indicated the slowest growth in capital spending by the largest US companies since it declined in 2010, in the aftermath of the recession of 2007-09.


And the punchline:


Companies are cautious about investing in spite of relatively low debt burdens by the standards of the past decade.
17---Corporations Have Record Cash: They Also Have Record-er Debt, As Net Leverage Soars 15% Above Its 2008 Peak, zero hedge


18---Business spending still the missing recovery link, nbr (great summary)




NB---
What has happened much more often over the past five years, though, has been a capital market that has matched cheap money with companies more than willing to take it. They’ve used that cash to reward the 20 percent minority that owns the lion’s share of the stock market, to the detriment of a labor force and a broader economy that relies on sales growth to expand.
Rissmiller noted that bottom-line profit for S&P 500 companies has exploded 119 percent since 2008—when the Federal Reserve began its zero interest rate policy—while sales growth has been a paltry 7 percent.
...
“Cost-cutting (including lower interest costs) and share repurchases have made up the difference,” he said.
As part of hopes for economic escape velocity for 2014, many high-profile economists have been preaching the capex theme. But so far the biggest headlines have come from still more buyback intentions....


The central bank has expanded its balance sheet to more than $4.1 trillion, mainly through the purchases of Treasurys and mortgage-backed securities. The purchases have dovetailed with a near-zero interest rate policy, with the twin effects being a fertile environment for companies to borrow low-cost money to reduce share count and boost their stock prices.....


S&P Capital IQ senior index analyst Howard Silverblatt said the numbers in the Duke survey sound about right for capital spending this year, but it may not manifest itself in ways that foster strong growth.
“The means to get there, for what we’re looking for, is new jobs. That speaks to a new plant or bringing in that second shift or expansion,” he said. “We haven’t seen the new plants and the ships yet.”
What Silverblatt did see in the fourth quarter through his data analysis at S&P is another huge period for stock buybacks—about 31 percent higher on an annualized basis....


A record 69 percent of respondents said companies are underinvesting, while the gap between investors demanding capex against returning cash to shareholders also grew to a record 33 percentage points—58 percent to 25 percent.
They don’t appear optimistic about getting their way, though, with eight of 10 predicting below-trend growth and a tendency for investors to avoid committing their own cash until they see capex increasing.
....
Capital expenditures—or capex—have been the missing link for the economy, with firms instead plowing about $1 trillion into share buybacks and dividend increases since the end of the recession and the onset of historically easy monetary policy. In the meantime, cash on the balance sheet remains at an elevated $1.9 trillion while long-term unemployment persists and corporate infrastructure continues to age.
“Public companies should not make money just to buy back stock,” analyst Don Rissmiller at Strategas said in an economic research note. “The purpose of the capital markets is to fund growth—as is commonly noted, the people with the good ideas are not always the people with money. The capital market matches the two.”


19----Fall in buybacks could signal S&P pause, cnbc


U.S. businesses took a pause from repurchasing their own shares—also known as stock buybacks—in the first quarter of 2014, according to the U.S.-focused research tracker TrimTabs, which now believes surging stock markets might have a tough time pushing even higher.
"Corporate actions have turned less supportive of stock prices," TrimTabs Chief Executive David Santschi said in a research note on Sunday. "The decline in the volume of buybacks is a cautionary sign, as buyback volume and the S&P 500 have a high positive correlation."


Many of the corporate America's' biggest names have decided to buy back their own stock in recent years. These buybacks happen when firms buy their own shares trading on the stock exchange, reducing the portion of shares in the hands of investors. They offer a way to return cash to shareholders - along with dividends - and usually coincide with a company's stock pushing higher as shares get scarcer


Many analysts see stock buybacks as being a key driver behind record highs for U.S. stock markets rather than any expansion in company earnings. In some cases, firms are borrowing cash to buy back their shares, thus taking advantage of ultra-low interest rates set by the U.S. Federal Reserve......


The final quarter of 2013 had cash-laden S&P 500 companies spending $214.4 billion on share buybacks and cash dividends, according to preliminary results released Wednesday by S&P Dow Jones Indices. The figure was second only to the $233.2 billion spent in the third quarter of 2007, according to the research company. Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices said he expected this trend of greater shareholder return to continue throughout 2014.
But Sunday's data from TrimTabs shows that new stock buybacks in first quarter of 2014 fell to their lowest in five quarters. This was despite a rush of stock repurchases by U.S. banks on Wednesday after an annual check-up by the Fed which tested if banks had a large enough capital buffer to keep lending through another financial crisis....


"With (interest) rates, even after an initial rise within the next year, far from pre-crisis levels, it will remain an attractive strategy for corporates and investors alike," she said.


20---Corporations Have Record Cash: They Also Have Record-er Debt, As Net Leverage Soars 15% Above Its 2008 Peak, zero hedge


From SocGen:


US corporates do indeed hold lots of cash, which is currently at record levels, but they also hold record levels of debt. Net debt (so discounting those massive cash piles) is 15% above the levels seen in 2008/09. The idea that corporates are paying down debt is simply not seen in the numbers. What is true is that deleveraging has occurred through the usual mechanism of higher asset prices (no doubt an aim of central bank policy). This is the painless form of deleveraging. It is also the most temporary, for a simple pull-back in equities and rise in volatility will put the problem back on centre stage.
zh:  And while it would be excusable if this debt had gone to prefund future growth, it is a travesty that the only thing companies have to show for it is that it has simply made a few already rich hedge fund managers even richer.


21--$500 Billion In 2013 Corporate Buybacks: Half Of QE , zero hedge 2013





22---NATO maneuvers with Georgia, Ukraine threaten war with Russia  , wsws


NATO is provacatively seeking to install its forces on Russia's borders, moving to recruit Georgia and Ukraine's unelected, pro-Western regime to the military alliance, a move that threatens a NATO-Russia war.
NATO and Georgian officials met yesterday in Brussels to plan talks on a Membership Action Plan (MAP) to admit Georgia into NATO as early as September.


“As a country aspiring to join our Alliance, Georgia is a special partner to NATO,” said NATO Secretary General Anders Fogh Rasmussen. He also thanked Georgia for being “the largest non-NATO troop contributor to our mission in Afghanistan,” where Georgia has deployed 1,560 personnel to assist NATO in its bloody war of occupation.
Rasmussen’s special representative, James Appathurai, added: “Georgia will become a member of NATO, this policy has not changed, and no one wants to change it.”


23--CIA torture and the threat of dictatorship, wsws


According to a McClatchy News Service follow-up to the Post report, more than half of the 100 prisoners were subjected to some form of torture, and as many as five died during interrogation. These included Gul Rahman, who died of hypothermia after being doused with freezing water and then left in a cold cell with only a scrap of clothing, and Manadal al Jamadi, who died after his head was wrapped in a plastic bag and he was hung on a wall crucifixion-style.


What the report describes is not “excess” or the actions of “rogue” individuals, but a systematic, organized, fully authorized program, endorsed by President George W. Bush and Vice President Dick Cheney. The cover-up, in turn, continues to this day, with the active involvement of the Obama administration, implicating top officials up to and including the president. Directly involved is CIA Director John Brennan—a former top aide in the Obama White House and official in the Bush administration...


 The fundamental driving force of the police-state buildup is the colossal growth of social inequality. In the final analysis, a relative handful of multi-millionaires and billionaires can maintain their wealth and privileged position against the masses only through methods of political dictatorship and state repression




24---Commercial and Industrial Loans, All Commercial Banks, Fed
2014-02: 1,648.8845 Billions of Dollars (+ see more) 
Monthly, Seasonally Adjusted, BUSLOANS, Updated: 2014-03-28 4:22 PM CDT


Click and drag in the plot area or select dates:   1yr | 5yr | 10yr | Max   to
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Created with Highstock 1.3.1020001950197502004006008001,0001,2001,4001,6001,8001950196019701980199020002010Shaded areas indicate US recessions - 2014 research.stlouisfed.org Source: Board of Governors of the Federal Reserve System
(Billions of Dollars)
Commercial and Industrial Loans, All Commercial Banks

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