Wednesday, March 18, 2015

Today's Links

1--U.S. Republican budget cuts social spending, boosts military, Reuters

2--100,000 Layoffs and Counting: Is this the New Normal?, oil price

3--Interview 1014 – Financial Survival: Why the Dollar is Rising, and How it Will Fall

4--Hurricane Pam  means that there is, all of a sudden, a very high probability that an El Nino is right around the corner.

5--The dollar may now be the market's biggest enemy, cnbc

6--Dalio warns Fed of 1937-style rate risk, FT

7--IMF Fears "Taper Tantrum"; Rear View Mirror Discovery Mish

8--Obama Goes After UK, Australia, the World for "Constant China Accommodation"; US Influence Clearly Waning

9--Santelli on Fed move, cnbc audio "Dollar Is New Oasis" DINO meets TINA

10--The Corbett report audio

11--Hedge Fund Manager Fears "Sudden, Pervasive Loss Of Faith" In Markets; Says "It's A Truly Scary Time", ZH

12--Breaking the Rsistance with Terrorism and Proxy Wars, eric draitser

13--Crash time?
Here’s Goldman:
Long-dated crash put protection costs on the SPX have more than doubled over the past 9 months. We believe it is an important development to watch as it implies investors are increasingly concerned about downside risk even as US equities trade near all-time highs. Based on our conversations with investors over the past few months, it appears the increase in long-dated put prices has largely gone unnoticed among equity and credit investors. In fact, Investment Grade credit spreads have actually tightened slightly over the same period. The rise in long-dated equity put prices may signal an increasing fear that a substantial market correction is on the horizon, despite low short-term put prices which suggest low probably of a near-term drawdown vs history.
As you can see from the following, this is no trivial divergence — it’s actually quite the anomaly:

14--Surprise: U.S. Economic Data Have Been the World's Most Disappointing, Bloomberg

15--UPDATE 1-New BoE regulator warns of risks from U.S. rate hikes, dollar strength, Reuters

16--Stronger Dollar will hurt Emerging Markets, wsws

Speaking in Mumbai, India on the eve of today’s Fed decision, International Monetary Fund Managing Director Christine Lagarde warned that so-called “emerging markets” faced a new period of turmoil if interest rates started to rise. She pointed to the “taper tantrum” of 2013, when money flooded out of these markets in response to indications by the Fed that it was going to start winding back its “quantitative easing” (i.e., money-printing) program.
She also warned of the impact of the rising US dollar on corporate balance sheets in emerging markets when major companies suddenly find that their interest and debt burdens have increased. In India alone, the dollar-denominated corporate debt had risen “very rapidly” in the past five years, nearly doubling to $120 billion.

“The appreciation of the US dollar is … putting pressure on balance sheets of banks, firms and households that borrow in dollars but have assets or earnings in other currencies,” she said.
In a comment published in the Financial Times last month, well known financial analyst Satyajit summed up the present situation as follows: “Mark Twain reputedly stated that history does not repeat but it rhymed. In an eerie parallel to 1997-98, falling commodity--especially oil--prices, a rising US dollar and potential increases in US interest rates may presage a new financial crisis.”
The 1997-98 financial crisis began with the collapse of the Thai baht and then swept across the Asian region, producing a downturn as significant as that resulting from the Great Depression in the advanced capitalist nations. While it was dismissed as merely a “blip” on the road to globalisation by US President Bill Clinton, the Asian crisis led to a debt default by Russia and the collapse of the hedge fund Long Term Capital Management in the US, requiring a major intervention by the New York Federal Reserve to stave off a wider crash.

Since then, Asian governments have sought to avoid the dollar-denominated loans that played a major part in spreading the financial contagion as investors pulled their money out. But it is a different story in corporate markets.
Already, the index of emerging market currencies compiled by JPMorgan Chase is at a record low, meaning the dollar-denominated debt burden for corporations has risen in real terms.

It has been estimated that foreign borrowings in US dollars have expanded to $9 trillion, compared to $2 trillion in 2000. The share of emerging markets, mostly in Asia, has doubled to $4.5 trillion since the eruption of the financial crisis in 2008.
Last December, the Bank for International Settlements (BIS), sometimes known as the central bankers’ bank, issued a warning about the growing volume of debt held in the American currency, noting that a rise in the dollar’s value could expose financial vulnerabilities.

Laying out what he called the increasing fragility beneath apparent market buoyancy, the head of the BIS monetary and economic department, Claudio Borio, said: “Should the US dollar, the dominant international currency, continue its ascent, this could expose currency and funding mismatches by raising debt burdens. The corresponding tightening of financial conditions could only worsen once interest rates in the US normalise.”

In the three months since these comments, the ascent of the dollar has accelerated. From July last year, the dollar index has risen by more than 23 percent, a steeper rise than that which took place in the mid-1990s, setting off the Asian financial crisis. Against the euro, the dollar has increased by 16 percent in the past three months, and by about 25 percent over the past year.
A continuation of this trend will not only hit emerging markets, but will start to have a significant effect in the US. While exports comprise about 13 percent of US gross domestic product, they are far more important for major corporations. It is estimated that foreign-generated revenues account for 46 percent of sales by S&P 500 companies, with information technology the most highly-dependent on foreign sales.

17--Mosler on Housing starts

18--The dollar is rising faster than any time in the last 40 years  Wa Post

The dollar has hit a 12-year high against the euro, and it's not going to stop anytime soon. Not when the dollar is in the middle of its biggest rally in almost 40 years.

But it's not just the euro that the dollar is rising against. It's pretty much every currency in the world. That's because the U.S. economy is doing well enough that the Federal Reserve is getting ready to raise rates, and the rest of the world is slowing down enough that it's cutting them. And that's not hyperbole. The not-so-short list of countries that have eased monetary policy the past few months includes Australia, Canada, Chile, China, Denmark, Egypt, India, Indonesia, Israel, Peru, Poland, Russia, Singapore, South Korea, Sweden, Switzerland, Thailand, Turkey, and, above all, the eurozone now that it's buying bonds with newly-printed money—aka quantitative easing—which Japan has also been, and still is, doing itself. The result is that investors can get better returns in the U.S. than they can in a lot of other places—would you rather buy a U.S. 10-year bond that pays 2.05 percent or a German one that pays 0.28 percent?—so that's where they're moving their money, and, in the process, pushing up the value of the dollar.

That's actually an understatement. The dollar is exploding up more than it's getting pushed up. As Citibank's Steve Englander points out, the dollar, going by its trade-weighted exchange rate, has increased more in percent terms the past 175 trading days than it has in any other similar period going back to 1976. And that will only continue if the Fed really does raise rates in June. It's expected to take the first step towards doing that by saying it will no longer be "patient"—Fedspeak for waiting at least two months—about hiking rates at its next meeting on Wednesday.

But wait a minute. If the Fed has told us it might raise rates, and told us that again, and again, and again, why would the dollar go up that much if it does does raise rates like it's said? You don't have to believe in perfectly efficient markets—only non-inefficient ones—to think that some of this should be priced in already. Well, the answer is that markets don't believe the Fed. Investors used to think there was an almost 50 percent chance the Fed would start raising rates in June, but then inflation fell and, as you can see below, those odds did too, down to just 18 percent today. Even normal-ish unemployment hasn't been enough to convince them that the Fed will begin normalizing policy—not when core inflation is so far below target.
Now it's true that more investors are starting to listen to the Fed and bet on a June rate hike. But despite that, markets would still be caught pretty off guard if the Fed's lack of "patience" turns into higher interest rates so soon. The dollar would shoot up even more violently, and put even more of a crimp in the recovery by making it harder for U.S. companies to sell exports overseas and compete against imports at home. But why would one teeny tiny rate hike matter that much? Well, because it's not just one teeny tiny rate hike. Earlier liftoff tells us that what economists call the Fed's reaction function is more hawkish than we thought. In other words, if the Fed raises rates sooner than we think they should today, they might raise rates more than we think they should later.
The only question is how much more the dollar is going to go up: a historic amount or something slightly less than that.

19--The End is Kind of Nigh, Bill Bonner

20--Dollar surge continues, wolf street

Take a look at this long-term, monthly chart of the U.S. Dollar Index plotted alongside its 50-day moving average (DMA)…

The dollar is up 25% in the past eight months. That would be a terrific gain for a stock – though not uncommon. But it’s an amazing gain for a currency – which tends to be much more stable. And traders are continuing to pour into the dollar.
Interest rates in several European countries have dipped into negative territory – meaning depositors are now paying banks to hold their funds. Meanwhile, there’s a growing conviction that the Federal Open Market Committee (FOMC) is going to start raising rates here in the United States. So money is flowing out of Europe and into the U.S. That action strengthens the dollar and weakens the euro.
And currency traders are lining up to profit off it. The most popular currency trade on the planet right now is to be long the dollar and short the euro. But the markets don’t usually reward popular trades. We’ve seen this sort of lopsided currency betting before. And the trades almost always break down.

21--The housing crunch with a taste of rental squeeze: Incomes down and home prices up. Los Angeles families took a hit to their household incomes yet home prices soared., Dr Housing Bubble

Extra:  Flippage

Flippers succeed through buying low

I spent three years actively flipping homes in Las Vegas before the inventory dried up, so I have some working knowledge of how the business works. While most people focus on the renovation, this isn’t really where the value resides. In real estate, investors make money when they buy property, not when they renovate or sell

a property is purchased at a good price, the subsequent improvements and sale merely convert that good purchase savings to cash. If a buyer overpays for a property, no amount of renovation is going to add enough value to dig them out of a hole. Of course, most novices don’t realize this, which is why most novices don’t get past their first flip.
Since the foreclosure market dried up, the only stable source of properties flippers can acquire at undermarket prices has been through short sales. A flipper I know in Riverside county even started a charity to help families obtain loan modifications purely as a source of leads for short sales when the loan modifications failed. Short sales make up 70% or more of the business of successful flippers.

Nobody looks out for the lender

Obtaining a property for an under-market price, by definition, hurts the seller who didn’t get fair-market value for the property. Since the owners on title really don’t care because they have no equity, the only really concerned party is the lender who must approve the short sale, and neither the agent for the seller or the agent for the buyer
 has a fiduciary responsibility to the lender  The seller’s agent has responsibility to the seller, so they are only concerned with getting the bank to sign off on the debt.
Nobody represents the lender, so in a short sale, everyone wants the screw the lender. The seller is losing their house because the lender wouldn’t forgive the debt (something loanowners think they deserve), so the seller is happy to screw the lender. The buyer wants to get the property at the lowest possible price, so they are happy to screw the lender.
In fact, the only leverage the lender has to get a better price is to threaten to reject the sale, but this only serves to delay the deal, which in turn makes most buyers shun short sales. The only buyers with the patience to wait out these deals are the all-cash flippers, a group likely to bid very little for the property.

An example of a flipper rip off

The property below was recently purchased by a flipper who put it on the market the day after closing for $110,000 more than he paid.

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