Saturday, July 9, 2016

Today's links

1--The Big-Bank Bloodbath: Losses Near Half a Trillion Dollars


Since the start of 2016, 20 of the world’s bigger banks have lost a quarter of their combined market value. Added up, it equals about $465 billion, according to FactSet data

2--A repeat of the 1930s?; Why So Many Missed the Nationalist Surge


Politicians and young, educated urbanites live in an economic and cultural bubble

National demography increasingly reflects these divisions between more-educated and less-educated classes. People with education—especially young people—have been drawn to urban centers as hubs of innovation as well as diversity. Meanwhile, older and less-educated people have remained in small towns and rural areas. The clash between the city and the countryside has been a staple of politics since classical antiquity, but now it has resurfaced full-force...

cultural change wouldn’t be threatening for less-educated people if the economic changes of recent decades hadn’t been so devastating. There is a difference, alas, between statistics and the lived reality they represent. Many in my line of work have been writing for years about wage stagnation, income decline and the disappearance of manufacturing jobs. Too few of us have spent much time with the victims of these trends. If we had, their revolt against politics-as-usual wouldn’t have come as such a surprise...

As economist Branko Milanović’s pioneering work has shown, the new economy has brought enormous benefits to populations in less-developed nations and to wealthy and upper-middle-class individuals in advanced democracies—but not to the working and lower-middle classes in these democracies. These people wonder: If globalization isn’t helping us economically but is undermining our way of life, why shouldn’t we embrace nationalism instead?

A fair question, and those of us who fear that resurgent nationalism could trigger a rerun of the 1930s must come up with better answers than we have so far. If we don’t, Brexit and Donald Trump are just the beginning.

3--U.S. 10-Year Treasury Yield Closes at Record Low  Uncertainty persists about health of global economy since Brexit


The yield on the benchmark U.S. 10-year Treasury note closed Tuesday below 1.4% for the first time on record, the latest milestone of the record-setting declines in global government bond yields following the U.K.’s vote in late June to quit the European Union....

The yield on the U.S. 10-year Treasury note settled at 1.367% Tuesday, breaching the previous close low of 1.404% set in July 2012 when investors rushed into haven debt amid the depth of the eurozone’s sovereign debt crisis. Yields fall as bond prices rise.
Lower yields in the developed world reflect a lack of confidence over the global economy that has been running at a sluggish pace due to soft global demand for goods, stagnant wages and aging populations. Ultraloose monetary stimulus by major central banks have been less effective to boost growth or battle low inflation...

On an intraday basis, the U.S. 10-year yield touched as low as 1.357%. It was 1.446% Friday and 2.273% at the end of last year. The U.S. bond market was shut Monday for a holiday....

Few in the financial markets have foreseen a period of negative interest rates touching off globally. The total of sovereign debt with negative yields jumped to $11.7 trillion as of June 27, up $1.3 trillion from the end of May, according to Fitch Ratings....

The 30-year Treasury bond has been the market darling, and the buying spree has pushed down its yield to record lows lately. The 30-year bond’s yield settled at 2.138%, falling below its record close low of 2.226% Friday.
The 30-year bond was usually the playground for pension funds and insurance firms. But it is now being bid up by a broader investor base due to the global hunger for income. Analysts say it wouldn’t surprise them if the 30-year yield falls below the 2% mark in the weeks ahead.
Lower government bond yields also reflect growing expectations that major central banks would take fresh actions

4--Low-Yield Blues? Corporate Bonds Are the Last Ones Paying


The relative attractiveness of U.S. corporate debt has drawn in billions of investor cash. That could be a boon for American businesses who can borrow almost unlimited amounts at almost unheard of rates, potentially boosting share buybacks, deals and, possibly, investment.

It is a situation that has arisen as a consequence not of what investors expect from the U.S. economy so much as of the fresh rounds of stimulus from global central banks. Even though the Federal Reserve stopped buying Treasurys in 2014, both the European Central Bank and the Bank of Japan have been vacuuming up government bonds. That has pushed European and Japanese yields lower, and made U.S. bonds a relative bargain..

Five years ago, U.S. corporate bonds represented around 9% of outstanding investment-grade debt and 13% of yield income. A year ago, corporate bonds accounted for 23% of yield income.

5--Bank of England Frees Banks to Lend More After Brexit Vote--Move marks one of the first instances of a major central bank relaxing bank-capital requirements to mitigate a possible economic slowdown


The Bank of England moved to boost the U.K. economy in the wake of Britain’s vote to exit the European Union, marking one of the first instances of a major central bank relaxing bank-capital requirements to mitigate a possible economic slowdown.
The central bank said it agreed to ease regulatory restraints on U.K. banks in a push aimed at allowing them to lend an extra £150 billion ($199 billion) to U.K. businesses and households and to keep the economy flush with credit. The move reduced the amount of capital banks must hold against loan portfolios.
(Capital? Why would a bank need capital?)

6--Slowdown in Shadow Lending Tightens Credit on Main Street--A $98 billion drop in bonds backed by loans makes it harder for businesses, shopping-mall owners and consumers to refinance debt



7--Bad Debt Piled in Italian Banks Looms as Next Crisis  


Brexit vote compounded strains in banking system burdened by sour loans; ‘Italy is the patient that is sickest’...


In Italy, 17% of banks’ loans are sour. That is nearly 10 times the level in the U.S., where, even at the worst of the 2008-09 financial crisis, it was only 5%. Among publicly traded banks in the eurozone, Italian lenders account for nearly half of total bad loans...

The U.K. vote to exit the European Union has compounded the strains on Europe’s banks in general and Italy’s in particular. It imperils the Monte dei Paschi sale, some bankers say, and creates fresh uncertainty at a time when lenders are struggling with ultralow and even negative interest rates and sluggish economic growth

8--Stock Market to Bond Market: ‘La-La-La I Can’t Hear You’  


After Lehman Brothers fell over in September 2008, equities slumped, then rallied back to their previous levels within a week. Brexit isn’t Lehman, but the stock market is behaving similarly. The S&P 500 remains a little lower than it was immediately prior to the British vote to leave the European Union, but it is already back above where it stood the day before that.

In 2008, shareholders made an epic mistake: They assumed Lehman would be manageable. This time the assumption is that central banks will ride to the rescue and corral any problems. Investors expect global easy money, adding yet another central-bank prop to the stockade protecting shares from weak economic growth. The result is some unusual, and worrying, behavior in the bond market....

Last week’s divergence of bonds and equities isn’t healthy. Bond markets are screaming that the world economy is slowing, and shareholders have their fingers in their ears singing “la-la-la I can’t hear you.” Stocks are no longer about growth, but about a desperate search for safe alternatives to low-yielding bonds.....

Since Brexit, the bond-driven nature of the stock market has been particularly stark. Four sectors in the S&P 500 are now higher than they were on the eve of the British vote, and none are a bet on the American economy’s underlying strengths....

(either way, you lose)
Brexit (probably) isn’t Lehman, but it has left investors facing an unpalatable choice: Expensive safe assets are likely to fall if things turn out better than feared, while cheaper growth stocks will be derated even further if the bond market is right about the economic outlook.

9--Brexit Provides Lucky Break for U.S. Homeowners  

Falling interest rates are already prompting more mortgage refinancing ...


That didn’t take long. The sharp fall in interest rates since the U.K.’s vote to leave the European Union is already having a real-world impact on the U.S. economy through a spike in mortgage refinancing.
As long-term rates have marched lower, mortgage rates have fallen with them. The average 30-year mortgage rate fell to 3.34% on July 6, down from over 4% at the start of this year and in-line with the all-time lows hit in 2012, according to Mortgage News Daily

This makes it more attractive for mortgage holders to refinance and lower their monthly payments. Homeowners are already responding. An index of refinancing activity put out by the Mortgage Bankers Association rose 21% in the week ended July 1 to its highest level in 18 months.

10--Helicopter money?


The term derives from a thought experiment made famous by Milton Friedman in a 1969 article. He started a parable about money and inflation with these words: “Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky. . . . Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.”...

The attraction of helicopter money in a depressed economy stems from a simple observation: Fiscal stimulus (transfers) and monetary stimulus (money creation) together are more powerful than either one separately. Without accommodating monetary policy, fiscal actions that raise the deficit normally push up interest rates, which cut into private spending and thus reduce the fiscal multiplier. An equal dose of new money solves that problem....

a successful helicopter drop would require near-perfect coordination between Congress and the Fed—impossible. Yet even if it were possible, imagine the damage such a high degree of coordination might do to the Federal Reserve’s independence. Members of Congress will get a taste of what it’s like to control monetary policy. (Wow! Free transfers with no increase in the national debt.) And Fed officials will get a taste of what it’s like to control fiscal policy. Which group do you think will come back for more?...

Advocates of helicopter money sometimes speak as if the Fed can do the whole operation by itself. Well, no—that would be illegal. The Federal Reserve has no authority to make fiscal transfers, to cut anyone’s taxes, or to spend more money on infrastructure (all of which have been suggested). Congress delegated its constitutional authority “to coin money, [and] regulate the value thereof” to the Fed in 1913. It has never delegated its constitutional authority over taxing and spending to anyone.
In the real world, “printing money” means creating new bank reserves, which the Fed normally does by purchasing government bonds and paying for them with newly created bank reserves. Notice that this operation achieves what Friedman mused about: The government engages in deficit financing, but the Fed buys the debt, so the Treasury doesn’t have to float (and pay interest on) more bonds.


11--Can You Please Sell This Building...by 5 p.m.?


When fast money meets illiquid assets, bad things happen. Six British property funds have told their clients they can’t have their money back for now, after a rush to withdraw cash, and it has prompted the obvious comparison to 2007.

The first sign of the global financial crisis was the closure to withdrawals of two Bear Stearns hedge funds in the spring of 2007. The crisis burst into the mainstream that summer, when BNP Paribas BNPQY 3.02 % halted withdrawals from one of its money-market funds, before the run on banks began with the U.K.’s Northern Rock VM. 4.83 % a month later.

Freezing withdrawals sends a bad message about the underlying market, and can create problems in itself. Still, Britain’s commercial-property market doesn’t look likely to trigger a new subprime-style crisis....

The real danger would be if there were contagion to other assets, as investors needing cash sell other things instead. Back in 2008 this was a serious problem, as investors unable to sell what they wanted to sell instead sold what they could.
But there’s just too little private client money in commercial-property funds to matter. The Bank of England says open-ended property funds have £35 billion ($45.6 billion), but that is only about 7% of the total in commercial real estate in the U.K.....


Just because the latest fund freeze is unlikely to prompt financial meltdown doesn’t mean it should be ignored. The same underlying problem is at work in sectors big enough to pose risks to the system.
Mutual funds and exchange-traded funds hold out the promise of immediate liquidity while investing in hard-to-trade corporate bonds, junk bonds and even bank loans, in much larger amounts.
The fast money hasn’t fled from these. So far.

12--More Fund Managers Suspend U.K. Property Fund Trade  

Henderson Global Investors, Columbia Threadneedle and Canada Life the latest to suspend redemptions...


Henderson said Wednesday that it had temporarily suspended all trading in its £3.9 billion ($5.08 billion) Henderson UK Property PAIF and its feeder fund “due to exceptional liquidity pressures.”
Columbia Threadneedle said it also had suspended dealings in its £1.4 billion Threadneedle UK Property Authorised Investment Fund and its feeder fund....

Aberdeen Asset Management did a variation of the move. It said Wednesday that it was suspending trading in its property fund for 24 hours starting noon Wednesday, after which time an investor who wanted to withdraw would need to accept a 17% reduction. It said investors who on Wednesday sought to withdraw had until midday Thursday to recall the request.


13--The Great Unravelling; Election 2016 Is Propelled by the American Economy’s Failed Promises


Median household income, accounting for inflation, has dropped 7% since 2000, and the income gap widened between the wealthy and everyone else. Even though official measures of unemployment have receded from postrecession peaks, seven in 10 Americans believe the nation is on the wrong track, the most recent Wall Street Journal/NBC poll found.
The 2016 election is shaping up in large part as a referendum on an economic model that is widely seen as failing...

Workers have come out short-handed. In 2000, they collected 66% of national income through wages, salaries and benefits. That dropped to 61% after the recession and has only recently partially recovered. Profits have risen to 12% of income from 8%.....

“I went back to square one and asked, ‘Where did I miss it and why?’ ” Mr. Greenspan says. He was wrong about his faith that markets on balance acted rationally, he says. “I had presumed that irrational behavior on the whole was essentially random and produced nothing of value.”...

A recent Pew Research Center poll found 61% of Trump supporters and 91% of Sanders supporters see the economic system as tilted toward powerful interests. Both embrace a new nationalism that rejects global integration and the influence of what they describe as moneyed interests.

After 2000, the economy would experience two recessions, a technology-bubble collapse followed by a housing boom, then the largest financial crisis in 75 years and a prolonged period of weak growth.The past decade and a half has proved so turbulent and disappointing it has upended basic assumptions about modern economics and our political system. This string of disappointments has resulted in one of the most unpredictable and unconventional political seasons in modern history, with the rise of Donald Trump and Bernie Sanders. ....

Between 2000 and 2012, estimates Harvard economist David Deming, the hollowing-out of work spread to professions including librarians and engineers. Those with the right skills came out ahead, a big reason the income gap widened. The top 20% of American families accounted for 48.9% of total income in 2014, Census figures show, versus 44.3% in 1990....

Those alternatives narrowed to Mr. Trump, who promised to rip up trade deals and deport millions of illegal immigrants, and Mr. Sanders, who would break up big banks, tax stock trading and match Mr. Trump as an opponent of free-trade deals.
China, more than any other issue, shows the disillusionment with globalization. ...

Mr. Trump has made China-bashing a campaign centerpiece. Of America’s 100 counties with industries most exposed to Chinese imports, 89 voted for him in Republican primaries. Of the 100 least-exposed counties, before all of his competitors dropped out, 28 gave him the nod. Mr. Sanders takes a tough line on China....

Between 1999 and 2011, work published this year found, China accounted for 2.4 million jobs lost, including manufacturing and service jobs.



14--Why Banks Aren’t Giving You a 3%, 30-Year Mortgage…Yet

Mortgage rates are super low, but they could be lower  


Government bond yields have plummeted this week, but mortgage rates haven’t fallen so fast.
After plumbing record lows earlier this week, the 10-year yield closed at 1.387% on Thursday. The national average for a 30-year, fixed-rate conforming mortgage was 3.41%, according to the latest data from Freddie Mac released Thursday. The difference or spread between the two, at 2.02 percentage points, has risen in recent weeks and is at one of its widest levels since mid-2012.

That should bolster bank profits from making mortgages. For banks and investors, that is a silver lining of the superlow interest-rate environment, which threatens to crush overall bank profits. Those come under pressure because falling bond yields mean banks lend out money at lower rates, even though they can’t reduce their own cost of borrowing since many are already paying next to nothing for deposits....

“Mortgage rates right now should be at least 3.25%, if not lower,” for 30-year fixed-rate mortgages, said Guy Cecala, publisher of trade publication Inside Mortgage Finance.

Indeed, if the difference between the 30-year mortgage rate and the 10-year Treasury yield were at its average level for the previous 10 years, the average mortgage would be 3.17%. Mortgage rates key off the 10-year Treasury because most homeowners tend to move within around 10 years, repaying their loans in the process.

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