Sunday, December 11, 2011

notes on the week ended Dec 10th

the first results are in from the dollar currency swaps that were extended by the Fed (and other major central banks) last week; on thursday, the ECB (european central bank) reported that it would lend $50.7 billion in dollars to 34 eurozone banks at a rate of .59%. for 84 days (theyre calling them 3 month loans); since demand from the BofJ was minuscule by comparison at $25 million, its probably reasonable to assume most of the swaps originated with the Fed... you should also recall the report last week on the 2008 $7.7 trillion Fed bailout of the banking system that resulted from a bloomberg news FOIA lawsuit; one would have thought that would have died in this weeks news cycle, but in what had to be a PR blunder by the Fed, Bernanke personally attacked the report, charging in a letter to members of Congress that stories about its bailout programs “have contained a variety of egregious errors and mistakes.” without mentioning bloomberg by name; bloomberg news, however, knew who ben was talking about, and shot back with a point by point rebuttal; the only real bone of contention seems to be the way the amount was described; the Fed said that on any given day, the credit extended the banks on one day was never more than about $1.5 trillion (still more than twice TARP, btw); it seems bloomberg arrived at the $7.7 trillion figure by adding the total loans, ie, including those that were rolled over again after the initial period...but in scoring this dispute, we'll have to give the point to bloomberg; if the Fed didnt have something they wanted to hide in the first place, why did they fight so hard to prevent this information from being divulged? and bloomberg may have miscalculated anyhow; a separate new study from the levy economics institute puts the Fed bailout total at $29.616 Trillion dollars, more than twice US GDP...at any rate, jon stewart had his usual take on these shenanigans, & it's now posted here at MW 666 as TARP times eleven...

congress is again running out of time to have either a budget for fiscal 2012 (started Oct 1) approved, or another continuing resolution passed to extend the current budget for another period; if you recall, in mid-november, as the supercommittee was gasping its last breath, congress passed a continuing resolution to fund the government another month, which now expires on Dec 16th; right now, negotiators from both chambers are trying to tie nine separate funding bills into an omnibus spending bill which would fund many government agencies through the remainder of the 2012 fiscal year (ending spet 30); however, the tea party contigent has dubbed it a "megabus" spending bill & has called for its defeat; they want to force a vote on each item to use for campaign ad leverage...and this bill doesnt even include the expiring programs we've been discussing the past few weeks; while there's been considerable debate on how to "pay for" the payroll tax cut, there's been little movement on either of the proposals to extend unemployment rations past the end of the year; as we saw last week, the average duration of unemployment is now at a record 41.1 weeks, so the need hasnt diminished; if there is no extension of this emergency program, 2 million will lose their tiny stipend (averaging $296/week) in january alone, and as the tiers the other jobless are on run out, as many as 7 million american who are on the extended program could lose their ration checks (right now there's a standard state allowance of 26 weeks, followed by 4 extended federal tiers of 20, 14, 13, & 6 weeks each, depending on the level of unemployment in each applicants state, & continuing rations for each tier necessitating a new application)… one congressman, David Camp, from michigan of all places, has introduced a bill to cut the federal portion of unemployment insurance by 40 weeks, which would hit the unemployed his state as hard as any...and although the house republicans passed a bill on thursday linking both the unemployment extension and the payroll tax cut extension to a fast tracking of the keystone XL oil pipeline from alberta to the gulf, obama has indicated he won't accept that deal...what does seem to be getting traction with both parties is a proposal by the administration to "pay for" the payroll tax increase by raising fees that Fannie and Freddie collect from lenders for mortgage guarantees...that has been included in a house republican bill that also includes minor cuts to medicare, increased federal employee retirement contributions, and a handful of other non-tax revenues...as the intention of this payroll tax cut extension is to put money into the hands of consumers who will spend it, the "making work pay" tax cut, which this replaced in last decembers last minute budget deal, would have been a better choice, as it was directed at those making under $40,000, with a gradual fade out at $95,000...

Chart-1_round2   there was an interesting study on the housing bubble from the NY Fed this week, entitled “Real Estate Investors, the Leverage Cycle, and the Housing Crisis", a long 52 page PDF including graphics; there was also a shorter summary of it on the NY Fed blog, titled “Flip This House”: Investor Speculation and the Housing Bubble; in it they document the considerable leverage being used by investors in housing as prices rose through the middle of the decade, and the subsequent cascading defaults by those investors as housing prices collapsed...it's pertinent to understand what happened because if you happen to tune in any wing-nut talk show, you can still hear the refrain that the housing bubble & subsequent collapse was caused by barney frank, Fannie & Freddie's strong arming the banks to loan money to subprime borrowers (read: minorities) who should have never been able to afford a home, even though barry ritholtz totally debunked that by showing the global nature of the housing bubble, wherein the housing price increases in the US were actually dwarfed over time by real price increases in ireland, the UK, the netherlands, spain, australia & several other countries where barney frank's influence was minimal; but even this week it was again alleged on CNBC that Fannie Mae and Freddie Mac were responsible for the majority of subprime loans leading to the bubble...at any rate, by way of explaining what the NY Fed found, im going to include first on the right a set of charts from the report; both charts show the percentage of homes purchased by investors who had multiple mortgages on their credit reports; the one on the left is national; the one on the right is for just the bubble states of AZ, NV, CA, & FL...red are those borrowers with 2 mortgages; green is three, & purple are those with 4 or more mortgages on their credit reports...you can see the number of multiple mortgagees got as high as 35% nationally, and nearly 45% in the bubble states, in 2006; far more than could be accounted for by the handful of people who may have purchased a second vacation home; in fact almost 20% of mortgages originating in the bubble states were from borrowers with 3 or more home loans on their reports...Investorsthe single chart below then shows the percentage of mortgages that were seriously delinquent during the same time frame...you can see that by the 4th quarter of 2008, those with the multiple mortgages accounted for a disproportionate amount of mortgages in default as home prices collapsed, and as the NY Fed says, "thereby contributed importantly to the intensity of the housing cycle’s downward leg"...clicking either the double chart above & the single one below should open it in a new window...


Household Real Estate Assets Percent GDP there was another surprising report from the Fed this week, or at least surprising to me, because i assumed the worst of the collapse of household wealth had played itself out as the decline in housing prices moderated...but apparently it hasnt yet, because the 3rd quarter flow of funds report from the Fed showed that household net worth was down the most in one quarter since the last quarter of 2008…what i overlooked was the effect that declining household financial assets such as mutual & pension funds would have on the total, as household net worth declined $2.4 trillion to $57.4 trillion from the 2nd quarter level…the effect of rising or declining household net worth on the economy is known as the “wealth effect”; when people see their assets growing, they tend to spend more; when they feel poorer, they spend less…the adjacent graph, constructed from data in the Fed report (click on it to expand), shows shows household real estate assets and mortgage debt as a percent of GDP; most of the decline in mortgage debt is as a result of foreclosures or short sales…apparently Americans dont too much cotton to feeling poorer, because in october they took on even more debt, as consumer credit increased by $7.65 billion to $2.457 trillion; the lion’s share of that was non-revolving credit, which includes student & auto loans, which grew by $7.28 billion; while revolving credit, ie, credit card debt, grew by a more modest $366.2 million...

U.S. Trade Exports Imports the handful of economic reports out this week further confirmed the improving trend we saw last week; another consumer index, the Reuters/UofM sentiment index for december was up tp 67.7 from 64.1 in november, the highest reading since june; rail carloads for november were up 2.3% from a year ago while intermodal traffic increased 3.8% YoY; meanwhile, our trade deficit report for october was lower at $43.5 billion, down from $44.2 billion in september, with both imports and exports declining, and although the ISM non-manufacturing index for november was at 52.0%, down from 52.9% in October, wholesale inventories increased by a seasonally adjusted 1.6% in october, indicating increasing business pre-holiday confidence, and prompting goldman to revise their 4th quarter GDP forecast from +2.5% to + 3.4%...the adjacent graph is of our monthly exports & imports over the last 18 years; you can note the decline in imports (red) over the past 6 months, gradually improving our trade deficit…

actually, it's not just that we seem to have avoided the double dip recession so often predicted earlier this year, the US has been the only major country that has seen its forecasts improve going forward; last week we saw the chinese manufacturing index fall to contractionary levels for the first time in 3 years; this week we see the composite 17 nation euro-zone PMI (purchasing managers index) contracted again in november, reading below 50 at 47.0 for the 3rd month in a row, as spain's industrial output fell 4% and even germany’s PMI showed contraction at 49.4 for the first time in 2 years; elsewhere in the EU, the UK mfg index contracted in november for the 3rd time in four months, and poland's government cut their 2012 growth forecast to 2.4% from 4.0%…meanwhile, japan’s 3rd quarter GDP growth was revised downward to an annualized 5.6% from the previously estimated 6% (rebounding from contaction in the first 2 quarters), while the Bank of Korea slashed its country’s growth forecast for 2012 to 3.7%, from the previous forecast of 4.6% growth…the growth rate in india dropped to 6.9%, the slowest in 2 years, & even the brazilian economy failed to expand in the 3rd quarter

there was a major summit of european countries this week, intending to produce another final solution to their crisis, but before that could even get underway, S&P put 15 eurozone countries, including both france and germany, on a negative credit watch with potential for downgrades within 3 months; the problem with any downgrade of the 6 countries that still have a AAA rating would pose is that those six back the EFSF (european financial stability facility), aka the bailout fund they’ve been trying to peddle, and if one of them should lose the AAA, so would the EFSF (which, btw, is being renamed the ESM - euro stability mechanism); a reuters poll of 13 economists had 11 of them predict just such a downgrade to france within 3 months…as the summit began on thursday, ECB president Draghi announced a rate cut from 1.25% to 1% and other bank support measures but generally disappointed by refusing to expand it’s bond-buying program...on the same day, the european banking authority ran another set of stress tests on the eurozone banks & found them to have a €115bn capital shortfall, higher than the €80 shortfall found in october, largely because of worse than expected capital deficits found at banks in germany; the first sentence in the FT article assumed this meant the prospect of further taxpayer bail-outs…the summit itself produced a treaty pushed by sarkozy & merkel on the rest of the eurozone countries, which was agreed to by the 17 countries that use the euro, but of the 27 EU countries, both the UK & hungary refused to participate, and the czech republic & sweden deferred till they could consult with their parliaments…the treaty itself included a provision that no investors would have to share in the losses resulting from the bailouts, and a commitment to unified fiscal austerity, with a strict enforcement of a 3% deficit ceiling…they also backed a $267 billion funding commitment to the IMF & changed the voting procedures on the ESM (bailout fund) so that unanimity would no longer be needed, prompting a threat by finland to pull out of the funding…

this is my weekly commentary that accompanied my sunday morning links mailing, which in turn was mostly selected from my weekly blog post on the global glass onion, and also includes other links of interest…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, most coming from the aforementioned GGO posts, contact me

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