Monday, December 26, 2011

notes on the week ended Dec 24th

you probably have all heard the news by now that the House republican leadership finally OK’d a two month payroll tax cut extension, et al, which had been earlier stalemated by a House vote to oppose it which had been taken tuesdayif you recall last week, that bill to extend the expiring programs had been passed by an overwhelming bipartisan vote in the senate on saturday & boehner had indicated his house majority would follow suit, so the senate had already left town when the house GOP revolted en-masse, leaving boehner with egg on his face....since it was obvious that some kind of deal would have to be cut before year end, because there was no way they would allow the mandated 27.4% pay cut for doctors who treat medicare patients to take effect, expectations were that the tea party contingent would hold out till the last minute to extract concessions that the democrats had expected they’d have to give; however, senate minority leader mcconnell broke ranks & joined obama & the Dems in attacking the House intransigence, boehner caved in & agreed to the 2 month extension, & the house version of the bill was passed by unanimous consent, which is a parliamentary trick that allowed the bill to be snuck through as long as no one objected…(seems our legislative process functions better when most of the congresscritters are out of town)…HR 3765, the $30 billion bill obama signed friday, extends the 2% payroll tax cut cut for all those who will make under $18,350 in the next 2 months (1/6th the payroll tax cap of $110,100) but adds on a “recapture” tax of 2% for those who make over that amount; it also extends rations for the unemployed, but because the emergency rations are still based on a state’s unemployment over 3 years & the Dems werent able to tweak it, 32,000 of the long term unemployed in michigan & minnesota, states which are better off now than their 3 year jobless rate, will be limited to 79 weeks, and be cut off in february...all this is being "paid for" by an increase in the fee charged by the GSEs on the home loans they purchase, which could put another crimp in the housing market…the bill also requires that obama make a decision on the Keystone XL pipeline within 60 days, which may doom the project, as envronmental groups are convinced that forcing obama to make a decision on the pipeline without a proper review will lead to its rejection…the concession won by boehner was to establish a House-Senate conference committee to work on changes to a one-year extension of this deal, so we get to reenact this whole brouhaha in another 60 days

Existing Home Sales Revisionsthere were a number of housing related reports out this week, the most important of which was the benchmark revisions to home sales that were reported by the NAR (National Association of Realtors) over the 4 years between 2007 and 2010; as unreal as this seems, existing home sales which had been reported as being 20,629,000 over that entire period were overstated by 16% more than the 17,680,000 that actually occurred, hence they announced on wednesday that U.S. home sales from 2007 through 2010 were about 14% lower than first reported; this revision had been known to be coming for weeks, because it was announced after a number of housing analysts had noticed the discrepancy between NAR figures & data from CoreLogic & the census bureau, even so, the magnitude of it seemed to surprise most observers…the adjacent chart from calculated risk, which should enlarge, shows the size of this change by month, with blue as home sales were first reported, & red as they were revised….since the government BEA has used NAR sales figures in computing the brokers commissions & fees component of GDP, these revisions are expected to result in minor revisions to GDP growth over the period, mostly in 2007…and speaking of GDP, the BEA released their 3rd estimate of 3rd quarter GDP this week, down to 1.8% from the 2nd estimate of 2.0% and much lower than the widely reported first guestimate of 2.5% growth

so, after the prior year revisions, the NAR announced existing home sales for november at a seasonably adjusted 4.42 million rate, up from the revised & adjusted 4.25 homes sold in october, & also up from the seasonally adjusted & revised sale pace of 3.94 million homes reported sold in november 2010; a separate report from a HousingPulse tracking survey indicated 46.1% of those november sales were of a distressed nature, with short sales leading that category at 17.6% of total home purchases for the month…CoreLogic reported there was also a “shadow inventory” of severely delinquent & foreclosed homes not on the market of 1.6 million units…new home sales for november were also reported by the census bureau this week, at a seasonally adjusted annual rate of 315,000 homes; although the actual number of homes sold for the month was 22,000, a couple thousand more than last november’s 20,000, this year is still shaping up to be the worst year on record for new home salesmortgage rates across the board were again at all time lows, with the 30 year fixed loan at 3.91%, the 15-year rate at 3.21% and the one-year ARM down to 2.77%; even so, mortgage applications fell 4.9% for the weekthe census bureau also reported housing starts for november a seasonally adjusted annual rate of 685,000, up 9.3% from the october rate, and building permits for a seasonally adjusted annual 681,000 additional homes were issued in novembermulti-family starts at around 170,000 will be about 60% higher than last years record low, which in turn will result in record low multi-family completions this year…

    in matters of the foreclosure fraud settlement being pushed by the administration & the banks, the lead attorney general on that case, iowa’s tom miller, continues to postpone the date for a settlement (last week he said it would be done by christmas); meanwhile, california’s camela harris & nevada’s catherine cortez masto, who are not part of the “50 state” settlement, have announced a joint investigation into fraudulent mortgage & foreclosure practices by the same banks that miller and the administration are suggesting immunity for…late last week nevada’s masto, who had previously brought fraud charges against 3 LPS (Lender Processing Services) executives, filed suit against the firm & its subsidiaries for widespread document fraud, deceptive statements in attempts to correct document fraud, improper control over foreclosure attorneys and the foreclosure process, & misrepresentations about LPS’s services; this week california’s attorney general harris filed suit against Fannie & Freddie for not maintaining 12,000 foreclosed properties in california where the GSEs serve as landlords, and in another rare case of a public official actually trying to do his job, Steve Linick, the inspector general of the FHFA, which supervises Fannie and Freddie, has taken the results of his investigations to new york attorney general Schneiderman because he cant get anyone in the Obama justice department to prosecute mortgage related misdeeds…

there were a number of important posts this week dealing with a problem i've been trying to wrap my head around & explain in comments on other's blogs for several weeks, that being that the outstanding US debt & other safe assets are in such short supply that financial markets, & more specifically the shadow banking system, is unable to function properly...US debt, that same US debt that our lame brained policy makers & politicians damn & rant about, has a special function in the financial markets; without it, the financial markets freeze up...what's important to understand is that short term US government debt has become, at least in part, the worlds money supply; a million dollar Treasury bill is used as money by the international banking system and by sovereign wealth funds in the same sense that you use a ten dollar bill in your wallet…thus, any contraction of the supply of the reserve currency (our treasury debt) has a negative impact on the world economy in the same manner that a contraction in the domestic money supply impacts our nation's economy (see IMF paper on this, PDF)...the adjacent chart, from the 2012 credit suisse global outlook via FT Alphavile, shows the decline in safe (AAA) assets in primary reserve currencies available to use as financial collateral & in repurchase agreements over the last decade (skipping some years); the two that dropped out with the recession’s onset were structured products (red) & agency MBS (grey); downgrades of european countries have further reduced AAA assets this year…as economist david beckworth points outthese safe assets serve as transaction assets and thus either back or act as a medium of exchange…(they) have served as collateral for repurchase agreements, the equivalent of a deposit account for the shadow banking system…the disappearance of safe assets therefore means the disappearance of money for the shadow banking system”…this problem exacerbated the liquidity crunch that developed in the European banking system a few months back which prompted the Fed’s recent action to coordinate with 5 other central banks to lower the price of dollar denominated currency swaps in order to ease ongoing bank funding strains, and this week’s ECB lending of $641B to banks via a 3 year LTRO, which, btw still doesnt seem successful as ECB overnight deposits hit a new high thursdayquality collateral has become so scarce that banks are hoarding it just as a miser would hide paper money under a mattress in times of uncertainty…but instead of creating “money” when its in short supply & needed, the world is stuck with this system of having to borrow it & pay it back; what steve roth at angry bear callsa stunningly byzantine and dysfunctional approach to managing the supply of money to the real economy that produces human-consumable goods and services (though it works out very nicely for the bankers, personally)”

reducing the debt even effects us adversely domestically; Dr Randall Wray has shown that in each of the 6 times in US history where we had a depression, it was preceded by substantial budget surpluses and significant reduction of the debt; this was a concern of the Fed & bush administration economists early last decade; it became clear that if clinton surpluses continued & our debt was paid down, the financial system would soon experience a dearth of safe assets & would begin to lock up; so the bush tax cuts were initiated in order to keep levels of AAA assets high enough for the markets to operate..but now, the same bush chief economist who was the architect those tax cuts, greg mankiw, is now nefariously suggesting that US debt under obama makes the US similar to greece or zimbabwe…we really need a new word to describe government note, bill, & bond issuance, because the nature of a government issue is closer to creating needed money than it is to what the public & the airheaded congresscritters think of as "debt"...obviously, obama suffers from the same delusion, saying that the government is like a household and should also tighten its belt when times are tough...& the mistake they're all making is what's costing us this prolonged & deep recession...

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

Sunday, December 25, 2011

grandma got indefinitely detained now…

(trying to come visit christmas eve)

A Very TSA Christmas to All, & to all a goodnight…

Friday, December 23, 2011

o robo-ly right (the servicers were signing)

a christmas hymn parody on robo-signing, loan servicing, & foreclosure fraud…

lyrics HERE

the 12 days of bailouts…

reposted from xmas 2009, & still apropos…h/t 8mileshi..

Monday, December 19, 2011

notes on the week ended Dec 17th

the major news this week seemed to be that the Fed didnt do anything...seriously, they had a FMOC meeting, their post-meeting statement was nearly identical to the statement after the November meeting, yet it generated heavy econoblog coverage & at least one article on it from every major media outlet...why so much attention from the econ-blogosphere on the Fed's routine inaction? likely its continued frustration with the shenanigans of a totally dysfunctional congress & a white house that completely ignores economists, leaving those whose business is it to chart a path through the maze to a sustained recovery waiting for Ben & his band to throw more money at the economy, even as ineffective as monetary policy has been to date...

with the continuing resolution passed last month expiring on friday, it was probably predictable that congress would wait till the eleventh hour to finally pass a budget to get us through the remainder of the fiscal year (ending 9/30/12)…instead of putting together a spending package that had a chance of passing, the house spent most of the week loading a christmas tree with special interest provisions that obama clearly stated from the beginning that he would veto…& as it seemed no compromise was in sight, by midweek we started seeing the expected “government gonna shut down o god we’re all gonna die” genre of headlines…but probably just as predictably, by the end of the week, the contentious items were separated out & over a trillion dollars of spending was agreed on to fund the major agencies of the government until the end of the current fiscal year; since this appropriations bill is more than 1200 pages, few details have been analyzed, although we do know that it reversed the ban on incandescent bulbs, now that all old domestic lightbulb production has been mothballed…that still left the half dozen or so expiring provisions, such as unemployment compensation, the payroll tax cut, the doc fix, etc, that we’ve talked about over the past couple weeks to be dealt with, budget add-ons that obama & the democrats wanted, leaving boehner & the house tea party again holding the trump cards…so the Senate democrats included with their compromise bill to fund those expiring provisions just till February a provision to fast track the keystone XL oil pipeline which was subsequently passed by the senate & sent to the house on saturday, where we’re waiting to see if it will pass before year end

there was another major piece of legislation passed separately this week you should all know about…the 2012 National Defense Authorization Act, which is the regular defense appropriations bill (920 pp pdf), includes provisions authored by john mccain & carl levin that allow for the indefinite detention of suspected terrorists, including US citizens, by the military without being booked, charged or tried, until such time as "hostilities end"...this has already passed by large bipartisan majorities in both the senate & the house and obama has indicated he will sign it...this bill effectively repeals the posse comitatus act (which had prevented use of the military against US citizens), abolishes habeas corpus (the right to challenge an unlawful detention), the right to a fair trial and the right to due process; clearly, it would seem that these provisions would be unconstitutional, but if someone is among those who have disappeared, they would hardly be in a position to challenge the constitutionality of what had been done to them, would they?...people in this country have been putting up with the inconveniences of the dept of homeland security & the provisions of the patriot act, but this is the patriot act on steroids; you might say there's nothing to fear if you're not a terrorist sympathizer; but the broad scope of this legislation leaves it entirely up to the executive branch to decide who's an enemy of the state, such that if a future president would want to round up & disappear politcal dissidents, such as OWS, it would be within the scope of this legislation to enable that action...the most complete article describing the language & potential abuses of this legislation ive seen to date is Three myths about the detention bill by glenn greenwald at salon; ive also posted a video rant about this legislation here at MW 666 as bill of rights? ha ha, tell me another one…

Capacity Utilizationthe economic reports that were out this week were not as encouraging as we've been seeing over the past several weeks; the official retail sales report for november from the census bureau made a liar out of the retail tracking estimates we reported earlier, as november sales were only up 0.2% over october's, & although they were still 6.7% better than sales of a year ago, a lot of that can be accounted for by higher gas prices, up 18.4% YoY; nominally, retail sales are at a new high, 5.5% above the 2008 peak, but again, that isnt adjusted for inflation....although wholesale inventories were higher, seasonally adjusted retail inventories were virtually unchanged...the Ceridian-UCLA diesel fuel index also slowed to 0.1% in november, compared to a 1.1% increase registered in october....we also had a weak industrial production & capacity utilization report from the Fed; overall production was down 0.2%, with factory output ex-autos down 0.4%, autos down 3.4%, & mining & utilities both up slightly; total industrial production was still 3.7% better than a year ago, although year to date is 5.2% lower than the 2007 high water mark...capacity utilization for all industry also decreased 0.2% to 77.8%, 10.5% off the record low but still considerably below the long run average as shown by the adjacent chart….in general, companies arent going to be investing in new plant & equipment while there’s that much unused capacity...trade also seems to be slowing as well; reports from LA & Long Beach ports, which account for 40% of US shipping container traffic, show both inbound & outbound traffic down over october's 0.3% & 0.2% respectively, & over last november's, 4% & 2% respectively...

it’s probably also worth noting that reported first time claims for unemployment fell to 366,000 for the week ending Dec 10th, the lowest since may 2008…the problem with this number is that’s it’s seasonally adjusted & typically volatile, ie, so we really should wait for adjustments, which have tended to be up, though less so than during the summer, and wait for a longer term tread to establish itself, but with the 4-week moving average at 387,750, 6,500 less than last week’s revised moving average, we’ll take whatever little light is in this tunnel…the consumer price index was also reported as unchanged for november, as energy declines offset increases in other categories; year over year, prices are up 3.4% (the BLS release says “over the last 12 months before seasonal adjustment”; would someone please explain how last november could be a different season than this november?); the core inflation rate, which excludes food & energy & which you’ll recall as the inflation measure the Fed follows, was up .2% for november & 2.2% over a year agothe cleveland Fed also publishes two other inflation measures; a median inflation, ie, the price change that’s right in the middle of the list of all the CPI price changes, which rose 0.1% in november (& at a 1.1% annualized rate), and a trimmed-mean inflation rate, wherein they eliminate the 8% of the CPI components with the highest and lowest one-month price changes & then figure the average of those remaining, which was up 0.1% for the month & 1.0% annualized…

FRED Graph

there was one report out this week that was quite surprising, especially in light of all the articles one reads about how burdened americans are by their accumulated debt; the Fed released the 3rd quarter Household Debt Service and Financial Obligations Ratios, a report which shows the percent of household disposable personal income that is dedicated to debt service; quoting the Fed release: The household debt service ratio (DSR) is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt. The financial obligations ratio (FOR) adds automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance, and property tax payments to the debt service ratio...what is surprising about this report is that the overall debt service ratio is now back to 1994 levels, obviously because of continuously lower interest rates; and as the adjacent chart of debt service as a percent of disposable income shows, with the Fed committed to a zero interest rate policy for another 2 years, we are well on track to hitting a series low on this debt service metric...it's also worth noting that what applies to households also applies to government debt, as long as the government debt service remains low, the interest on the debt portion of the federal budget remains very manageable...

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

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

Tuesday, December 6, 2011

notes on the week ending Dec 3rd

ok, its been a busy week, & not just with the unemployment & housing reports that came out, but a lot of other news as well...even though im already running late, i'm going to try to point out & comment on as much of it as i can, but may not get to all i'd like to, so if there's a week you should check my other blog for whatever i miss or mention briefly here, this would be it...

let's start with the news wednesday that the Fed coordinated with 5 other central banks (BofJ, BofE, Swiss, Canadian & ECB) to lower the price of dollar denominated currency swaps in order to ease worldwide bank funding strains that had developed in light of the euro mess, because that's been widely misunderstood as meaning "the Fed just bailed out europe"...so we should start by noting that this isnt costing the taxpayers anything, and the action the Fed has taken is actually closer to a temporary loan rather than anything close to a gratis bailout...and the Fed doesnt really give a damn about the euro or the governments of europe, either; the Fed is only interested in saving the banking system, everything & everyone else is secondary...lets start by explaining what they're doing; ie, lowering the cost of swaps from 1% + the overnight index swap rate to a half percent; for any given swap, a central bank sells a given amount of its currency to the Fed in exchange for dollars; the swap agreement specifies that the swap will be reversed at a specified future date at the same exchange rate, so essentially the entire action is unwound at that time, and there is no risk when dealing with other central banks...this is not unprecedented, the same thing was done after the Lehman collapse, & after 9-11...so why did they need to do this now? well, by virtue of the current high interest rates on sovereign debt issued by the peripheral european states, bonds in those countries that were purchased earlier by european banks have gone down in value considerably; hence, most of the european banks had grown suspicious of the solvency of the others, and they either stopped lending to each other, or charged ever higher premiums for their interbank loans; the same became true of their transactions with banks in the US & elsewhere around the world...as suspicion & apprehension mounted, their only alternative became to borrow from the ECB & deposit funds overnight at the ECB; normal interbank transactions started freezing up...by temporarily providing safe dollars cheaply to the ECB which they could lend to the euro-zone banks, the Fed is delaying their day of reckoning, when those banks, unable to rollover their funds, would be forced to sell their bonds in the peripheral countries at loss, likely causing cascading bank failures...but most of those who've followed the european situation closely think its still far from being out of the woods, because of continued intransigence by the Germans & the ECB...if the ECB would announce a commitment to buy as much spanish & italian debt as would be necessary to drive their interest rates to say 3%, the crisis would be over tomorrow; but they wont "print money"; their bond purchases have been sterilized because the germans still have their historical, deep seated fear of inflation, even though the underlying trends in europe are now contractionary...

more details about the Fed's involvement in the bailout of the banking system during the crisis in 2008 were revealed last week as a result of a bloomberg FOIA lawsuit & ongoing investigation, and compared to the $700 billion treasury TARP bailout that we knew about, the Fed bailout at $7.7 trillion was 11 times as large, including $1.2 trillion on one day alone; and what did the banks do with this money? nothing for us; they sat on it & collected $13 billion in interest before paying it back...former treasury economist brad delong took a look at the details & opined that "without the Fed and the Treasury, the shareholders of every single money-center bank and shadow bank in the United States would have gone bust"…links to around 2 dozen on these Fed related stories are included right at the beginning of this week's blog post, if you want more details, opinions & analysis...

we havent seen much progress from congress this week on the extension of unemployment rations and the payroll tax cut which expire at year end; for the unemployment extension, most of the news was was that the parties were far apart & still debating how long, what size, and what strings should be attached to an extension; both parties have introduced bills to extend them; the democrats continue most of the provisions currently in effect; while the republicans would tie the extension to repealing some "job killing" regulations, possibly even taking away the presidents authority to rule on projects such as the keystone XL pipeline...the news on the payroll tax cut was on again, off again all week until friday when two bills, one introduced by each party, both failed to pass in the senate; the democrat plan proposed to "pay for" the tax cuts by a surtax on those making over a million; the republicans planned to "pay for" the tax cut with a federal staff reduction & a pay freeze for federal workers; surprisingly, more even republicans voted against the republican plan than voted for it, which suggests it will be hard to get them on board on any compromise...economist karl smith suggested an interesting way to "pay for" it; issue 10 year TIPS at their current 0.2% percent real interest rate; after 10 years the $119 billion cost would have risen to $120.4 billion, but that could be paid for then off what should be a much bigger tax base; & if the economy hadnt grown by that time, TIPS rates would likely be negative reflecting deflation, so the can could be kicked further down the road by issuing more TIPS at a profit...


on friday, the labor department released results of the 2 surveys making up the november unemployment report; from the broader based establishment survey, they estimated that 120,000 jobs were added on a seasonally adjusted basis, just about enough to keep up with the growth of the population; even better, we again got positive revisions to the previous two reports; september was revised from +158,000 to +210,000, and october was revised from +80,000 to +100,000; while these kinds of numbers aint spectacular, they at least go some way in alleviating the fear of sliding backwards into a recession that the weaker midsummer reports brought on…the lions share of the jobs added this month were in retail, restaurants and bars, obviously not the highest paying; accordingly, average hourly earnings for the month declined 2 cents, to $23.18, from october’s average…the average workweek for all employees was unchanged at 33.4 hours, although it fell a tenth of an hour to 33.6 for the grunt laborers…from the much smaller household survey, from which the headline number is calculated, BLS estimated a gain of 278,000 jobs, but also showed a decline in the labor force  as 487,000 dropped out, eliminating those former workers who no longer met the requirements to be counted; as a result of that higher numerator and lower denominator, the ratio of employed to unemployed rose, resulting in a reported decline of the unemployment rate to 8.6% from last months 9.0%; were it not for the declines in the labor force, the unemployment rate would be well over 11%…for the same reason, the U-6 unemployment rate, which includes those only working part time or intermittently when they want full time work decreased to 15.6% from the reported 16.2% in october; gallup, which does an unadjusted survey of unemployed workers, showed the percentage working part time but wanting full-time work to be 18.1%paul krugman took a brief look at the BLS report and said “meh” (with feeling); producing the chart above right, showing that in terms of the normal working age population, we really havent gained anything since the recession officially “ended” almost 2 & a half years ago…and we did hit a couple of new records we dont want to brag about, too; the labor force participation rate fell 0.2% to 64.0%, the lowest since the early 80s, before women had to join the labor force en-masse, and the average duration of unemployment also set a new record at 41.1 weeks, as show by the above left chart…

there were also a number of housing & mortgage related reports out this week; census reported seasonally adjusted new home sales for october at 307,000, up slightly from the october number of 303,000, which was revised down from the first reported 313,000; the average new home price was reported at $242,300, the lowest since 2003; last week the existing home sales for october were reported at a 4.97 million annual rate, up 1.4% from the annual rate reported in september, and according to the NAR (National Association of Realtors), the median home price was 4.7% lower than a year ago…this week case shiller reported it’s 20 city index of home prices for july, august & sept as .6% lower than the previous 3 month report ending august, and 3.59% lower than a year ago; their national index, reported for the 3rd quarter, was down 3.9% from a year ago…another index, the national home sales index from DataQuick for the current 30 day period, showed home prices 7.8% lower than a year ago, based on reports from 98 of their hundred covered markets…despite a new record low rate for new ARM mortgages, mortgage applications plunged 11.7% this week from the week before…CoreLogic also released a negative equity report for the 3rd quarter, showing that 10.7 million, or 22.1 percent, of all home were underwater at the end of the quarter, a slight improvement from the second quarter; an additional 2.4 million homeowners had less than 5 percent equity at the end of september…

Foreclosure Inventory LPS (lender processing services) also reported this week on mortgages delinquent & in foreclosure in october; although delinquencies were down nearly 30% from a year ago, homes in the foreclosure process were at an all-time high; of those homeowners delinquent, 2.33 million loans were less than 90 days delinquent, and 1.76 million loans were over 90 days delinquent...a record 2.21 million homes, or 4.29% of all mortgages, were in the foreclosure process, up from 4.18% in september, and the average number of days that homes in foreclosure had gone without making a house payment also set a new record of 631 days…they also report foreclosure rates in non-judicial states as being 4 to 5 times higher than in judicial states, where the banks have to “show the note” in court, likely indicative of the mess that MERS made of home titles during the slicing & dicing of mortgages into bundles for security sales…the adjacent chart from LPS (click to view) shows this difference, showing non-judicial foreclosure home percentages stuck in foreclosure less than half that of judicial states…at least for the judicial states, this probably bodes well for christmas sales, as almost 7% of homeowners arent making house payments, so they’ll have that much more to spend on toys from china…

there was also an important foreclosure fraud lawsuit brought this week massachusetts attorney general Martha Coakley against the 5 biggest mortgage services, MERS and the shell corporation MERSCorp which is owned by the banks; charges include deceptive foreclosure practices by conducting foreclosures when the defendants lacked the right to do so, producing false documentation practices to initiate foreclosures, failure to comply with Massachusetts’ registration statutes, failure to pay local recording fees, and more; there was also mention in the suit of the damage to massachusetts land & title records, similar to the charges in the lawsuit initiated earlier by geauga county on behalf of ohio…this is the first major lawsuit by a state attorney general for the same charges that that the administration & the so-called 50 states attorneys general are attempting to settle with the banks and heads off their attempt to grant the banks immunity from prosecution for the aforementioned and any other mortgage related crimes they may have committed…

all in all, the economic data this past week continued to indicate that we'd likely avoid the double dip recession that we feared this past summer...the conference board reported their index of consumer confidence rose to 56 in november from 40.9 in october; accordingly, black friday sales were up nearly 7%, to the highest nominal sales ever for that day, although slow sales in the early part of the month reduced the monthly gain to 3.2%; november car sales at an adjusted annual rate of 13.6 million units were the highest since august 2009, and except for the "cash for clunkers" driven sales blip, the highest since june 2008; further more, the chicago PMI (purchasing managers index) rose to 62.6% in november from 58.4% in october, a 7 month high, and the ISM (Institute for Supply Management) PMI was at 52.7% in november, up from 50.8% in october; so while europe may be heading into a recession, it looks as if we've avoided that fate for the time being...

the above is my weekly commentary that accompanied my sunday morning links mailing, which in turn was selected from my weekly blog post on the global glass onion…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