Sunday, January 29, 2012

notes on the SOTU, the FOMC, 4th qtr GDP, December’s LPS report, et al

unless you've been living under a proverbial rock, you all probably know that obama gave a major campaign speech disguised as a "state of the union address" on tuesday night...since he tried to mention something he has done or would do for almost every constituency, rather than detail his speech a point by point, i'll just point you to the full text of the SOTU at the WaPo, and note that a lot of what he proposed therein will take congressional approval, and we all know how likely that is...what is likely more interesting than his speech itself is what was not in it, and even more importantly, what he had planned to include but couldnt...for at least two weeks before the speech, it was widely assumed and reported that he'd be announcing the so called "50 state foreclosure fraud settlement" with the nation's 5 largest mortgage servicers, as the administration had been applying pressure to get it done in time - they even went so far as to offer california attorney general kamala harris a bribe of $10 billion of the proposed $25 billion settlement to sign on...but with a number of state attorneys abandoning the administration driven talks, and activists lobbying their state attorneys, a last minute change of strategy was apparently forced on the administration when iowa's tom miller, who was leading the negotiations on behalf of the states, announced that he couldnt complete the deal in what obama did in lieu of announcing a settlement was to announce a new housing fraud unit within the previously ineffective "Financial Fraud Enforcement Task Force" (the obama administration has had less financial fraud prosecutions than any president back to & including reagan, and they've all been small fry) and appoint NY attorney general Eric Schneiderman, one of the original opponents of the settlement, as a co-chair, in the hopes of appeasing his progressive base...but as Schneiderman is only one of 5 co-chairs of the task force, and Holder, Breuer & Khuzami are known to be bank friendly, the appointment has been viewed with skepticism, as some feel schneiderman is selling out, and others think he's being co-opted…and perhaps the most interesting appointment to chair this new task force is that of Tony West, a previously unknown assistant attorney general, whose claim to fame seems to be that he’s california attorney general Kamala Harris’s brother in law…speculation is that West is on this committee at least in part to pressure her to take the administration's foreclosure fraud deal

Appropriate Pace of Policy Firming we also had a 2 day FOMC (Fed Open Market Committee) meeting this week, followed by a Bernanke press conference...although these are usually boring affairs unless some major monetary policy change, such as QE or Twist, comes out of them, they're widely followed in the econo-blogosphere, and examined for every nuanced change from the previous meeting...what made this months meeting unique, however, was that it was the first meeting conducted under a new Fed transparency regime, largely a policy initiated by Bernanke, by which they intend to be quite clear about what they're thinking, what they intend to do, and that end they've even produced a number of childlike graphics to explain how they've arrived at their policy decisions & projections for the future of the such is included here; each dot on this graphic represents the opinion of one member of the FOMC as to what the Fed's funds rate should be set at in each of the next three years, and then for the longer term; you can see that most of them favor rates near zero (ZIRP) for at least 2 years, & even into 2014, while consensus is that they should return to a range of over 4% sometime in the any rate, there were two relatively important changes that came out of this fed meeting...first was the widely reported announcement that they intended to keep the federal funds rate at "exceptionally low levels" at least through late 2014, because they expect economic conditions to remain sluggish until then....this changes their previous commitment to leave rates near zero till spring of 2013, so its obvious that their consensus longer term outlook has deteriorated...the second policy change made this week was the decision to announce a formal inflation target of 2 percent...what didn't get widely reported, however, was their decision to use PCE (personal consumption expenditures) inflation (from the BEA) rather than the BLS core consumer price inflation rate (which excluded food & fuel) as the measure by which they will set policy...this change may be as important than anything else that came out of this meeting, because with food & fuel now included in the Fed inflation target measure, monetary policy decisions may well be influenced by swings in commodity prices…

the Fed's apparent intention in keeping rates near zero is to encourage borrowing, & as they've even explained "operation twist", was to bring longer term rates down as well, providing some rate relief to the housing that extent they've been successful, as we've noted new record low mortgage rates several times this past year, and as Treasury rates fell immediately after this weeks meeting, with the 5 year note hitting another new record low...but there are potential downsides to a long term commitment to near zero interest rates...if one was thinking about borrowing for a business expansion or a mortgage loan but unsure of economic conditions, the Fed's commitment to keeping rates low likely encourages potential borrowers to wait until improving conditions are more certain, which could in itself tend to prolong a slump...another problem with low rates is that those who are retired & living on fixed income will have less to live on, and that reduces demand accordingly...and we've seen that those approaching retirement are more likely to delay retirement because their savings will no longer generate enough cash flow for them to live on, and thus there are less job openings for young people with the labor force participation rate for seniors at record highs...and low rates exacerbates the problem with public pension funds...funding for most of them is predicated on a return of 7% or more, and they're already in bad shape after 2 years of losses...this week returns for 2011 on the two largest were reported at 1.1% for CALPERS & 2.3% for CALSTRS; both of those plans assume a 7.75% return...& in arguing for changes in worker contracts, mayor Bloomberg claimed that NYC's pension fund was $8 billion in the hole...there have been reports that even with normal return expectations, government worker pension funds are underfunded by $3 trillion, so we'll likely see another crisis with those on the horizon...

Annualized growth in the public and private sectors.on friday, we got our first estimate of GDP growth for the 4th quarter, which came in at a disappointing 2.8% annualized over the 3rd quarter's reading...recall these first “guestimate” GDP reports are on flimsy data & are often subject to revisions; for instance, the 3rd quarter was first reported at a 2.5% annual rate, but it was subsequently reduced to 2.0% on the second estimate, then to 1.8% for the final take, and that may even be subject to further revision years hence, as we saw the last quarter of 2008 recently revised fron an initially reported negative 3.8% to a minus 8.9%...nonetheless, a read on GDP is important because its generally accepted by economists that it takes 3% GDP growth over a year to bring down unemployment one percent...but even though this report at 2.8% is fair, especially after reports for this years previous quarters of 0.4%, 1.3%, & 1.8%, the internals are much weaker than the headline number, because much of the growth came from $56 billion inventory rebound (from fukushima), which contributed 1.9% to the total...personal consumption expenditures, which is the major component, were up 2.0% in the 4th quarter compared to 1.7% in the 3rd, weakened largely by an anemic 0.2% growth in we've seen with most of the recent reports, government spending remains the major drag on GDP, as it subtracted 0.93 from the total; had it remained constant, we'd have seen a 3.7% GDP uptick…the adjacent chart from the NYT economix blog shows this; the blue line is the rate of government growth or contraction quarterly since 2007; the red shows the same for the private sector; you can see that after the private sector collapsed in 2008, government stimulus contributed positively to the rebound in 2009, but now that the stimulus has wound down & state & local budgets are being cut, government austerity is the drag in the face of an improving private sector….
    the handful of other economic reports out this week tended to confirm an improving trend; the Chicago Fed’s National Activity Index increased to +0.17 in december from –0.46 in november, and the 3 month average was –0.08, the best its been since march; the American Trucking Associations’ trucking index for december showed a tonnage increase of 6.8%, & it also posted the largest annual increase in 13 years; durable goods orders for december were up a better than expected 3%; the conference board’s leading economic index, meant to show future trends, rose 0.4% last month after a revised 0.2% gain in november…and all of the Fed regional manufacturing surveys also indicate stronger expansion in january over december’s rate…

on friday we also saw the release of the monthly LPS (Lender Processing Services) Mortgage Monitor (pdf) for december...this report has been tended to be so devastating that LPS has turned to headlining it's press release with whatever good news they can find, & this month was no different, as they led with the fact mortgages originations for 2010 & 2011 were the best quality yet, not too surprising since banks have tightened lending standards & only those who are financially secure are applying for new mortgages...the report's internals are as bad as ever; 12.26% of home loans, or 1 in 8, are delinquent or in foreclosure; of those, 2.07 million loans, 4.11% of all mortgages, are in the foreclosure process, 2.31 million loans are less than 90 days delinquent, and another 1.79 million loans are over 90 days delinquent...from the pdf itself, which is mostly headlined graphics, we see that foreclosure starts were at the lowest level of the recession in december (p14), that 50% of the homes in foreclosure in judicial states have been there more than 2 years without payment (p16; see the adjacent graph), and that foreclosure sales rates in judicial states are at 1.6%, compared to 6.8% where judicial action is unnecessary (p19), stats reflecting the problem the servicers are having proving their right to foreclose; even though non judicial states have the same delinquency rate (p17)...p 13 of the pdf provides a table of percentage of non-current loans by state, also included below should you want to check yours; as of december, loans florida were in the worst shape, with 22.7% of homeowners no longer paying on their mortgages...

 LPS states

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

1 comment:

  1. With the continued low rates and since most everyone that could refinance has, I think a mortgage reit is a safe and profitable investment. I was concerned about big drops should more QE happen but they didn't really drop much with the last.

    Armour Residential, arr, American Capital Agency, agnc, and Annaly, nly, are good choices imo.

    As usual, good info MW666.