Archive - Mar 30, 2011 - Story

About a year ago, Zero Hedge first floated the then apocryphal idea that the economy is receiving an implicit boost from the money "saved" by squatters: people who no longer pay their mortgage, but due to banks' unwillingness to have a price discovery event on the home (in the form of an auction on REO or foreclosed properties) which would force mark bank assets far lower (due to impairments on the mortgage as opposed to it merely being in "Special Servicing" status), continue to reside in the property. Furthermore we disclosed yesterday, per LPS the average delinquency period is now 573 days meaning the typical deadbeat resides in their home for over a year and a half without paying a single cent. And since there are millions of delinquent mortgages, all this adds up to a lot of money. How much? Well, nobody had been quite able to quantify this huge boost to the economy, which is why the topic never received prominent media notice. Until now. In "Rental income and "Squatter's Rent" JP Morgan's Michael Feroli kills two disinformation birds with one client note: first he debunks all myths that "rental income" is surging, as was reported in glaring headlines in a variety of propaganda media outlets following Monday's personal income report was released. This is patently false. As Feroli explains: "This rise has little to do with landlords getting more from their tenants. In fact, it has very little to do with what speakers of the English language would normally consider "rent." Instead, it mostly reflects mortgage payments of the household sector coming down, in part because of the aggregate decline in household mortgage debt due to net cancellation of mortgages associated with foreclosures." In other words, surging rental income is nothing more than "squatter's rent" saved by not paying one's mortgage. As to quantifying this amount - per Ferroli until recently it was $60 billion a year! This is a stunning 0.5% of GDP. Luckily there is good news: this unethical and artificial "boost" to the economy is finally declining... and is now only $50 billion on an annualized basis.

In a letter focusing on what has been well known to Zero Hedge readers for about two years now, Bill Gross' latest investment outlook does the usual attack of Beltway stupidity (as if Congress is in any way competent of making math-related decisions - they do what Wall Street - that's you Bill! - tell them to do, and you know it), emphasizing the impossible math of total US entitlement liabilities (on a net present value basis), which Gross estimates at $75 trillion. That Gross conclusion is predetermined from the onset is not surprising: "Unless entitlements are substantially reformed, I
am confident that this country will default on its debt; not in
conventional ways, but by picking the pocket of savers via a combination
of less observable, yet historically verifiable policies – inflation,
currency devaluation and low to negative real interest rates." Then again, that America is bankrupt is not really news to anyone. Neither is it news, that Gross, as we first reported, no longer has any US bonds to dispose of. What will be news is the inflection point at which Gross starts purchasing Treasuries once again. And after all with $220 billion in AUM in the Total Return Fund, what else will he do: hold on to cash? Buy Netflix? Then the only question will be how Gross spins the inevitable capitulation of the re-hypocrisy trade, validating that he, in a narrow sense, and PIMCO in a broad one, is perhaps the biggest cog in the very system that Bill spends so many hours writing letters about and complaining against. But yes, even that won't be all that surprising to us. After all, in this bizarro world absolutely everything is now priced in.

Margaret Harding of Iowa State University is currently conducting a lecture on the latest developments at Fukushima. She has thirty years of experience in the nuclear industry. She was Vice President of Engineering Quality at GE Nuclear Energy and is now a consultant to the nuclear power industry. She serves on Iowa State's Engineering College Industrial Advisory Council and has an undergraduate degree from Iowa State. This is a live lecture. There will likely be a very strong pro-industry bias in the presentation, but at least she might have some additional facts.

The Environmental Protection Agency and the Food and Drug Administration say that very low levels of radiation have turned up in a sample of milk from Washington state. But federal officials say consumers should not worry. Results from a March 25 milk sample taken from Spokane, Wash., show levels of radioactive Iodine-131 that are still 5,000 times below levels of concern set by the FDA, including levels set for infants and children.

And once again our prediction about Fukushima (namely the inevitable entombment of the entire facility in thousands of tons of concrete) is about to be realized. Bloomberg reports that Japan will consider pouring concrete into its crippled Fukushima atomic plant to reduce radiation and contain the worst nuclear disaster in 25 years. The reason for the admission of total defeat is the gradual comprehension that the worst case scenario has come to pass: "The risk to workers might be greater than previously thought because melted fuel in the No. 1 reactor building may be causing isolated, uncontrolled nuclear chain reactions, Denis Flory, nuclear safety director for the International Atomic Energy Agency, said at a press conference in Vienna." Not one to cover up the worst case outcome for a week, TEPCO only did so... for five days: "Radioactive chlorine found March 25 in the Unit 1 turbine building suggests chain reactions continued after the reactor shut down, physicist Ferenc Dalnoki-Veress of the James Martin Center for Nonproliferation Studies in Monterey, California, wrote in a March 28 paper." It's good thought"  Radioactive chlorine has a half-life of 37 minutes, according to the report." It appears Japan is willing to give up, and write off a several hundred square kilometer area, as nobody in their right mind will ever agree to move in next to a territory that, contrary to lies, er, promises, will not seep radioactivity in the soil and in the water. This is an unprecedented admission of defeat by the Japanese which unfortunately may be the only solution, which will certainly have major implications for the Japanese economy.

Just as Zero Hedge first suggested when we heard about the ridiculous idea that AIG wants to buy back the Maiden Lane II loans that were among those forcing the government to effectively nationalize the insolvent company, the Fed has rejected the less than arms-length offer, and instead is opening up the portfolio of toxic loans to popular bidding. That other investors will trickle in is great, yet it is merely another confirmation that all funds are once again scrambling after yield since nobody has any hope of seeing the loans through maturity, and is merely a ploy to capture a few basis points before the current credit bubble implodes. Luckily for taxpayers, the Fed is not paying AIG a fee of a few hundred million for what Benmosche would most certainly characterize as a "stalking horse" bid.

The brain behind the Lubrizol acquisition resigns unexpectedly, and the strangest press release-cum-letter from Buffett follows: "Shortly before I left for Asia on March 19, I learned that Dave first
purchased 2,300 shares of Lubrizol on December 14, which he then sold on
December 21. Subsequently, on January 5, 6 and 7, he bought 96,060
shares pursuant to a 100,000-share order he had placed with a $104 per
share limit price. Dave’s purchases were made before he had discussed
Lubrizol with me and with no knowledge of how I might react to his idea.
In addition, of course, he did not know what Lubrizol’s reaction would
be if I developed an interest." Frontrunning? We won't know - the kindly Octogenarian of Omaha will say no more ever: " if questioned about this matter in the future, I will simply refer the questioner back to this release."

Compare and Contrast James Bullard's boilerplate optimism: "U.S. growth prospects remain reasonably good for 2011...quantitative easing was “a classic easing of monetary policy and an effective tool" and "The US is on track for a "reasonable" recovery in 2010...Now it seems like the natural thing is to withdraw the quantitative easing and then as some later point raise interest rates"

Libyan foreign minister Moussa Koussa arrived in Britain on Wednesday to seek refuge after quitting the government in protest against leader Muammar Gaddafi's forces attacks on civilians, a friend told Reuters. "He has defected from the regime," said Noman Benotman, a friend and senior analyst at Britain's Quilliam think tank. "He wasn't happy at all. He doesn't support the government attacks on civilians," he said. "He's seeking refuge in Britain and hopes he will be treated well," Benotman said.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 30/03/11

No surprises here.

While we expect the imminent attempt at refutation from Hillary Clinton, we can't help but admire the symmetry between the handling of this campaign and that of Afghanistan where Al Qaeda also ended up on the receiving end of US generosity.

The IAEA which is quickly outstaying its Japanese welcome by disclosing actual facts about the radioactive fallout around the power plant, has just announced that it has found excessive radioactivity in a village 40 km from Fukushima. While the news will not be a surprise to anyone watching the grand lie unfold over the past three weeks, it may hopefully force the Japanese government to finally relent and extend the evacuation perimeter from the existing 20 km, thereby actually preventing the needless loss of life in the long run. From Reuters: "Radiation measured at a village 40 km from Japan's crippled nuclear plant exceeded a criterion for evacuation, the U.N. nuclear watchdog said on Wednesday, the latest sign of widening consequences from the crisis. Criticized for weak leadership during Japan's worst crisis since World War Two, Prime Minister Naoto Kan has said he is considering enlarging the evacuation area to force 130,000 people to move, in addition to 70,000 already displaced."The first assessment indicates that one of the IAEA operational criteria for evacuation is exceeded in Iitate village," Denis Flory, a deputy director general of the International Atomic Energy Agency (IAEA), said.  "We have advised (Japan) to carefully assess the situation and they have indicated that it is already under assessment," he told a news conference." Hopefully our Japanese readers who have been following our coverage of this tragedy, which many have at times called "hysteric" even if always based on facts, have already evacuated long ago. Ultimately, it is one thing for the government to lie with just the Russell 2000's closing level being at stake. It is something totally different when people's mutagenic skills and/or life expectancy is at stake. When this is all said and done, Kan will likely be forced into exile for his tragic botching of an operationg whose only downside to disclosing the truth would have been a few hundred points in the Nikkei/S&P. Well, those losses will still come eventually, but at least thousands of lives would not have been put needlessly at risk in the meantime.

After losing almost 80% of their investment in 3 weeks, here come more bad news for TEPCO shareholders. According to Yusuke Ueda analyst for Bank of Lynch TEPCO shareholders may be wiped out by clean-up costs and liabilities. "The amount of compensation demanded of TEPCO will also vary considerably depending on how long it takes to resolve the nuclear reactor crisis. Below we set out our assessment of the nuclear power damage under the scenarios we envisage and of TEPCO’s credit enhancements in each scenario. We think TEPCO will face compensation claim demands of less than ¥1tn if the nuclear reactor accident can be resolved swiftly (roughly within two months). If the problems take a longer time to resolve (up to about six months or so), we estimate that compensation claims could amount to ¥2.4-3tn.The total could potentially reach ¥10tn under a worst-case scenario (about two years needed to resolve the nuclear power plant accident). Shareholders are very likely to be held liable, through capital reductions of a certain amount, so as to clarify responsibility for damage compensation, but given the principle of maintaining stable supplies of electric power, a scheme involving a default on the company's bonds is very unlikely to be adopted." Which means when the Nikkei opens up tonight look for another demonstration of Xeno's paradox where the stock continues selling off but never reaching zero.

On the right hand side of the Treasury Department website homepage, under the subheading Wall Street Reform, is the following lofty statement: "It is time to restore responsibility and accountability to our financial system." That's the spin. Now, it's been spinning there awhile, so it's not exactly news. But today, in complete contrast to the meaning of that statement, Geithner suggested backing a 'risk-retention' proposal that excludes banks that meet high underwriting standards (probably those that got high marks on the latest Fed stress tests for which the Fed isn't releasing any details) from having to retain portions of the deals they securitize, you know, of having to maintain a stake in the outcome of those deals and the performance and integrity of their underlying loans. To recap, as a result of the 2008 debacle, banks that passed their stress tests, effectively borrow money at next to zero percent. The aftermath of the financial crisis is the loosest monetary policy in our nation's history. Even with all that help, banks don't want to be bothered holding anything that could screw around with their capital ratios. Of course.