There are those who, not illogically, thought that the second interest rates start creeping up, that there would be a rush of mortgage activity to lock in rates as low as possible before 30 year mortgages roll ever higher. Of course, for that plan to work, one Benjamin Shalom Bernanke would need to have broad credibility among the general population, as he would need to be perceived as one who would not rush to purchase bonds in the future, should rates jump far too high, in the process impairing banks and PDs which still hold massive amounts of paper. If, however, that plan were to not work, then the latest recent attempt to force a rotation out of stocks and into bonds would have abysmal consequences on housing, as the entire mortgage issuance machinery would grind to a halt. Alas, it appears the latter has happened. Minutes ago we got the latest MBA Mortgage Application data and it was ugly. The broad Mortgage Application index collapsed by 7.4% in the week ending March 16, when rates experienced the bulk of the move downward, which was the 6th consecutive week of declines, following last week's 2.4% drop. And while refis have been down for 5 weeks in a row, with the index slamming 9.3% lower as higher rates have now obviously killed any interest in mortgages, so have purchase applications. MBA Purchasing index was down 4.4%, breaking a trend of 3 weeks of gains. Some other hard statistics: the Average 30 year fixed rate soared to 4.19% from 4.06% last week, while the refi % of number of loans dropped to 73.4% - the lowest since July 2011.
During the last 31 years of the US Treasury bond rally, the 10Y interest rate has never risen for 10 consecutive days and today's very modest 1.6bps rally ensures that will continue. Yesterday's weakness equaled the previous 9-days-in-row record from 6/26/06. The rise in 10Y rates over this 10 day period equals the Oct 2011 jolt in percentage terms as we hold at those 10/28/11 swing highs in rates. The previous 8 times that 10Y rates have risen for 7 days or more, the next 10 days have seen an average 16bps compression and next 20 days a 31.5bps compression (following the consecutive break). This of course is wreaking havoc with mortgage rates as according to Bloomberg's bankrate.com data, we are back above 4% for the 30Y fixed for the first time this year and this week has seen mortgage rates jump their most in 16 months.
When it comes to predicting consumer spending patterns, especially those of the baby boomers who are traditionally reliant on fixed income (but lately have had to migrate back into the workforce, as retirement prospects diminish, in effect displacing the young 18-24 year old Americans where unemployment is now at a substantial 46%), the following two charts from today's David Rosenberg letter do a great job at explaining the schism between interest and dividend income. The former, as is well-known, has been crippled and is plunging courtesy of Bernanke's ZIRP policy, which makes cash yields on savings and fixed income instruments virtually negligible, and the latter, which while rising, has a long way to rise if it is to catch up to lost annuity potential. It is here that the primary tension for the Fed resides: it has to force investors to switch their mindsets from the capital preservation of fixed income, to the risky behavior of pursuing stock dividends. It is also here that we see the lost purchasing power of the US consumer: interest income is down $450 billion from 2007-2008 levels to roughly $1 trillion, while dividend income has risen to $825 billion, which is where it was at the prior peak. In other words, when all is said and done, Bernanke's ZIRP policy has eliminated $450 billion in purchasing power, even if he has succeeded in reflating the equity bubble. Yet while bonds at least have capital preservation optics, what happens to dividend stocks whose cash flow yields can be eliminated at the bat of an eye, if and when the next flash crash materializes, or the next financial crisis is finally too big for the central planners to control?
One of the central premises of CDS is that the “basis” package should work. An investor should be able to buy a bond, and buy CDS to the same maturity and expect to get paid close to par – either by the bond being repaid at par and the CDS expiring worthless, or through a Credit Event, where the price of the bonds the investor owns plus the CDS settlement amount add up to close to par. The settlement of the Greek CDS contracts worked well, but that was pure dumb luck. This leaves playing the basis in Portuguese bonds and CDS as a much riskier proposition than before Europe's PSI/ECB decisions - and perhaps explains why at over 300bps, it has not been arbitraged fully away - though today's rally in Portugal bonds suggests a new marginal buyer which given the basis compression suggests they may be getting more comfortable.
This week brings policy decisions in Taiwan and Thailand. The CBC decision will be very interesting to watch. The December statement at the time was surprisingly hawkish, only to be followed by a large upside surprise in inflation, and the TWD was subsequently allowed to appreciate. Given that the bank continues to view inflation as a major problem, according to quotes from Reuters, it will be very interesting to see how the bank weighs up concerns about hot money inflows vs the need to contain inflation risks. In particular, in the face of imported inflation pressures via higher commodity prices, many central banks may shift towards accepting the need for more currency strength. The week also brings some important central bank commentary. The RBA governor has an opportunity to opine on the recent slew of weak Australian data, as well as developments in the A$. There is quite a bit of commentary from Fed officials on the docket, including from Bernanke, which we will dissect for information on the further direction of policy. More dovish commentary than that of the FOMC last week, would arguably be a surprise and potentially dampen, if not reverse some of the moves of last week.
The persistent negative investment flows at U.S. listed mutual funds specializing in domestic stocks is one of the most important long-term trends catalyzed by the Financial Crisis. AUM has dropped by $473 billion since January 2007 despite the S&P 500 Index’s essentially flat performance over this period. The news is no better since the beginning of 2012 – despite the ongoing rally in domestic equities – with $6.8 billion of further outflows year to date. In today’s note Nic Colas, of ConvergEx analyzes what will reverse this trend along two vectors: the desire and ability of individuals to invest. The rally in risk assets, along with declining actual volatility, is the best hope for a reversal in money flow trends. Offsetting that factor are continued stresses on household budgets and consumer psychology combined with problematic demographic trends. Bottom line: domestic money flows have likely become more economically sensitive than in previous cycles.
This cannot be the right course for us to take in the wake of such a widely recognized crisis. The lack of purposeful outrage is deafening. We cannot restore lasting stability to our economy and society unless we are willing to face up to what we did wrong, right it, and throw out the bums who put us there. Without that, the pattern of ever escalating crisis and interventionist, market-distorting solutions will surely lead to a bigger crisis still ahead... Perhaps the most important symbol of our failure to address reform are the pictures accompanying much of the coverage of Greg Smith’s letter, those of a power-posing Blankfein and Cohn, who without the Government’s accommodation might be striking a very different pose, indeed. You want to sign on to Mr. Smith’s army in joint distaste for Goldman’s lost culture? Please, be my guest. But more deserving of your enmity is the insidious co-option of the core premise of capitalism by a handful of people to ensure the banks’ undeserved survival, and their managers’ really nice lifestyle.
We have long argued that at its core, modern society, at least on a mathematical basis - the one which ultimately trumps hopium every single time - is fatally flawed due to the existence, and implementation, of the concept of modern "welfare" - an idea spawned by Otto von Bismarck in the 1870s, and since enveloped the globe in various forms of transfer payments which provide the illusion of a social safety net, dangles the carrot of pension, health, and retirement benefits, and in turn converts society into a collage of blank faces, calm as Hindu cows. Alas, the cows will promptly become enraged bulls once they realize that all that has been promised to them in exchange for their docility and complacency has... well... vaporized. It is at that point that the final comprehension would dawn, that instead of a Welfare State, it has been, as Bill Buckler terms it, a Hardship State all along. Below we present the latest views from the captain of The Privateer on what the insoluble dilemma of the welfare state is, and what the key problems that the status quo will face with its attempts at perpetuating this lie.
Who's more foolish, the fool, or the fool who follows him?
A few days after the one year anniversary of the Fukushima disaster, nobody talks about it anymore. After all it's "fixed", and if it isn't, the Fed will fix it. Remember in the New Normal nothing bad is allowed the happen. So for those who have forgotten, here is a reminder.
Eventually, people will discover that they cannot save in terms of dollars (those who don’t figure it out will be rendered economically irrelevant as their wealth is removed from their hands). Savings is a necessary prerequisite for investment. Investment is necessary for companies to grow, to develop new technologies, products, and markets. Growth is necessary to hire new workers. As existing companies achieve higher productivity of labor, and do not need as many workers to perform the same work, they lay off unneeded people. In a free market, the unemployed would quickly be hired by growing companies that expand and develop new businesses. But today’s structurally high unemployment can be traced back to Friedman’s quack prescription (among other government interference). Weakening the currency not only discourages savings, it also weakens businesses who have to keep the currency on their balance sheet and who have to import some of their inputs. When a currency loses value, then all who hold it incur a loss. It is not possible to employ workers and run a business in a country without holding significant amounts of its currency. Currency debasement therefore imposes constant losses on enterprises that try to operate in such an environment.
Terminated CBO Whistleblower Shares Her Full Story With Zero Hedge, Exposes Deep Conflicts At "Impartial" Budget OfficeSubmitted by Tyler Durden on 03/15/2012 22:05 -0400
Yet another whistleblower has stepped up, this time one already known to the general public, and one that Zero Hedge covered just over a month ago: we refer to the case of former CBO worker, Lan T. Pham, who, as the WSJ described in early February, "alleges she was terminated [by the CBO] after 2½ months for sharing pessimistic outlooks for the banking and housing sectors in 2010" and who "alleges supervisors stifled opinions that contradicted economic fixes endorsed by some on Wall Street, including research from a Morgan Stanley economist who served as a CBO adviser." As we observed in February, "what is most troubling is if indeed the CBO is nothing but merely another front for Wall Street to work its propaganda magic on the administration. Because at the core of every policy are numbers, usually with dollar signs in front of them, numbers which have to make sense and have to be projected into the future, no matter how grossly laughable the resultant hockeystick." As it turns out, somewhat expectedly, the WSJ version of events was incomplete. There is much more to this very important story, one which has major implications over "impartial" policy decisionmaking, and as a result, Ms. Pham has approached Zero Hedge to share her full story with the public.
Relatively quiet overnight session in the markets, where Europe has seen several bond auctions, most notably in France and Spain, whose good results has in turn sent the German 30 Year Bund yield to the highest since December 12, all courtesy of the recently printed (and collateralized with second and third-hand Trojans) $1.3 trillion. Per BBG, Spain sold 976 million euros of 3.25 percent notes due April 2016 at an average yield of 3.37 percent. The bid-to-cover ratio was 4.13, compared with 2.21 when the notes were sold in January, the Bank of Spain said in Madrid today. It also auctioned 2015 and 2018 securities. France sold 3.26 billion euros of benchmark five-year debt at an average yield of 1.78 percent. The borrowing cost for the 1.75 percent note due in February 2017 was less than the yield of 1.93 percent at the previous sale of the securities on Feb. 16. Elsewhere, we got confirmation of the collapse in Greece, where Q4 unemployment rose to 20.7%, up from 17.7% in the prior quarter. China weighed on Asian market action again following ongoing concerns about domestic property curbs, and a slide in the Chinese Foreign Direct Investment of -0.9% on Exp of +14.6%. ECB deposit facility usage, primarily by German banks, was flattish at €686.4 billion, while in Keynesian news, Italian debt rose to a new record in January of €1.936 trillion. Watch this space, once inflection point occurs and vigilantes realize that not only has nothing been fixed in Italy, but the current account situation in Italy, and Spain, is getting progressively worse as shown yesterday, all at the expense of Germany.
The current situation within the European Union should not be a surprise to anyone.