Inflating serial asset bubbles is no substitute for rising real incomes. Why are we stuck with an economy that only generates serial credit/asset bubbles that crash with catastrophic consequences? The answer is actually fairly straightforward.
By standards of previous generations, the middle class has been stripmined of income, assets and purchasing power. So what does it take to be middle class nowadays? A recent paper used Census data to discuss what sort of income it takes to qualify as middle class but income is not the only the metric - indeed, it can be argued that 12 other factors are more telling measures of middle class membership than income.
It would likely also deal another blow to the U.S property market and the fragile U.S economy. JP Morgan, Bank of America and Wells Fargo appear to be most exposed - meaning that either taxpayers will again be asked to bail out banks or more likely the coming bail-in regime will confiscate cash from depositors.
It’s interesting, disturbing and pathetic that this article emerged so shortly after we highlighted the fact that there is about to be a huge, and potentially disruptive reset in home equity loans over the next several years. So while we are still dealing with the ramifications of the prior housing bubble and the HELOCs associated with that debacle, we are right back at it. Extracting additional equity from another phony housing bubble to remodel homes that likely aren’t worth anywhere near what people think once private equity and money laundering oligarchs are done with their binge buying. As we have said many times before, QE makes a society lose its mind.
Of all the screwed up, misallocated parts of the U.S. economy, the housing market continues to be one of the biggest potential train wrecks. While the extent of the insanity in residential real estate should be clear following the peak insanity yesterday, there are other potential problems just on the horizon. One of these was written about over the weekend in the LA Times. In a nutshell, the next several years will start to see principal payments added to interest only payments on a large amount of second mortgages taken out during the boom years. The estimate is that $30 billion in home equity lines will reset next year, $53 billion in 2015, and then ultimately soaring to $111 billion in 2018 - a looming “wave of disaster” because large numbers of borrowers will be unable to handle the higher payments. This will force banks to either foreclose, refinance the borrower or modify their loans.
The 19% increase in the Case-Shiller home price index since March 2012 is widely thought to have boosted the prospects for overall household spending via the “wealth effect” transmitted by rising prices and cash out refinancing. But as Bloomberg's Joseph Brusuelas notes, claims that spending is about to snap back should be interpreted with caution.In fact, there is little evidence that the bottoming out of cash out refinancing is translating into rising demand for the moribund service or non-durable retail sectors. Perhaps a lesson for Ms. Yellen here?
Being bullish on the market in the short term is fine... The expansion of the Fed's balance sheet will continue to push stocks higher as long as no other crisis presents itself. However, the problem is that a crisis, which is 'always' unexpected, inevitably will trigger a reversion back to the fundamentals. The market will eventually correct as it always does - it is part of the market cycle. The reality is that the stock market is extremely vulnerable to a sharp correction. Currently, complacency is near record levels and no one sees a severe market retracement as a possibility. The common belief is that there is 'no bubble' in assets and the Federal Reserve has everything under control.
Wonder why the Fed and the banks are so desperate to reflate the second housing bubble, to the delight of flippers and taxpayer consequences (deja vu) be damned? Simple: as Goldman points out in a note released last night, "without the boost from housing, real GDP growth would fall below 1% this year." That's the revised GDP by the way, the one that now includes iTunes song sales and underfunded pension plans in the sumtotal. Which in reality means that ex housing, GDP would almost certainly be negative. So the bigger question is what happens to housing which has already seen a shock to the system following the surge in interest rates in the past month and which hobbled both homebuilders and mortgage applications? This is what Goldman sees there: "On house prices, we have started to see the first signs of deceleration and expect a slowdown from the 10%+ pace observed over the past year. Our bottom-up house price model projects 4-5% annual growth rate in the next two years." Alas, since prices moves from top and bottom inflection point never happen in a straight line as everyone rushes to buy, or sell as the case may be, resulting in a skewed and pronounced move, once the reality seeps in that the artificial housing 'recovery' is over, watch what happens when everyone rushes for the door. That goes for GDP as well.
The Department of Justice’s (DOJ) latest civil suit against Bank of America (B of A) is an embarrassment of tragic proportions on multiple dimensions. We're "only" going to explore seven of its epic fails here. The two most obvious fails (except to most of the media, which failed to mention either) are that the DOJ has once again refused to prosecute either the elite bankers or bank that committed what the DOJ describes as massive frauds and that the DOJ has refused to bring even a civil suit against the senior officers of the banks despite filing a complaint that alleges facts showing that those officers committed multiple felonies that made them wealthy by causing massive harm to others. Those two fails should have been the lead in every article about the civil suit. There are many more...
In May 22 testimony to the Joint Economic Committee of Congress, Fed Chairman Ben Bernanke issued another of many similar positive interpretations of central bank policy. Yet again, he continued to argue that quantitative easing has decreased long-term interest rates and produced other benefits. The Fed's polices have not produced the much-promised re-acceleration in economic growth. The standard of living - defined as median household income - has fallen back to the level of 1995. The best approach would be for the Fed to recognize the failure of QE and end the program immediately, thereby allowing price distortions in the markets to correct themselves. By ending the illusion that the Fed can take constructive actions, this might even serve to force federal government leaders to deal with the growing fiscal policy imbalances. Otherwise, debt levels will continue to build and serve to further limit the potential for economic growth.
While one can have sympathy for the over-levered, underwater homeowners that took free-money with both hands and feet as house prices surged in the mid-2000s (just like they are now) but the latest moves to 'save' people from themselves in the city of Richmond, CA is raising both market and constitutional concerns. As NYTimes reports, the city is the first to use eminent domain by the local government (in partnership with a 'friendly' mortgage provider) to seize homes, force investors to take a loss on the mortgages, re-issue a new 'lower' mortgage, and allow the homeowner back with positive equity (ready to lever-it-back-up into a new Harley). As Guggenheim notes, this is likely to hurt supply of new mortgages and as we noted previously (here and here), it seems clear that private-label MBS holders will not be happy, consumers hurt as mortgage costs would rise (this 'risk' has to be priced in), and taxpayers unhappy as this is yet another transfer payment scheme to bailout underwater loans.
In remarks given late last week to the curiously named United States Institute for Peace, the head of the Treasury’s Financial Crimes Enforcement Network (FinCEN) vociferously denied any attempts at regulating digital currency... specifically Bitcoin. But that doesn’t mean they can’t spread fear, uncertainty, and doubt. Bitcoin, being completely decentralized, is nearly impossible to regulate. And the government at least seems to understand this point. Which is why the director so emphatically denies attempting to regulate the digital currency. But in this short 4-page speech, the Director twice made a connection between Bitcoin and (you guessed it) terrorism. Twice more connected Bitcoin to those who would exploit children. And four times linked digital currency to ‘criminals’ in general. It’s certainly enough to scare most people away.
Bank of America, Wells Fargo and JPMorgan Chase control 67.87% of 1-4 Family First Liens NPLs yet only had 32.62% of the charge offs in the quarter.
Households Cut Another $110 Billion In Debt Even With $577 Billion In Q1 Mortgages Originated: Most Since 2007Submitted by Tyler Durden on 05/14/2013 10:44 -0500
It is not immediately clear how much of the net drop in mortgage balances from $8.033 trillion to $7.932 trillion was due to defaults as opposed to actual pay downs and non-credit rating impairing deleveraging. We do know that a whopping $577 billion in new mortgages were opened in Q1, the highest since Q3 of 2007. Which means that some $680 billion in mortgages should have been extinguished in one quarter. If this happened primarily via defaults and discharges, one can only wonder just how the bank balance sheets were not decimated in Q1. As a reminder, half a year ago we observed that the bulk of US mortgage debt reduction has come from defaults not from actual deleveraging.
The political class set in motion the eventual obliteration of our economic system with the creation of the Federal Reserve in 1913. Placing the fate of the American people in the hands of a powerful cabal of unaccountable greedy wealthy elitist bankers was destined to lead to poverty for the many, riches for the connected crony capitalists, debasement of the currency, endless war, and ultimately the decline and fall of an empire. The 100 year downward spiral began gradually but has picked up steam in the last sixteen years, as the exponential growth model, built upon ever increasing levels of debt and an ever increasing supply of cheap oil, has proven to be unsustainable and unstable. Those in power are frantically using every tool at their disposal to convince Boobus Americanus they have everything under control and the system is operating normally. Nothing could be further from the truth.