Housing Market

Josh Barro of Bloomberg has an interesting theory.  According to him, conservatives in modern day America have become so infatuated with the school of Austrian economics that they no longer listen to reason.  It is because of this diehard obsession that they reject all empirical evidence and refuse to change their favorable views of laissez faire capitalism following the financial crisis.  Basically, because the conservative movement is so smitten with the works of Ludwig von Mises and F.A. Hayek, they see no need to pose any intellectual challenge to the idea that the economy desperately needs to be guided along by an “always knows best” government; much like a parent to a child.  CNN and Newsweek contributor David Frum has jumped on board with Barro and levels the same critique of conservatives while complaining that not enough of them follow Milton Friedman anymore.

To put this as nicely as possible, Barro and Frum aren’t just incorrect; they have put their embarrassingly ignorant understandings of Austrian economics on full display for all to see.

June macro data is giving a 'cleaner' picture of the economic state of our great nation. With seasonal affectations (unusually warm weather and the rebound in auto production) out of the way, June macro data has very much surprised consensus to the downside as BofAML's economics team notes that 14 of the last 20 June indicators has come in below expectations. Over the next several weeks we will get more 'hard' data for June. The most important will be retail sales, industrial production and the durable goods orders report. Retail sales look likely to disappoint as weak chain store sales offset the modest tick higher in auto sales. And given the collapse in the ISM, we expect manufacturing production and durable goods orders to be soft. This data will determine if the FOMC has enough ammo to ease aggressively on August 1st (or wait til September 13th) which we expect to only be an extension of forward rate guidance to mid-2015 from late-2014 (and not the panacea of NEW QE). BofAML remains more concerned with the consensus outlook for H2 - particularly Q4 (with 14% YoY EPS growth expected despite just a 1% GDP growth rate) - as the recession in Europe and high level of uncertainty ahead of the US fiscal cliff will likely lead to slowing growth in H2. And for those hanging their hats on the housing recovery, it will not be enough to save the rest of the economy - Housing construction is now only 2.3% of GDP compared to more than 6% prior to the crisis. This means we need a decisive turn to significantly matter for GDP growth. In addition, we believe it would take a sustained period of price increases to reverse the negative wealth and confidence effects of the housing collapse. Households remain skeptical about the home as a store of wealth or an investment.

• EU talks up Spanish banks package, markets skeptical (Reuters)
• China’s Import Growth Misses Estimates For June (Bloomberg)
• The monkeyhammering continues: Paulson Disadvantage Minus Fund down 7.9% in June, down 16% in 2012 (Bloomberg)
• Draghi pledges further action if needed (FT)
• JPMorgan Silence on Risk Model Spurs Calls for Disclosure (Bloomberg)
• Norway's Statoil to restart production after govt stops strike (Reuters)
• Top Fed officials set table for more easing (Reuters)
• Euro-Split Case Drives Danish Krone Appeal in Binary Bet (Bloomberg)
• Obama Intensifies Tax Fight (WSJ)
• Europe Automakers Brace for No Recovery From Crisis (Bloomberg)
• Boeing’s Air-Show Revival Leaves Airbus Nursing Neo Hangover (Bloomberg)
• Libor Woes Threaten to Turn Companies Off Syndicated Loans (Bloomberg)

The last two weeks have seen the largest drop in mortgage refinancings in over 7 months. While refis are trending generally higher as mortgage rates drop to all-time-record-lows, there is an odd reaction evident in the data. Each time interest rates tick up even modestly, the rate of refinancings plunges violently. In a sane world of rational actors, we would expect a rush of refinancings at the first sign of a rise in interest rates as they scramble to lock-in the last best deal. However, in our surreal world of extreme balance sheet inflation and seemingly infinite zero-interest rates from the Fed, the crowd (instead of seeing a blip up in rates as a signal to act) decides to hold off from refinancing as they await rates to continue trending down/lower (as per The Fed). So, does the Fed need to signal that rates will be rising soon, and lift its easing pedal to remove the perverse incentive that ZIRP has enabled, in order to improve the housing market (or household balance sheets)?

• Finland (which with Holland account for 50% of the Eurozone's AAA rated countries), just says "Ei" to stripping ESM subordination (Bloomberg)
• Libor Rate Scandal Set to Spread (WSJ)
• #ByeBarclays flashmob descends on bank (FinExtra)
• What is financial reform in China? (Pettis)
• Cities Consider Seizing Mortgages (WSJ)
• China Beige Book Shows Pickup Unseen in Official Data (BBG)
• China’s New Rules May Curb Credit Growth, CBRC Official Says (BBG)
• India Said to Pay in Euros for Iranian Oil Due to Rupee Hurdles (BBG)
• Wealthy Hit Hardest as France Raises Taxes (FT)
• Euro Bank Supervisor Faces Hurdles (WSJ)

Confused by all the amusing arguments of a housing "recovery" (because if you believe in it, it just may come true.... maybe) in the sad context of a reality in which the economy is once again turning from bad to worse missing expectations left and right (for every report surprising to the upside, two do the opposite), corporate earnings and margins have rolled over, US states and cities and European countries are filing for default or demanding bailouts at an ever faster pace, and only headlines such as "stocks rise on hopes of more central bank easing" appear in the good news columns of mainstream media? Don't be: David Rosenberg explains it all.

We know its is blasphemous to question the NAR and given the dismal state of the manufacturing sector data in the US in recent months, the entire recovery now seems predicated on good old 'residential real estate' rising phoenix-like from the ashes of negative equity. Goldman's Jan Hatzius ignores the 'see no evil, hear no evil, speak no evil' of the mainstream media's call for a glorious recovery in housing and lays out his own three monkeys. While recent data is encouraging, he is far from sounding the all-clear as the massive instability of seasonal factors; the gradual nature of the 'turn' and wide dispersion between strong and weak markets; and housing's considerably less important role in the broad economy (and macroeconomic spillover wealth effects); all leave the Goldman economist unamused as he sums up his perspective quite succinctly: "while housing may be getting better, it's no longer about housing."

• The next Enron: JPMorgan at centre of power market probe (FT)
• Former Brokers Say JPMorgan Favored Selling Bank’s Own Funds Over Others (NYT)
• Ex-JPMorgan Trader Feldstein Biggest Winner Betting Against Bank (Bloomberg)
• Finland Firm On Collateral As Spain Aid Terms Discussed (Bloomberg)
• Heatwave threatens US grain harvest (FT)
• Wall Street Is Still Giving to President (WSJ)
• Greenberg Suit Against U.S. Over AIG To Proceed In Court (Bloomberg)
• Crisis forces "dismal science" to get real (Reuters)
• Hope continues to be as a strategy: Asia Stocks Rise On Expectation Of Monetary Policy Easing (Bloomberg)

Some time ago we said that in a world in which virtually every risk and liquidity benchmark is manipulated by either private banks (thank your Liebor) or central banks, if one needs to know the true state of events in Europe, the only real remaining, unmanipulated benchmark remain Swiss nominal bond yields. And at -23.5 bps for the 2 Year it is telling us that nothing is fixed. As usual. Also judging by the SNB's new head Jordan statements which just hit the tape, in which he says that he would not rule out capital controls or negative rates if the crisis worsens, the SNB gets it. Or does it? Jordan also said that the SNB is ready to defend the FX market with unlimited market purchases if necessary. However, as the note below from JPM shows, the SNB may simply be faking it, hoping it too can get away with simple jawboning, instead of actually putting its money where its mouth is. As it turns out the SNB has indeed been intervening in huge size in the month of May to keep the EURCHF peg. The previously undisclosed news is that it has also been sterilizing its purchases. As JPM further notes: "This is highly significant and undermines the credibility of the SNB’s claim that it is willing to do whatever it takes to hold EUR/CHF 1.20. For the floor to be credible the SNB needs to surrender control over the Swiss monetary based, i.e. it has to be willing to deliver both unlimited and unsterilised FX intervention. The intervention in May was certainly unlimited; it most definitely was not unsterilised." How long until the FX vigilantes decide to test just how far the SNB is truly willing to go in defending the peg? And what happens when Swiss nominal yields hit record negative numbers once again?

• Funny WSJ headline: Berlin Blinks on Shared Debt  (WSJ)... sure: if XO hits 1000 bps tomorrow, Eurobonds in 2 days
• Barclays $451 Million Libor Fine Paves Way for Competitors (Bloomberg)
• Fed officials differ on whether more easing needed (Reuters)
• China Local Government Finances Are Unsustainable, Auditor Says (Bloomberg)
• Just because the NYT is not enough, Krugman has now metastasized to the FT: A manifesto for economic sense (FT)
• Merkel dubs quick bond solutions ‘eyewash’ (FT)
• Yuan trade settlements encouraged in SAR (China Daily)
• Katrina Comeback Makes New Orleans Fastest-Growing City (Bloomberg)
• European Leaders Seek to Overcome Divisions at Summit (Bloomberg)

Let's give federal money to tax cheats!!

• France to Lift Minimum Wage in Bid to Rev Up Economy (WSJ)... weeks after it cut the retirement age
• Merkel Urged to Back Euro Crisis Measures (FT)
• Monti lashes out at Germany ahead of summit (FT)
• Italy Official Seeks Culture Shift in New Law (WSJ)
• Migrant workers and locals clash in China town (BBC)
• Romney Would Get Tough on China (Reuters)
• Bank downgrades trigger billions in collateral calls (IFRE)
• Gold Drops as US Data, China Speculation Temper Europe (Bloomberg)

In a detailed discussion with Bloomberg TV's Tom Keene, Gluskin Sheff's David Rosenberg addresses everything from Europe's "inability to grow its way out of the problem" amid its 'existential moment', Asian 'trade shock' and commodity contagion, and US housing, saving, and fiscal uncertainty. He believes we are far from a bottom in housing, despite all the rapacious calls for it from everyone, as the over-supply overhang remains far too high. "The last six quarters of US GDP growth are running below two percent" he notes that given the past sixty years of experience this is stall speed, and inevitably you slip into recession". He is back to his new normal of 'frugality' and bearishness on the possibilities of any solution for Europe but, most disconcertingly he advises Keene that "when you model fiscal uncertainty into any sort of economic scenario in the U.S., what it means is that businesses raise their liquidity ratios and households build up their savings rates. This comes out of spending growth. And that's the problem - you've got the fiscal uncertainty coupled with a US export 'trade shock'."

Forty five years after the War on Poverty began, there are 49 million Americans living in poverty. That’s a solid good return on the $16 trillion spent so far. It’s on par with the 16 year zero percent real return in the stock market. We have produced a vast underclass of ignorant, uneducated, illiterate, dependent people who have become a huge voting block for the Democratic Party. Politicians, on the left, promise more entitlements to these people in order to get elected. Politicians on the right will not cut the entitlements for fear of being branded as uncaring. The Republicans agree to keep the welfare state growing and the Democrats agree to keep the warfare state growing -bipartisanship in all its glory. And the middle class has been caught in a pincer movement between the free shit entitlement army and the free shit corporate army. The oligarchs have been incredibly effective at using their control of the media, academia and ideological think tanks to keep the middle class ire focused upon the lower classes. While the middle class is fixated on people making $13,400 per year, the ultra-wealthy are bribing politicians to pass laws and create tax loopholes, netting them billions of ill-gotten loot. These specialists at Edward Bernays propaganda techniques were actually able to gain overwhelming support from the middle class for the repeal of estate taxes by rebranding them “death taxes”, even though the estate tax only impacts 15,000 households out of 117 million households in the U.S. The .01% won again.

“Pessimism has become tiresome, so optimism is gaining a foothold”