Back in late 2010, there was much hope that as a result of the unfolding robosigning "Linda Green" scandal, not only would banks would be forced to fix their ways by incurring crippling civil penalties (because not even the most optimistic hoped any bankers would ever face criminal charges for anything), but that the US housing market may even reprice to a fair price as for a brief moment there nobody had any idea who owned what mortgage. Ironically, what did end up happening was to provide banks with a legal impetus to slow down the foreclosure process to such a crawl that an artificial backlog of millions and millions of houses at the start of the foreclosure process formed, bottlenecking the foreclosure exits even more and in the process providing an artificial, legal subsidy to housing prices manifesting itself best in what is erroneously titled a "housing recovery" for many months now. What this did was to allow banks to aggressively reprice the mortgage-linked "assets" on their balance sheets much higher, and in the process unleash much capital, primarily for bonus and shareholder dividend purposes. Yet this epic self-benefiting act did not come without a cost. Yes, it turns out the banks will have to fork over some out-of-pocket change to put not only the robosigning scandal behind them but the indirect housing subsidy from which they have benefited to the tune of hundreds of billions. That quite literally change, which is what the final cost of the release and bank indemnity amounts to, is roughly $300 for each of the affected borrowers!
- Finally the MSM catches up to reality: Workers Stuck in Disability Stunt Economic Recovery (WSJ)
- China opens Aussie dollar direct trading (FT)
- National Bank and Eurobank Fall as Merger Halted (BBG)
- Why Making Europe German Won’t Fix the Crisis - The Bulgarian case study (BBG)
- Nikkei hits new highs as yen slides (FT)
- Housing Prices Are on a Tear, Thanks to the Fed (WSJ)
- Why is Moody's exempt from justice, or the "Big Question in U.S. vs. S&P" (WSJ)
- Central banks move into riskier assets (FT)
- N. Korea May Conduct Joint Missile-Nuclear Tests, South Says (BBG)
- North Korea Pulls Workers From Factories It Runs With South (NYT)
- Illinois pension fix faces political, legal hurdles (Reuters)
- IPO Bankers Become Frogs in Hot Water Amid China Market Halt (BBG)
- Portugal Seeks New Cuts to Stay on Course (WSJ)
If the economy is getting better, then why does poverty in America continue to grow so rapidly? Yes, the stock market has been hitting all-time highs recently, but also the number of Americans living in poverty has now reached a level not seen since the 1960s. Yes, corporate profits are at levels never seen before, but so is the number of Americans on food stamps. Yes, housing prices have started to rebound a little bit (especially in wealthy areas), but there are also more than a million public school students in America that are homeless. That is the first time that has ever happened in U.S. history. So should we measure our economic progress by the false stock market bubble that has been inflated by Ben Bernanke's reckless money printing, or should we measure our economic progress by how the poor and the middle class are doing? Because if we look at how average Americans are doing these days, then there is not much to be excited about. Unfortunately, that bubble of false hope is not going to last much longer. In fact, we are already seeing signs that it is getting ready to burst.
- The revolving door continues: Mary Schapiro joins Promontory Financial (WSJ)
- First Peek at Health-Law Cost (WSJ)
- Abe warns over Japan inflation target: warns 2% inflation target may not be reached within two years (FT)
- BoJ's Kuroda tested by divided board (Reuters)
- Nanjing poultry butcher fourth person infected with H7N9 bird flu (SCMP)
- What time do top CEOs wake up? (Guardian)
- Cyprus Seeks More Time to Meet Targets in Talks With Troika (BBG)
- Investors Ignore Negativity at Their Peril (WSJ)
- Apple bows to Chinese pressure (FT)
- One can only laugh: North Korea to restart nuclear reactor in weapons bid (Reuters)
- Visa Demand Jumps (WSJ)
- Bloomberg's refutation of Stockman: yes, yes but... look over there, stocks are up! (BBG)
The smart money is selling Hong Kong and Singapore property. This implies real estate prices may be topping out, with far-reaching consequences.
Until this weekend's Cyprus black swan, the biggest red flag facing the market was the threat of persistent Chinese inflation, manifesting itself in very sticky and upward rising home (and many other) prices. In fact, quite recently the new Chinese leadership encouraged "bold" and aggressive steps to tame real estate inflation and instituting fresh curbs on house appreciation "speculation", which is a natural byproduct in a nation that has an underdeveloped and untrusted capital market - unlike in the US where the S&P absorbs all the Fed's reserves (with no money multiplier impact) keeping inflation elsewhere largely tame. It is this inflation that has kept the PBOC not only on the global "reflation" sidelines, but forced it to withdraw liquidity with several record repos in the days following the Chinese new year. It is also the downstream effects of this inflation that has pushed the Chinese stock market red for the year. So just how much of an issue is the soaring Chinese real estate market as global liquidity makes its way to triplexes in Shanghai? The chart below explains it all.
The American spirit is rooted in the belief of a better tomorrow. Its success has been due to generations of men and women who toiled, through both hardship and boom times, to make that dream a reality. But at some point over the past several decades, that hope for a better tomorrow became an expectation. Or perhaps a perceived entitlement is more accurate. It became assumed that the future would be more prosperous than today, irrespective of the actual steps being taken in the here and now. And for a prolonged time – characterized by plentiful and cheap energy, accelerating globalization, technical innovation, and the financialization of the economy – it seemed like this assumption was a certain bet. But these wonderful tailwinds that America has been enjoying for so many decades are sputtering out. The forces of resource scarcity, debt saturation, price inflation, and physical limits will impact our way of life dramatically more going forward than living generations have experienced to date. And Americans, who had the luxury of abandoning savings and sacrifice for consumerism and credit financing, are on a collision course with that reality.
- Cardinals head to conclave to elect pope for troubled Church (Reuters)
- Hyperinflation 'Unthinkable' Even With Bold Easing: Abe (Nikkei)
- Ryan Plan Revives '12 Election Issues (WSJ)
- Italy 1-yr debt costs highest since Dec after downgrade (Reuters)
- Republicans to unveil $4.6tn of cuts (FT) - Obama set to dismiss Ryan plan to balance budget within decade
- CIA Ramps Up Role in Iraq (WSJ)
- Hollande Hostility Fuels Charm Offensive to Show He’s No Sarkozy (BBG)
- SEC testing customized punishments (Reuters)
- Judge Cans Soda Ban (WSJ)
- Hungary Lawmakers Rebuff EU, U.S. (WSJ)
- Even Berlusconi Can’t Slow Bulls Boosting Euro View (BBG) - luckily the consensus is never wrong
- Funding for Lending ‘put on steroids’ (FT)
- Investigators Narrow Focus in Dreamliner Probe (WSJ)
- With new group, Obama team seeks answer to Karl Rove (Reuters)
In a stunning headline-making moment of clarity, it appears that all the major financials that the Fed monitors (except GMAC Ally) will survive a cataclysmic, Lehman-like moment based on their self-determined analytics of their deeply illiquid off-balance-sheet assets (and a comprehensive understanding of the co-dependence of all those assets). As Bloomberg notes,
*FED SAYS 18 BANKS PROJECTED LOSSES WOULD BE $462B UNDER TEST
*FED SEES 17 BANKS' TIER 1 COMMON RATIO ABOVE 5% IN WORST CASE
*GMAC ALLY ONLY STRESS-TESTED BANK SEEN WITH TIER 1 COMMON BELOW 5%
*TESTS SCENARIO ASSUMES EQUITY PRICES DROP MORE THAN 50%, HOUSING PRICES DECLINE MORE THAN 20%
Is it any wonder that Government Motors wanted to IPO its GMAC/Ally business recently - with a 1.5% stressed Tier 1 ratio.
Hedge fund icon Stanley Druckenmiller sat down with Bloomberg TV's Stephanie Ruhle, saying that he’s decided to speak out now because he sees "a storm coming, maybe bigger than the storm we had in 2008, 2010." His fear is that the ballooning costs of Social Security, Medicare and Medicaid (which with unfunded liabilities are as high as $211 trillion) will bankrupt the nation's youth an pose a much greater danger than the debt currently being debated in Congress. He said, "While everybody is focusing on the here and now, there's a much, much bigger storm that's about to hit... I am not against seniors. What I am against is current seniors stealing from future seniors." While not exactly Maxine Waters' sequestration-based 170 million job loss, this concerning interview is must-see for his clarity and forthrightness from who is to blame, to the consequences of gridlock, our society's short-term thinking, and the concerning demographics the US faces.
What could go wrong with the housing 'recovery' in 2013? To answer this question, we need to understand that housing is the key component a middle class squeezed by historically high debt loads, stagnant incomes, and a net worth largely dependent on their home. In response, Central Planners have pulled out all the stops to reflate housing as the only available means to spark a broad-based “wealth effect” that would support higher spending and an expansion of household debt. This returns us to the key question: Are all these Central Planning interventions sustainable, or might they falter in 2013? Once markets become dependent on intervention and support to price risk and assets, they are intrinsically vulnerable to any reduction in that support. Should these supports diminish or lose their effectiveness, it will be sink-or-swim for housing. Either organic demand rises without subsidies and lenders originate mortgages without agency guarantees, or the market could resume the fall in valuations Central Planning halted in 2009.
Think Americans are the only people in the world toiling under a gargantuan debtload, which at last check was a massive $55.3 trillion, or about $175K per person? Think again. Meet Sherry Sheng, a 29-year-old Shanghai policewoman, who bought herself a 4,000 yuan ($642) black fur jacket, splurging for the last time before she starts paying off the mortgage on her first home.
Sherry is what is known as a Chinese "housing slave."
As always happens when central planning is involved, when one tries to stop a leak here, two new leaks appear elsewhere. Because while the Homeowners Bill of Rights managed to grind foreclosure activity to a halt in California, what is happening elsewhere is the dreaded Boomerang Foreclosure phenomenon, or, said simply, redefaults. In other words, those homeowners who tried to take advantage of the most recent housing bubble mania created over the past year by the unholy trinity of the Fed (open-ended liquidity, REO-to-Rent programs, and $40 billion in monthly purchases of MBS), foreign buyers (who launder illicit money courtesy of the NAR's anti-money laundering exemption and park it in ultra luxury US real estate, usually sight-unseen) and of course, the banks, who with the aid of the robosigning fiasco and the Homeowner Bill of Rights, have over the past year subsidized the housing market by keeping non-cash flow generating mortgages on their books in exchange for a wholesale subsidizied rise in housing prices, ran out of cash before they could flip the "hot potato" that is the house they just bought, to a greater fool, and since they had no actual cash to pay the mortgage with, and with no fear of retribution, handed it right back to the bank. As the chart below shows, while California foreclosure activity is collapsing, things in other places are starting to indicate that the second housing bubble blown by Bernanke in 5 years, is finally starting to crack:
Whether you're aware of it or not, a great battle is being waged around us. It is a war of two opposing narratives: the future of our economy and our standard of living. The dominant story, championed by flotillas of press releases and parading talking heads, tells an inspiring tale of recovery and return to growth. The other side, less visible but with a full armament of high-caliber data, tells a very different story. One of growing instability, downside risk, and inequality. As different as they are in substance, they both share one fundamental prediction – and this is why you should care: This battle is about to break. And when it does, one side will turn out to be much more 'right' than the other. The time for action has arrived. To position yourself in the direction of the break you think is most likely to happen. It's time to choose a side.