Housing Market

If last week's tax data is indicative of what's ahead this month, the "good news" won't be sustained.

• Merkel Seeks to Reassure China (FT)
• German-IMF Rift Stalls Greece Deal (WSJ)
• Survey of Banks Shows a Sharp Cut in Lending in Europe (NYT)
• Bernanke to testify on economy and deficit (AP)
• House votes to freeze congressional, federal pay (WaPo)

In the past, when discussing the goalseeking C-grade excel jockeys at the Congressional Budget Office (or CBO), we have not been technically full of reverence. After all when one uses a phrase such as this one: "What do the NAR, Consumer Confidence and CBO forecasts have in common? If you said, "they are all completely worthless" you are absolutely correct", it may be too late to worry about burned bridges. We do have our reasons: as we pointed out last year, following the whole US downgrade fiasco when the Treasury highlighted the CBO's sterling work in presenting a US future so bright, Timmy "TurboTax" G had to wear shades, we said "according to the same CBO back in 2001, net US indebtedness in 2011 would be negative $2.436 trillion, the ratio of debt held by the public to GDP would be 4.8%, total budget surplus would be $889 billion, and GDP would be $16.9 trillion." As we know now they were off only by a modest $17.5 trillion on that debt forecast. Yet we never attributed to malice and bias and outright corruption, what simple stupidity and gross incompetence could easily explain. Until today that is, when following a WSJ article, we are left wondering just how deep does the CBO stench truly go and whether its employees are far more corrupt than merely stupid?

The Case Shillers are shilling that the market is still weakening. But that's just not the Case.

Listen to the Landlord in Chief lay out his REO to LBO plan live and in stereo. Since everyone will end up paying for it, directly or indirectly, sooner or later it probably is relevant.

Following today's sizable miss and significant revision to the ADP data it is perhaps worth taking a step back and looking at some independent research on the adjustments and seasonality issues in forecasting jobs around this time of year and furthermore, why one of the pillars of this extended rally and US decoupling story (a substantially improving jobs market) could be made of salt. Bloomberg's consensus for Friday's NFP at +145k (from +200k prior) and a 30k standard deviation, there is plenty of uncertainty among the economic elite (with 125k to 150k the sweet spot for their guesses) and our favorite outlier Joe LaVorgna near the top at +210k. So while the trend is supposedly improving (though expectations are slightly off December's exuberance), Stone & McCarthy (SMRA) point out a disturbing trend of sizable forecasting errors for the January payroll print with 7 straight years of estimates overshooting by an average of 64k - strangely consistent post the BLS switch to a probability-based sample. But its not just forecasting error, TrimTabs takes a deep dive into the actual daily income tax deposits from all salaried employees (which are historically more accurate than BLS initial estimates) sees the US economy added only 45,000 jobs in January, nearly unchanged from the 38,000 in December. Noting similar forecasting errors as SMRA, TrimTabs points out that the decline in seasonal adjustment factors and the reality of the underlying tax data suggest "It appears that the economy has hit stall speed due to lackluster demand and a deleveraging consumer who would rather save than spend." as wage and salary growth (net of inflation) weakened further to -2.1% YoY in January from -0.5% YoY in December. "The weak job market has us concerned" seems like a truer reality than the establishment trying to keep the dream alive.

• China’s factories in strong start to 2012 (FT)
• Merkel to court Chinese investors (FT)
• States to decide this week on mortgage deal (Reuters)
• Europe is stuck on life support (FT)
• IMF's Thomsen Says Greece Must Step Up Reform (Reuters)
• Tax cuts expiry to slow US growth (FT)
• Government health spending seen hitting $1.8 trillion (Reuters)
• Romney Win in Florida Primary Shows Strength (Bloomberg)
• EU regulator blocks D.Boerse-NYSE merger (Reuters)
• Greek Bondholders said to get GDP Sweetener in Debt Swap Agreement (Bloomberg)
• S. Korea Plans to Buy China Shares (Bloomberg)

China's goal-seeked economy performed admirably in January, and its Manufacturing PMI came absolutely golidlocks at 50.5, an increase from 50.3, previously, just modestly beating Wall Street expectations of a slight contraction of 40.6, yet a less than earlier whisper numbers which put it at 52. As such, thereis absolutely no indication if the PBoC will further tighten or ease in the next month, just as the PBoC likes it, because while many have been demanding easing in the last several weeks, and especially the housing market, the reality is that hot pockets of inflation still remain. Furthermore, the last thing China needs is to proceed with full on easing just as Bernanke goes ahead and launches QE x which will export more hot money, and thus inflation, to China than anywhere else, with the possible exception of gold.

All you need to read.

History is repeating itself, again.

For breathtakingly stupid political ideas and catastrophic “solutions” to America’s biggest problems, it’s hard to beat the New York Times op-ed page.  There, joined by such jihadists of the Left as Frank Rich and Maureen Dowd, resides the peerlessly wrong-headed economist Paul Krugman, whose Nobel Prize was as well-deserved as the one Yasser Arafat received for helping to bring Peace to the world. Until yesterday, we might have thought Krugman had cornered the market for the absolute worst ideas on how to revive the economy.

Looks like the earlier analysis that the US is slowly morphing into a second Japan just got even more confirmation. According to the Census Bureau (not NAR data, which we will hence ignore completely due to its consistent bias, error and overall worthlessness) December New Home Sales declined from 321K to a seasonally adjusted annualized rate of 307K in December, on expectations of a rise to 321K from last month's revised 315K. On a non-seasonally adjusted basis the US sold a whopping 21K homes, the lowest since January 2011, and on par with the lowest on record. What is more troubling is that according to Bloomberg, the 2011 number of 302K sales is the lowest on record. Of these 21K, 5K were not even started. So much for that housing recovery. And also confirming that there is not even a glimmer of hope for the US housing market is that the Median Price for new homes just dropped from $215,700 to $210,300, which is the lowest median price since October 2010. The chart below of pricing trends indicates all that is needed to know which way the housing market is going.

All you need to read.

Yesterday the Japanese Finance Ministry made a whopper of an announcement: in the year ending March 2013, total Japanese debt will surpass one quadrillion yen, or ¥1,086,000,000,000,000. This is roughly in line with the Zero Hedge expectations that by this March total Japanese debt would surpass one quadrillion yen. In USD terms, at today's exchange rate, this is precisely $14 trillion. And while smaller than America's $15.4 trillion (net of all post debt ceiling breach auctions), which was $14 trillion about a year ago, the GDP backing this notional amount of debt, which just so happens is greater than the GDP of the entire Euro area, is a modest ¥481 trillion, so by the end of the next fiscal year, Japan will have a Debt to GDP ratio of 225%. And that's not counting all the household and financial debt. So prepare to add quadrillion to the vernacular. At this exponential rate of increase quintillion will appear some time in 2015 and so on. Yet the scariest conclusion is that as Bloomberg economist Joseph Brusuelas points out, America is not only next, it already is Japan. Actually scratch that, America is worse than Japan, which at least generated a real housing bubble in the years just preceding the onset of its multi-decade credit crunch, something not even America could do in comparable terms. More importantly, "the debt-to-GDP ratio of the U.S. recently surpassed 100 percent, and it did so in the four years after the onset of the recession, compared with the six years it took the Japanese debt-to-GDP ratio to do so." The Japanese may be better than America in most things, but when it comes to destroying its economy, the US has no equal. Brusuelas' conclusion: "If below trend growth is the most probable scenario in the U.S., the most likely alternative is that the U.S. economy is headed for a lost decade… or two." So... go all in?

While Paulson's star was finally setting in 2011, that of mega macro fund Brevan Howard was rising, and has been rising for years by never posting a negative return since 2003. The $34.2 billion fund, now about double the size of John Paulson's, returned 12.12% in a year marked by abysmal hedge fund performance. But how did it make money? Simple - by taking advantage of the same permabullish market myopia that marked the beginning of 2011, and that has gripped the market once again. "The Fund’s large gains during the third quarter were due predominantly to pressing the thematic view that markets were ignoring clear signs of economic slowdown and were not correctly pricing the probability of central bank accommodation, particularly the reversal of the ECB rate hikes in April and July." Not to mention the €800 billion ECB liquidity accommodation that started in July and has continued since. So yes: those betting again that the market correction is overdue, will once again be proven right Why? Because "we are about to witness an unprecedented policy move. In the US, Eurozone and UK, fiscal austerity is being prescribed as the cure following the bursting of the credit bubble and to overcome the malaise following a balance-sheet recession. Unfortunately, there is no historical example of when this approach has been successful." As for looking into the future, "we continue to believe that markets remain at risk of  substantial dislocation."