Bank of America

We've Gone Way Too Far ... It's Time to Decentralize

HARP, The Home Affordable Refinance Program, is a streamline refinance program developed to help borrowers who have continued to make their mortgage payments, but have be unable to refinance due to a decline in their home value. While it is encouraging that more and more underwater homeowners are gaining the benefits of today’s low interest rates, tremendous profits are being made at their expense. Lack of competition is the primary catalyst, but the underlying economics of the large “too big to fail” banks will do nothing but stoke additional anger in the general public.  Expect this trend to continue until the dynamics of the program is changed once again, possibly in HARP 3.0.  Until then, the cash cow will continue for the TBTF banks.

Virtually all developments in Europe over the past two years can be easily explained using a simple version of three actor game theory. So can the endless delays in reaching an actionable resolution. The problem, however, as Bill Gross earlier, and now Bank of America, shows, is that the incentive to delay, based at least on one the actors' preferences - that of the market - is becoming very tenuous, and "the risk of an ugly end game is rising." By implication, this means that the goodwill of both Europe's monetary and political authorities is waning by the day, as last Thursday demonstrated so very vividly.

While normally quite absurd, we do have to admit that last month, Deutsche Bank's Joe LaVorgna was among the analysts closest to the final actual number, which came in far below consensus. As such we give him the benefit of the first forecast: Joe LaVorgna is expecting a headline/private payroll increase of 75k/80k respectively. The market is looking for 100k/110k. Unemployment is expected to hold at 8.2%. The irony today is that max pain is a far stronger number, which in light of some very recent economic news, can not be ruled out (see Nick Colas' discussion below): if indeed NFP rises by well over 100,000 the market will have to push back its prayer that the NEW QE will come in September into 2013 as Bernanke will not do another easing round just as the presidential election approaches. What are some others thinking? Here is what Bank of America says.

• U.S. nuclear bomb facility shut after security breach (Reuters)
• EU Commission Welcomes Greek Reform Pledge, Wants Implementation (Reuters) -> less talkee, more tickee
• China Cuts Stock Trading Costs to Lift Confidence (China Daily) as France hikes transactions costs
• Holding Fire—for Now—but Laying Plans (WSJ)
• ECB-Politicians’ Anti-Crisis Bargain Starts to Emerge (Bloomberg)
• Dollar falls back as non-farm payrolls loom (FT)
• Ethics Plan to Raise Consumer Confidence (China Daily)
• Brazil backslides on protecting the Amazon (Reuters) - fair weather progressive idealism?
• Japan Foreign-Bond Debate May Boost BOJ Stimulus Odds (Bloomberg)
• Japan’s Lower House Passes Bill to Let Workers Stay on to 65 (Bloomberg)

From the just released Bank of America 10-Q: "During the three months ended June 30, 2012, positive trading-related revenue was recorded for 95 percent, or 60 of the 63 trading days of which 75 percent (47 days) were daily trading gains of over $25 million and the largest loss was $11 million. These results can be compared to the three months ended March 31, 2012, where positive trading-related revenue was recorded for 100 percent (62 days) of the trading days of which 95 percent (59 days) were daily trading gains of over $25 million. There were no daily trading losses recorded during the three months ended March 31, 2012." This vaguely reminds us of the JPM's trading performance. Just before they got busted for hiding a $350 billion hedge fund in the firm's "risk hedging" aka CIO/Treasury division that is. Also, if anyone else has problems believing that BofA's trading desk, with or without Merrill, both of which are better known as the C-grade (and that is being generous) of Wall Street traders, could generate profits on 122 of 125 trading days, please lift your hand.

When it comes to building wealth, muddying the difference between perception and reality is the key manipulation tool that banksters use to goad people into wrong choices.

You Wont Believe What They’ve Done …

• Schäuble View on Eurozone at Odds With US (FT)
• Juncker: Euro zone leaders, ECB to act on Euro (Reuters)
• German Banks Cut Back Periphery Lending (FT)
• Monetary Policy Role in EU Debt Crisis Limited: Zoellick (CNBC)
• Bond Trading Loses Some Swagger Amid Upheaval (NYT)
• As first reported on ZH, Deflation Dismissed by Bond Measure Amid QE3 Anticipation (Bloomberg)
• Record Cash Collides With Yen as Topix Valuation Nearing Low (Bloomberg) - but, but, all the cash on the sidelines...
• Greek Leaders Agree Most Cuts, Lenders Stay On – Source (Reuters)
• Chinese Investment in US 'set for record year' (China Daily)

While in principle central banks around the world can talk up the market to infinity or until the last short has covered without ever committing to any action (obviously at some point long before that reality will take over and the fact that revenues and earnings are collapsing as stock prices are soaring will finally be grasped by every marginal buyer, but that is irrelevant for this thought experiment) the reality is that absent more unsterilized reserves entering the cash starved banking system, whose earnings absent such accounting gimmicks as loan loss reserve release and DVA, are the worst they have been in years, the banks will wither and die. Recall that the $1.6 trillion or so in excess reserves are currently used by banks mostly as window dressing to cover up capital deficiencies masked in the form of asset purchases, subsequently repoed out. Which is why central banks would certainly prefer to just talk the talk (ref: Draghi et al), private banks demand that they actually walk the walk, and the sooner the better. One such bank, which has the largest legacy liabilities and non-performing loans courtesy of its idiotic purchase of that epic housing scam factory Countrywide, is Bank of America. Which is why it is not at all surprising that just that bank has come out with a report titled "Shipwrecked" in which it says that not only will (or maybe should is the right word) launch QE3 immediately, but the QE will be bigger than expected, but as warned elsewhere, will be "much less effective than QE1/QE2, both in terms of boosting risky assets and stimulating the economy."

The major problem with daily jawboning by central bankers, such as Draghi today, and the Fed via Hilsenrath on Tuesday, is that it "achieves" to price in QE without QE actually being implemented: in essence the various central banks try to run up assets on the rumor, knowing well that with every incremental "news" event, the news will be sold ever faster, and ever more forcefully. Which then begs the question: how much QE is currently priced in, in order to determine how much more "rumor" there is to buy. According to Bank of America: not much, as a full 65% of QE 3, or the NEW QE, to use the proper iNomenclature, is by now priced in.

Because Everyone from the Ultra-Rich to Illegal Immigrants Pay Nothing

There was a time when we mocked all those who said the US economy can sustain some sort of organic, Fed-free recovery on its own, and perhaps, just perhaps, regain the virtuous cycle. We now just feel sad for them. The latest confirmation why those perpetual optimists will likely never again get it correct in their lifetimes, except for the 1-2 month (and increasingly shorter) period just after a new LSAP program is introduced by the Fed, is the June US economic report card. Courtesy of Bank of America we see that 22 of the 30 most important economic indicators in June missed expectations. And since this includes the seasonally adjusted July 7 claims beat, which was discovered to have been merely a seasonal auto-channel stuffing gimmick, the real number of misses is 23 out of 30, or a whopping 76% fail rate.

Too Big Leads To Destruction of the Rule of Law

10,000 baby boomers are retiring per day.  This two decade trend has only started but will certainly have an impact on the housing situation moving forward.  In most economic reports the boom and bust of the housing market was not factored into the equation.  Many boomers will downsize or sell as they age.  This is just a matter of demographics.  While trends are harder to predict, we know that 10,000 baby boomers will be retiring on a daily basis for well over a decade.  What does this do to housing?  The challenge we will face is that the younger home buying generation is less affluent and more in debt prior to purchasing a home.  Instead of growing households, we saw over 2 million young adults move back home to live with their parents.  So much for household formation taking up all that excess demand.  The recipe for the moment has been to constrain inventory and artificially push rates lower but this has done very little to increase actual financial security.  What happens when millions of baby boomers retire?