Housing Bubble

At this point, there is literally not one single reason to invest a cent in Europe. Banks are lying about their balance sheets. Politicians are lying about citizen’s rights. The Central Bank is lying about everything…

A mere nine months after we first discussed the inevitability of Stockton, CA.'s bankruptcy, a judge has ordered today that the city will now become the most populous in the US to be declared bankrupt.

• *STOCKTON CREDITORS DIDN'T NEGOTIATE IN GOOD FAITH, JUDGE SAYS

Creditors are pushing to get the city out of bankruptcy but the judge states that "by any measure" the city was insolvent. So, in summary, yeah, it was broke years ago, it still is broke - despite the best efforts by the Central Planning Reserve to reflate the same housing bubble that was the primary reason for the city's insolvency in the first place. Only this time, it's official!

Synthetic securities based on putrid shipping loans

The food fraud story has now progressed from somewhat humorous with the undersized Subway footlong subs, to the highly disturbing with the revelations of horse meat and fake tuna, to the really creepy with the now potential emergence of dog meat in UK lamb curry.  No you can’t print lamb folks, which is exactly why many humans are now eating worse than their pets in the Western world.

While Germany quietly bailed out all investors in one of its own rotten banks.

For those still with capital in the paper markets, Peak Prosperity's Chris Martenson believes there are dangerous risks re-building. In particular, he sees an unacceptably high and growing risk of a cascading series of corrections in the bond markets (corporate and sovereign), which would have a much greater impact on destroying wealth worldwide than any stock market crash could. The return of reckless practices like CDOs and overuse of derivatives indicates that we are far along the timeline in repeating a 2008-like contraction -- but worse. Despite today's heady elevated prices, it's time to get to the sidelines, and use your paper - while it still has the purchasing power it does - to park your wealth in hard assets.

With the Fed now fully engaged, and few if any policy tools left, the effectiveness of continued artificial stimulation is clearly waning.  Lower mortgages rates, interest rates and excess liquidity served well in priming the pumps of the real estate and financial markets when valuations were extremely depressed.  However, four years and four programs later, stock valuations are no longer low, earnings are no longer depressed and the majority of real estate related activity has likely been completed. It is for this reason that the returns from each subsequent program have diminished.  The reality is that Fed may have finally found the limits of their effectiveness as earnings growth slows, economic data weakens and real unemployment remains high.  Reminiscent of the choices of Goldilocks - it is likely the Fed's estimates for economic growth in 2013 are too hot, employment is too cold and inflation estimates may be just about right.  The real unspoken concern is the continued threat of deflation and the next recession.

So far, Cyprus has not been able to pass a direct tax against depositors and has gone to Russia for a helping hand (and failed).  However, the question of whether such an event could happen in the U.S. is a much more interesting point of discussion. While to most onlookers the idea of a direct deposit tax instituted by domestic US banks remains far off - the issue of the Fed's monetary policies, particularly since the last recession, has had a significant impact on "savers." While the individuals in Cyprus have been faced with an outright extraction of capital from their accounts - U.S. savers have had their savings negatively impacted much more surreptitiously. The continued drive by the Fed's monetary policies to artificially suppress interest rates to create a negative interest rate environment for savers is a defacto "tax" on savings. The destruction of principal since the turn of the century, which is far more disastrous than it appears when adjusted for inflation, has ended the dream of retirement for many individuals. So, can the U.S. potentially have a direct tax on savings?  It's already happened.

As part of its 2013 budget, the UK announced something quite dramatic - a government-funded housing subsidy. The government will to commit GBP 3.5 billion of capital spending over the next three years to shared equity loans. The Loans will be up to 20% of the value of a new-build home. The government will also offer mortgage guarantee to lenders to help them provide more loans to people who can’t afford big deposits. Guarantees will be sufficient to support GBP130b of mortgages, Osborne says. "These guaranteed mortgages will be available to all homeowners, subject to the usual checks on responsible lending,” Osborne says.

In 2013, we are receiving the same banker and mass media propaganda that we heard in 2008. The stock markets are okay, economies are recovering, blah, blah, blah. However, do any of the facts support the propaganda? For example, this “bullish” US stock market has not even recovered to the levels of October, 2007. And even, if more QE, more HFT low-trading volume rigging can rig US and other western markets higher, do rising stock markets even matter if the growth of stock markets are less than

Timing couldn’t be worse.

In addition to the phenomenon of "foreclosure stuffing" described here extensively before, one of the main reasons for the artificial drop in housing supply has been the ongoing government-subsidized, GSE/FHFA endorsed REO-to-Rent initiative, through which large asset managers have been encouraged to take advantage of government funded, risk-free financing and purchase foreclosed properties in bulk, with the intention of converting them into rental properties. The REO-To-Rent has traditionally been open to the biggest of financial companies, or at least those who don't have the stigma of legacy mortgage origination resulting in billions in litigation reserves, which means mostly hedge funds and PE firms. One of the main players in the space, Och-Ziff, decided to pull out of the landlord business in October of last year because, as Reuters reported, "the returns it is generating from rental income are less than expected and it is looking to take advantage of a recent rebound in home prices in northern California." In other words, selling while the selling is good. Of course, there is another, far more traditional way to offload risk while preserving some of the upside: dump the balance sheet exposure to others while giving them a fraction of the potential upside yield. This is precisely what the big banks were doing during the last housing bubble when massive residential mortgage-backed security portfolios were packaged, spliced, securitized (sometime without the feedback of firms like Paulson pre-shorting the MBS courtesy of firms like Goldman) and sold off to other yield-starved investors. Everyone knows how that ended. So fast forward to today, when this final missing link from the credit and housing bubble is finally here too, following news that mega-PE firm Blackstone is pushing forward with the first ever REO-To-Rental securitization.

• One in four Germans would back anti-euro party (Reuters)
• EU Chiefs Seeking to Stave Off Euro Crisis Turn to Cyprus (BBG)
• Ryan Says His Budget Would Slow Annual Spending Growth to 3.4% (BBG)
• Goldman leads decline as Wall Street commodity revenues plummet (Reuters)
• South Korea and US begin military drills (FT) and North Korea cuts off hotline with South Korea (Reuters)
• Karzai Inflames U.S. Tensions  (WSJ)
• Algorithms Get a Human Hand in Steering Web (NYT)
• Meeting Is Set to Choose Pope (WSJ)
• More U.S. Profits Parked Abroad, Saving on Taxes (WSJ)
• Banks rush to redraft pay deals (FT)
• Fugitive Fund Manager Stuffed Underwear With Cash, Fled (BBG)
• Post-Newtown Gun Limits Agenda Narrows in U.S. Congress (BBG)
• China Hints at Shift in One-Child Policy (WSJ)

In a testament to just how euphoric stock markets are right now, James K. Glassman the co-author of the fabled Dow 36,000 — a book published in 1999 that claimed that stock prices could hit 36,000 by as soon as  2002 (and which quite understandably is now available for just 1 cent per copy) — has written a new column for Bloomberg View claiming that he might have been right all along... The uber-optimistic atmosphere permeating much of the financial press is frightening to me. The resurrection of the Dow 36,000 zombie is a symbolically significant event that likely signals much the same thing as it did first time around: a correction.