Housing Bubble

Readers of Zero Hedge know well that one of the most abhorred (by us) accounting gimmicks employed by banks each and every quarter over the past 3 years to boost their bottom line, is to engage in loan-loss reserve releases: a process which has absolutely no associated cash flow benefit, but merely boosts EPS for GAAP purposes. In some cases, like this quarter's absolutely farcical JPM earnings release, the abuse is beyond the pale, as the offending bank releases reserves even as it reports surging non-performing loans: two processes which in a normal world can not coexist. Yet quarter after quarter banks keep on doing this, and in fact a big part of Q3's to date EPS outperformance is courtesy of financial company "earnings", of which, in turn, loan losses amount to about 50% of the entire blended financials bottom line. Yet while we can rage and warn, nothing usually happens until there is a market crash due to the gross manipulation of reality that such an activity entails. Luckily, this time someone with more clout in the legacy establishment has now stood up to warn about the mounting dangers associated with the relentless abuse of loan-loss reserve releases: none other than the US Comptroller of the Currency.

There is an interesting dynamic unfolding in the housing market. Real estate agents in places like California are arguing that there is a lack of inventory and are also generally against the government unloading blocks of properties to big investors. Why? There has been bulk selling and buying to the investor class and a large amount of crowding out has occurred. This brings about an interesting set of problems for your average buyer in the current market. They are competing with swaths of big investors but also local flippers trying to make a quick buck once again courtesy of low interest rates and another mania in some markets. SoCal is now in a mania again as you will see with some of the patterns occurring. This is also happening in many other states as well. A new feudal system has emerged. The banks were bailed out by the Fed, were allowed to circumvent accounting standards, and now deep pocket investors in the financial class are buying up these places either to increase prices on flips or to hike up rents. In the end, if you want to compete in today’s market you need to bow down to the Fed, put on a football helmet and go head-to-head with big investors, flippers, suckers, and take on a massive mortgage.

By now everyone knows that as part of QEternity, Uncle Ben is currently monetizing $40 billion in MBS per month, a number which as we first forecast hours after its announcement and which everyone is now piling on to reaffirm, will rise to $85 billion in outright, unsterilized monetization beginning January 1, 2013 (as anything less would be seen as impllicit tightening in a market which now needs $85 billion in Fed Flow monthly simply not to collapse). This is fungible money which is going solely to benefit the banks, whose reserves with the Fed swell, and which proceeds can be used for virtually any purpose - from buying MBS (which they are doing) to 300x P/E stocks like AMZN - but not to be lent out to those desperately seeking loans? Why: one simple reason - the banks are already mired in legacy litigation from loans made during the last housing bubble (just see the hundreds of mortgage-related lawsuits Bank of Countrywide Lynch is a defendant in and you will get a sense of how bad it is) and the last thing they need is a repeat of that. And while the Fed has only one monetary easing pathway, which always goes through the banks, we wish to demonstrate to our readers what, in a thought experiment ignoring all the obvious practical considerations, the equivalent benefit to the general population would be if instead of being held by the banks and used to make the rich even richer, this money would bypass the banking syndicate and go straight to the US job seeker...

We want to 'believe', we really do; but anyone with any sense (and no skin in the game) can see through the data; the eon-like periods of foreclosure and the drastically reduced supply. No matter how 'bullish' homebuilders are, or how much they dream of a future pickup, calling the recovery (as Bob Shiller recently noted) is just a fool's errand. The truth is, for the average citizen, housing is not recovering - the wealth effect is not creating animal spirits - and we do indeed have more to fear than fear itself. The following 79 second clip from Bloomberg TV should perhaps clarify the 'difference' in demand for housing. Primary residence 'buyers' are down remarkably, while 'investors' are up dramatically - now at pre-crisis bubble levels! Perhaps, as we noted here, Och-Ziff's stepping away from the 'flip-that-house' or 'REO-to-Rental' game is as good an indicator of exuberance as any.

Readers may recall that Ron Paul once surprised everyone with a seemingly very elegant proposal to bring the debt ceiling wrangle to a close. If you're all so worried about the federal deficit and the debt ceiling, so Paul asked, then why doesn't the treasury simply cancel the treasury bonds held by the Fed? After all, the Fed is a government organization as well, so it could well be argued that the government literally owes the money to itself. He even introduced a bill which if adopted, would have led to the cancellation of $1.6 trillion in federal debt held by the Fed. Of course the proposal was not really meant to be taken serious: rather, it was meant to highlight the absurdities of the modern-day monetary system. In a way, we would actually not necessarily be entirely inimical to the idea, for similar reasons Ron Paul had in mind:  it would no doubt speed up the inevitable demise of the fiat money system. Control can be lost, and it usually happens only after a considerable period of time during which their interventions appear to have no ill effects if looked at only superficially: “Thus we learn….to be ignorant of political economy is to allow ourselves to be dazzled by the immediate effect of a phenomenon."

Just before Lehman, these people had exactly zero predictive capabilities.

The pre-election barrage of "six-sigma" economic beats continues, with today the trophy going to Housing Starts, which soared by a whopping 15% from a revised 758K to 872K. The highest forecast called for a 800,000 print with consensus expecting an increase to 770,000K. Did we say 6 sigma? We meant a 9 sigma beat to consensus. The numbers being thrown about are so ridiculous they are almost credible in their political talking point ridiculousness. Expect this outlier printing to continue at least until the election. In the meantime, prepare for a barrage that housing start soared to the highest since July 2008. Looking inside the numbers, the print for single family rose to 603K from a revised 543K, while multi-family houses increased to 260K from 208K. The geographical breakdown is as follows Northeast down 4K to 75K, Midwest modestly higher to 143K from 134K, West a little more higher from 169K to 203K, and the biggest surge was in the South from 376K to 451K. At this point the best one can hope for is for a return to some normal data reporting after the election, because it is now obvious that every data series will be skewed and 'seasonally adjusted' substantially higher. Curious why BofA charge-offs are already soaring thanks to the Housing Bubble 2.0? That's why.

When one combs through the usual hodge podge of purposefully distracting headline bullets in Bank of America's quarterly release one as usual ends up with a sorry picture. Here are the key numbers: Noninterest income for the firm, traditionally about half of total revenues in addition to Net Interest Income, has continued to decline, and slid fo $10.5 billion, down from $12.4 billion in Q2 and down from $18.0 billion in Q3 2011. The other side: Total Interest Income (before expenses) also has continued to decline, and dropped to $13.976 billion from $13.992 billion a quarter ago, and down from $15.853 billion a year earlier. These numbers are hard to fudge. The number that is very easy to fudge is the Net Income (and per share) line, which was reported at $340 MM or $0.00 in diluted earnings per share after dividends. What helped substantially here is the following: while the firm booked a provision for credit losses of just $1.774 bilion, in line with Q2 and half of the $3.4 billion in Q3, 2011, what more than offset this was the surge in reserve reduction which soared to the highest in years at $2.348 billion, up from $1.853 billion in Q2 and way up from the $1.679 billion in Q3 2011. What is even more paradoxical is that despite what Moynihan is saying about an improvement in the housing market, the bank's total chargeoffs rose to the highest in a year, at $4.122 billion, up from $3.626 billion in Q2, and the highest since Q4 2011. The result is that the Net charge off ratio also spiked to the highest in a year, at 1.86%.

The ability of reflationary policy to mute the worst risks of debt deflation has been a source of enormous frustration for stock market bears ever since the 2008 collapse. Yes, the initial moderate rally out of the S&P500’s black hole was perhaps not so surprising in 2009. Bombed-out stock markets can always manage some sort of rally. But the ability of the rally to continue through 2010, and then 2011, and now 2012 has been quite vexing and painful for bearish investors. Indeed, the entire post-2008 market phase has now produced an era of consistently poor performance for hedge funds. Recent data, for example, shows that an incredible 90% of hedge funds are underperforming the S&P500 through mid-September. Will the pain continue? If OECD policy makers do in fact lose stock markets as the main transmission mechanism for reflationary policy, then trouble of a very serious nature will make itself known in the biggest way imaginable since the 2008 crisis began.

Lately there has been an amusing and very spurious, not to mention wrong, argument among both the "serious media" and the various tabloids, that US households have delevered to the tune of $1 trillion, primarily as a result of mortgage debt reductions (not to be confused with total consumer debt which month after month hits new record highs, primarily due to soaring student and GM auto loans). The implication here is that unlike in year past, US households are finally doing the responsible thing and are actively deleveraging of their own free will. This couldn't be further from the truth, and to put baseless rumors of this nature to rest once and for all, below we have compiled a simple chart using the NY Fed's own data, showing the total change in mortgage debt, and what portion of it is due to discharges (aka defaults) of 1st and 2nd lien debt. In a nutshell: based on NYFed calculations, there has been $800 billion in mortgage debt deleveraging since the end of 2007. This has been due to $1.2 trillion in discharges (the amount is greater than the total first lien mortgages, due to the increasing use of HELOCs and 2nd lien mortgages before the housing bubble popped).

As we all know, what matters isn't our nominal earnings, it's what our earnings can buy that counts. If it takes an hour of labor to buy four gallons of gasoline, it doesn't really matter if we're paid $1.60 an hour and gasoline costs 40 cents a gallon or we're paid $16 an hour and gasoline costs $4 per gallon. Ditto $16,000 an hour and $4,000 per gallon. What matters is if our hourly wage once bought eight gallons of gasoline and now it buys only four gallons. This is called purchasing power, and rather naturally the Status Quo has worked mightily to cloak the reality that our purchasing power of the bottom 95% of wage earners has been declining for decades. Until oil no longer matters, our real earnings and our economy remain hostages to the cost of oil.

• U.S. Military Is Sent to Jordan to Help With Crisis in Syria (NYT)
• IMF Weighing New Loans for Europe (WSJ)
• Romney Targets Obama Voters (WSJ)
• China’s Central Banker Won’t Attend IMF Meeting Amid Island Spat (Bloomberg)
• Japan Calls China PBOC Chief Skipping IMF Meeting ‘Regrettable’ (Bloomberg)
• German media bristles at hostile Greek reception for Merkel (Reuters)
• The End Might Be Near for Opel (Spiegel)
• IMF sounds alarm on Japanese banks (FT)
• Cash Tap Stays Dry for EU Banks (WSJ)
• Goldman in Push On Volcker Limits (WSJ)
• IMF Vinals: Further Policy Efforts Needed to Gain Lasting Stability (WSJ)
• King signals inflation not primary focus (FT)

The other day the Huffington Post ran an article by a Bonnie Kavoussi called “11 Lies About the Federal Reserve.” And you’ll never guess: these aren’t lies or myths spread in the financial press by Fed apologists. These are “lies” being told by you and me, opponents of the Fed. Bonnie Kavoussi calls us “Fed-haters.” So she, a Fed-lover, is at pains to correct these alleged misconceptions. She must stop us stupid ingrates from poisoning our countrymen’s minds against this benevolent array of experts innocently pursuing economic stability. Here are the 11 so-called lies (she calls them “myths” in the actual rendering), and Tom Woods and Bob Murphy's responses.

The essence of money-laundering is that fraudulent or illegally derived assets and income are recycled into legitimate enterprises. That is the entire Federal Reserve project in a nutshell. Dodgy mortgages, phantom claims and phantom assets, are recycled via Fed purchase and "retired" to its opaque balance sheet. In exchange, the Fed gives cash to the owners of the phantom assets, cash which is fundamentally a claim on the future earnings and productivity of American citizens. Some might argue that the global drug mafia are the largest money-launderers in the world, and this might be correct. But $1.1 trillion is seriously monumental laundering, and now the Fed will be laundering another $480 billion a year in perpetuity, until it has laundered the entire portfolio of phantom mortgages and claims. The rule of law is dead in the U.S. It "cost too much" to the financial sector that rules the State, the Central Bank and thus the nation. Once the Fed has laundered all the phantom assets into cash assets and driven wages down another notch, then the process of transforming a nation of owners into a nation of serfs can be completed.

Here's the Fed's policy in plain English: Debt-serfdom is good because it enriches the banks. All hail debt-serfdom, our goal and our god!

Spoiler Alert: They’re mostly still in office  (so much for building suspense).

On October 3, 2008, 338 elected officials (263 House reps, 74 Senators and 1 President) took it upon themselves to save America from certain financial doom by passing the Emergency Economic Stabilization Act of 2008, completely ignoring the will of the American people,  opting instead to fulfill a Thomas Jefferson prophesy:

“The end of democracy and the defeat of the American Revolution will occur when government falls into the hands of lending institutions and moneyed incorporations.” 
~ Thomas Jefferson