Mortgage Loans

The Department of Justice’s (DOJ) latest civil suit against Bank of America (B of A) is an embarrassment of tragic proportions on multiple dimensions. We're "only" going to explore seven of its epic fails here.  The two most obvious fails (except to most of the media, which failed to mention either) are that the DOJ has once again refused to prosecute either the elite bankers or bank that committed what the DOJ describes as massive frauds and that the DOJ has refused to bring even a civil suit against the senior officers of the banks despite filing a complaint that alleges facts showing that those officers committed multiple felonies that made them wealthy by causing massive harm to others.  Those two fails should have been the lead in every article about the civil suit. There are many more...

It is well-known that as part of the S&P500's ascent to new records, investor margin debt has also surged to all time highs, surpassing for the past three months previous records set during both prior, the dot com and the housing, stock market bubbles. And as more attention has shifted to the topic of speculator leverage once more, inquiries into the correlation between bets upon bets and stock performance are popping up once more, in this case in a study by Deutsche Bank titled "Red Flag! - The curious case of NYSE margin debt." Of particular note here is a historical comparison of margin-debt warnings that have recurred throughout history but especially just before major stock bubble crashes, such as in the period 1999/2000, 2007/2008 and of course today, which have time and again been ignored. Here is what was said then, what is being said now, and what is ignored always.

China is similar to Japan in the 1980s in terms of financial imbalances and challenges for the real economy, but, as JPMorgan notes, China differs in terms of its stage of economic development. Turning possibility into reality is not an easy task, especially as China’s structural slowdown is accompanied by mounting financial imbalances. In the near term, overcapacity and decline in the rate of return on investment are the major challenges to be addressed by policymakers, and rising debt in the corporate sector and local governments needs to be contained and gradually reduced. In our view, this would require reform not only on the economic front (e.g., fiscal reform, land reform, financial reform, and SOE reform), but also social reform (e.g., hukou reform) and governmental reform (e.g., changing the role of the government and de-monopolizing). The list of tasks is daunting, but policy inaction could be even more dangerous - a delay in economic restructuring in China could lead to a repeat of Japan’s experience.

Get It?

It was bound to happen some might say. We were warned! Chinese banks have stopped lending due to pressure from liquidity deposits. Some branches of the Bank of China and the Industrial and Commercial Bank of China have issued statements in which they announce that they are halting lending for a temporary period.

That Iceland is so far the only success story in the continent of Europe, which continues sliding into an ever deeper depressionary black hole, as a result of the complete destruction of its financial sector and its subsequent rise from the ashes, is by known to most. What is still not exactly clear is what conditions have allowed success and growth to flourish in a barren wasteland where 60% youth unemployment is increasingly the norm, and where economic "outperformance" is measured in shades of red. As it turns out, perhaps the biggest jolt to Icelandic economic growth is what we said was the correct prescription for resolving not only the US but global growth malaise that struck in 2008: debt liquidation.

Let's start with the oldest economics joke in the book: "assume there is a housing recovery."

• Pimco Sees 60% Chance of Global Recession in Five Years (BBG)
• Global Tumult Grips Markets (WSJ)
• NSA Secrecy Prompts a Pushback (WSJ)
• ANA Scraps 787 Dreamliner Flight as Engine Fails to Start (BBG) - one of these days, though, it shall fly
• Kuroda’s April-Was-Enough Message Faces Markets Wanting More (BBG)
• S&P warns top US banks are still ‘too big to fail’ (FT)
• Democracy for $500 per plate (Reuters)
• Iran, the United States and 'the cup of poison' (Reuters)
• Japan grapples with lack of entrepreneurs (FT)
• Greece First Developed Market Cut to Emerging at MSCI (BBG)
• Asia's ticking time bonds; time to cut and run? (Reuters)
• Sony Outduels Microsoft in First PS4-Xbox One Skirmish (BBG)

Here is a simple way to test if the last year of housing market gains have been due to a real, fundamental, consumer-led recovery, or nothing but the latest iteration of the Fed's money bubble machine manifesting itself in the place of least du jour resistance - houses: Assume rising interest rates.

European Union Launches Investigation Into Manipulation of Oil Prices Since 2002

It is only logical that when one of the smarter people in finance warns that he "sees bubbles everywhere" that he should be roundly ignored by those who have no choice but to dance. Because Bernanke and company are still playing the music with the volume on Max, and if not for POMO there is always FOMO. However, if there is any doubt why this "rally is the most hated ever", here are some insights from the Bond King from an interview with Bloomberg TV earlier today: "We see bubbles everywhere, and that is not to be dramatic and not to suggest they will pop immediately. I just suggested in the bond market with a bubble in treasuries and bubble in narrow credit spreads and high-yield prices, that perhaps there is a significant distortion there. Having said that, it suggests that as long as the FED and Bank of Japan and other Central Banks keep writing checks and do not withdraw, then the bubble can be supported as in blowing bubbles. They are blowing bubbles. When that stops there will be repercussions. It doesn't mean something like 2008 but the potential end of the bull markets everywhere. Not just in the bond market but in the stock market as well and a developing one in the house market as well."

The diminishing returns of the Fed's quantitative easing are very evident in the latest WFC results.  

In 2007 a small number of French hedge funds imploded over sudden losses stemming from highly leveraged bets made on the unstoppable subprime mortgage market. At the time, a few saw the writing on the wall; but many simply wrote it off as just another over-levered hedge fund and the subprime mortgage market was 'fine'. Fast forward six years and as we have discussed numerous times (most recently here and here) there is a bubble, potentially far bigger than subprime, in student loan debt. As one of the last remaining outlets for state-sanction credit creation, this is a big deal; but, of course, the popping of the bubble (or even a slight leak) is eschewed since there is so much 'reach for yield' and the Fed's got your back. That is until this week. As WSJ reports, Sallie Mae (SLM), the nation's largest non-government student lender just cancelled a $225 million debt offering as investors  decided they simply were not getting paid enough for risk - amid rising student loan defaults. Simply put, there's a limit to what investors will tolerate.

Cost reductions and layoffs are the drivers for bank earnings... Watch those ski tips.  

MERS: The Center of the Mortgage Scam