Fannie Mae

When one thinks "recovery", some of the images envisioned include a healthy labor market (not one saturated by part-time, low wage jobs), rising earnings (not wages that have stagnated for years and in real terms are at Lehman levels) and a vibrant housing market in which new home buyers enter with confidence, and where mortgage loans are abundant and available to qualified creditors. One certainly does not imagine a housing "market" dominated by Chinese, Russian and Arab monely-laundering oligarchs, where half of all transactions are "all cash", and where, as Fannie Mae just reported, the number of Americans who said "now is a good time to buy a home" plunging to 64% - the lowest print in survey history!

Although I never thought it was possible, it makes me angry to write this book review. I'm not angry because I don't like the book. On the contrary, this is the best economics book I've ever read. Indeed, it may be the best and most influential book I've ever read in my life. I only wish I had read it the moment it was published in April 2013. 

How do we know when an asset class is in a bubble? When everyone who stands to benefit from the continuation of the expansion declares it can't be a bubble.

It was in June of 2011 when we reported that Bank Of America agreed to pay $8.5 billion to settle mortgage (mis)representation suit, where we said the bank was "about to part with more money than it has earned since 2008 in what will soon be the biggest financial settlement in the industry." Fast forward 3 years later when Bank of America once again makes history with its latest, and literally greatest, mortgage settlement with the US government, putting all of its MBS transgressions in the past, and which will cost the bank some $16.65 billion (of which, however, some $7 billion will be "consumer relief" and the remainder likely tax-deductible), a new record, and allow the bank to continue adding back "one-time, non-recurring" litigation charges to its adjusted, non-GAAP bottom line, thus once again "beating expectations".

The stories make you want to take all of your money out of the stock market and put it in your mattress!

The failure to understand money is shared by all nations and transcends politics and parties. The destructive monetary expansion undertaken during the Democratic administration of Barack Obama by then Federal Reserve chairman Ben Bernanke began in a Republican administration under Bernanke’s predecessor, Alan Greenspan. Republican Richard Nixon’s historic ending of the gold standard was a response to forces set in motion by the weak dollar policy of Democrat Lyndon Johnson. For more than 40 years, one policy mistake has followed the next.  Each one has made things worse. What they don’t understand is that money does not “create” economic activity.

Among this week's most notable moves was the decompression of high-yield credit spreads to near 9 month wides (and continued outflows). What went notably-under-reported by the mainstream media, however, was an even bigger selloff in US mortgage bonds. While JPMorgan is unable to see "any fundamental reason" for the plunge in prices, the worrying indication from the magnitude of the drop relative to volumes is that liquidity has evaporated. As Bloomberg notes, with dealer inventories sold down (due to new regulations that make repo and agency securities unpalatable), they have no way to 'smooth' the selling when investors want to exit positions. Weakness of this magnitude when the 10Y gained only 2bps on the week is a big wake-up call that traders are looking for the exits from housing debt and the door is very narrow.

• As we predicted yesterday, the "big" Gaza ceasefire lasted all of a few hours (Reuters)
• To Lift Sales, G.M. Turns to Discounts (NYT)
• Espirito Santo Family’s Swift Fall From Grace Jolts Portugal (BBG)
• Argentine Debt Feud Finds Much Fault, Few Fixes (WSJ)
• Fiat Says Ciao to Italy as Merger With Chrysler Ends Era (BBG)
• Euro zone factory growth eases in July as inflation fades away (Reuters)
• CIA concedes it spied on U.S. Senate investigators, apologizes (Reuters)
• Ukraine Reports Losses After Pro-Russian Ambush Near Malaysia Airlines Flight 17 Crash Area (WSJ)
• U.S. says India refusal on WTO deal a wrong signal (Reuters)
• Why Putin Has 2006 Flash Before His Eyes After Sanctions (BBG)

• Moscow fights back after sanctions; battle rages near Ukraine crash site (Reuters)
• On Hold: Merkel Gives Putin a Blunt Message (WSJ)
• Argentina’s Default Clock Runs Out as Debt Talks Collapse (BBG)
• Argentina braces for market reaction to second default in 12 years (Reuters)
• Banco Espirito Santo Plunges After Posting 3.6 Billion-Euro Loss (BBG)
• Adidas Plunges After Cutting Forecast on Russia, Golf (BBG)
• GOP Says Lerner Emails Show Bias Against Conservatives (WSJ)
• Londoners Cashing in Flee to Suburbs as Home Rally Wanes (BBG)
• BNP Paribas Reports Record $5.79 Billion Quarterly Loss (WSJ)
• Swiss Banks Send U.S. Client Data Before Cascade of Settlements (BBG)
• Putin Sows Doubt Among Stock Bears Burned by 29% Rebound (BBG)

Let's take a look at the amount of settlements/fines from various banks and financial institutions around the world since the crisis.

The Phoenix housing market has a special place in the heart of housing bubble watchers: together with Las Vegas and various California MSAs, this is the place where the last housing bubble was born and subsequently died a gruesome death which nearly brought down the entire financial system. Which is why the monthly WP Carey report on the Greater Phoenix Housing Market is of peculiar interest for those who want to catch a leading glimpse into the overall state of the bubble US housing market. As hoped, this month's letter does not disappoint. What we find is that while equilibrium prices have been largely flat month over month, and are up 6% on an average square foot basis from a year ago, something very bad is happening with a key component of the pricing calculation: demand has fallen off a cliff.

This is a big deal. On the heels of our pointing out the surge in Treasury fails (following extensive detailing of the market's massive collateral shortage at the hands of the unmerciful Fed's buying programs), various 'strategists' wrote thinly-veiled attempts to calm market concerns that the repo market (the glue that holds risk assets together) was FUBAR. Even the Fed itself sent missives opining that their cunning Reverse-Repo facility would solve the problems and everyone should go back to the important business of BTFATHing... They are wrong - all of them - as yet again the Fed shows its ignorance of how the world works (just as it did in 2007/8 with the same shadow markets). As JPMorgan warns (not some tin-foil-hat-wearing blogger with an ax to grind) "the Fed’s reverse repo facility does little to alleviate the UST scarcity induced by the Federal Reserves’ QE programs coupled with a declining government deficit." The end result, they note, is "higher susceptibility of the repo market to collateral shortages" and thus dramatically higher financial fragility - the opposite of what the Fed 'hopes' for.

• Carl Icahn says 'time to be cautious' on U.S. stocks (Reuters)
• Banco Espirito Santo Lifts Lid on Exposure to Group (BBG)
• Slowing Customer Traffic Worries U.S. Retailers (WSJ)
• Insurgents enter military base northeast of Baghdad (Reuters)
• Obama tells Israel U.S. ready to help end hostilities (Reuters)
• Japan economics minister warns of premature QE exit, sees room for more easing (Reuters)
• Greek Banks See Quadrupling of Housing Loans by Next Year (BBG) ... to fund buybacks like in the US?
• Piggy Banks Being Raided Signal Swedish Housing Dilemma (BBG)
• London Seeks New Spenders as Russians Skip $719 Champagne (BBG)

The Great Depression did not represent the failure of capitalism or some inherent suicidal tendency of the free market to plunge into cyclical depression - absent the constant ministrations of the state through monetary, fiscal, tax and regulatory interventions.  Instead, the Great Depression was a unique historical occurrence - the delayed consequence of the monumental folly of the Great War, abetted by the financial deformations spawned by modern central banking. But ironically, the “failure of capitalism” explanation of the Great Depression is exactly what enabled the Warfare State to thrive and dominate the rest of the 20th century because it gave birth to what have become its twin handmaidens - Keynesian economics and monetary central planning. Together, these two doctrines eroded and eventually destroyed the great policy barrier - that is, the old-time religion of balanced budgets - that had kept America a relatively peaceful Republic until 1914. The good Ben (Franklin that is) said,” Sir you have a Republic if you can keep it”. We apparently haven’t.

One of the things that this era of American history will be known for is conspicuous consumption. Even though many of us won't admit it, the truth is that almost all of us want a nice vehicle and a large home. They say that "everything is bigger in Texas", but the same could be said for the entire nation as a whole. We live in a debt-based system which is incredibly fragile. We experienced this firsthand during the last financial crisis. But we just can't help ourselves. We have always got to have more...