Bear Market


Supreme Court gives banks foreclosure win

September 30, 2012 by · Leave a Comment 

In a 26-page ruling delivered Thursday, all seven justices agreed that hundreds of thousands of home mortgages in the state involving the Mortgage Electronic Registration System Inc. could be put into foreclosure after technical adjustments.

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Dems Let Obama Off the Hook for the Bad Economy

September 30, 2012 by · Leave a Comment 

“Despite mixed economic signals and warnings about the country getting dropkicked into recession next year by the “fiscal cliff,” consumer confidence has climbed in parallel with President Obama’s surge in the polls over Mitt Romney. Analysis by the Gallup Organization suggests that both phenomena are being driven by politics instead of finances. ”

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Meet The New Subprime: It Will Cost Us Billions

September 30, 2012 by · Leave a Comment 

Apparently the continuing pain of the subprime crisis has taught our feckless politicians nothing. While sub-prime has morphed into a naughty word, a near clone has stealthily infiltrated the mortgage markets, choking the breath out of many unfortunates ensnared by its enervating tentacles. Meet the Federal Housing Administration or FHA.

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Oregon Rewards CMBS Manager Who Blew Up Fund in 2008: Mortgages

September 30, 2012 by · Leave a Comment 

Edward Shugrue lost $100 million of Oregon’s state pension fund during the credit crisis in 2008, within three years of getting the money to invest in commercial property debt. The retirement board took just 30 minutes last month to hand him another $125 million.

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U.K. House Prices Extend Drop as Hometrack Sees Demand Weakening

September 30, 2012 by · Leave a Comment 

Prices declined 0.1 percent from August and 0.5 percent from a year earlier, the London-based property research group said in an e-mailed statement today. The number of new buyers registering with real-estate agents fell 3.6 percent, the biggest drop in eight months.

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Young and living at home – Record percent of 25 to 34 year olds living with parents. Los Angeles employment figures back to 1990 levels. Rents rising are merely a sign of a squeeze on standard of living.

September 30, 2012 by · Leave a Comment 

When it comes to real estate, California seems to push things to the extreme.  When the nationwide market was booming California was booming with even more bells and whistles.  When things went bust, we went down like a boxer with a glass jaw.  Now with housing values going up, some areas are having bidding wars […]


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Monday Morning Cup of Coffee: Mortgage rates to set more record lows

September 30, 2012 by · Leave a Comment 

“We believe that originators will take time to ramp up their capacity,” Barclays Capital says. “Rates are likely to grind tighter as originators continue trying to attract the marginal borrowers who are increasingly less responsive.”

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Why QE Won’t Create Inflation Quite as Expected

September 27, 2012 by · Leave a Comment 

By Charles Hugh Smith, OFTWOMINDS


The Fed can create money but if it doesn’t end up as household income it is “dead money.”


In the consensus view, the Federal Reserve’s unlimited quantitative easing (QE3) programs will do two things: 1) boost stocks and other “risk on” assets and 2) generate inflation. The two follow-on effects are related, of course; gold and other hard assets are rising in anticipation of higher inflation.

But all is not quite as it seems when it comes to the inflationary effect of creating money. I’m going to cover a lot of ground here so buckle up and grab your favorite stimulating beverage.

Let’s use some examples to illustrate key features of the relationship between money creation and inflation. Let’s say a central bank prints $1 trillion in cash currency, digs a big hole and buries it. Does that $1 trillion in new money cause inflation? No, because it never got into the hands of people who might trade it for goods and services in the real world.

Recall that the premise of monetary inflation is straightforward supply and demand: when money is abundant and goods are scarce, the price of goods rises as abundant demand (everybody has lots of cash or credit) meets limited supply (limited oil, gold, grain, etc.) in an open marketplace.
Let’s say the Fed electronically creates $1 trillion and metaphorically buries it in some account where it sits as “dead money.” It cannot trigger inflation because it isn’t reaching the hands of people who might use it to buy scarce goods and services.

Let’s also recall that money is destroyed, not just created, when assets fall in value and bad debt is written down. Consider a house purchased for $350,000 at the top of the real estate bubble with a $50,000 cash down payment and a $300,000 mortgage. The owner defaults and the house is sold for $150,000. The $50,000 down payment was cash; it was not “on paper.” It has not been transferred to someone else; it has vanished.

The same can be said of the $150,000 the bank lost on the mortgage. The bank’s cash reserves (capital) take a $150,000 hit. That was real money, too, and it wasn’t transferred to someone else; it disappeared. Thus $200,000 of real money has been destroyed.

To the degree that immense overhangs of bad debt are slowly being written off, money is being destroyed. If the Fed “prints” $500 billion a year, and write-downs erase $500 billion, the money supply hasn’t expanded at all.

The Fed bought $1.1 trillion in mortgage-backed securities as part of its earlier QE interventions in 2009-10. Notice that the $1.1 trillion has already fallen to $850 billion–a decline of $250 billion in just a few years. The loans were paid down, paid off or written off.


According to the Balance Sheet of Households (federalreserve.gov), home mortgages have declined from $10.3 trillion in 2009 to $9.7 trillion in 2012. Credit is being destroyed in the primary asset of the American household, their home: one-third have zero equity (underwater), millions more have insufficient equity to borrow against/extract, and millions more are not creditworthy enough to borrow more, even though they have equity in their house.

The decline in asset values has destroyed money and credit.

The general assumption is that the Fed buys dodgy MBS from banks which then take the money and dump it into the stock market, pushing stocks higher. This assumption fails to consider the weak balance sheets of banks, which will soon be required to post some collateral behind their trillions of dollars of outstanding derivatives.

The favored collateral is U.S. Treasury bonds, and so banks may be constrained by their need to build reserves against future writedowns. They may end up buying Treasuries as collateral rather than gambling in the equities market. The newly created money may end up as “dead money” in reserves, not cash propping up equities.

A number of indicators suggest money is not flowing into hands which might actually trade it for goods and services. Consider money velocity, courtesy of Chartist Friend from Pittsburgh:


The velocity of money buried in a hole is zero. The velocity of hoarded money is also zero. The velocity of credit that is never used (i.e. no money is actually borrowed and spent) is also zero. Money that is created but which has zero velocity cannot spark inflation.

If money were flowing into real-world households, we’d expect to see household incomes rise. Instead we see falling incomes. Here is the real (adjusted) income for the 45-54 year old age bracket, when lifetime earning tend to peak (courtesy of dshort.com):


Ouch. Income, Poverty and Health Insurance Coverage in the United States: 2011 According to the Census Bureau, “In 2011, real median household income was 8.1 percent lower than in 2007.”

If there is net expansion of the base money supply, it isn’t finding its way into household incomes where it could be spent on real goods and services.

As for the “wealth effect,” it only affects the 5% who own enough equities to make a difference. That narrows the whole “wealth effect” to 7 million people out of 142 million workers.


Interestingly, the top 5% is the only demographic that is actively deleveraging, i.e. reducing debt rather than borrowing more:



Add all this up and here’s what we get: money is not just being created by the Fed, it’s being destroyed by declines in asset valuations and writedowns of impaired debt. Credit may be expanding but the top rung of households is paying down debt, not borrowing more, and the bottom 95% are unable to add much to their already staggering debt load.

Incomes are declining, providing a smaller base for both spending and borrowing. The top 5% may be experiencing a “wealth effect” as stocks soar but 7 million people cannot levitate the entire $15 trillion U.S. economy much while the incomes of the 137 million other workers are stagnant or down.

Money velocity is plummeting and banks are hoarding Treasuries as much-needed collateral.
It’s difficult to see how these forces could generate inflation. There may be new money and credit being created, but very little of it is flowing to households whose spending in the real economy drives inflation.

Read the Introduction (2,600 words) and Chapter One (7,600 words) for free.

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution.
Rather than being powerless, we hold the fundamental building blocks of power. We need neither permission nor political change to liberate ourselves. A powerless individual becomes powerful when he renounces the lies and complicity that enable the doomed Status Quo’s dominance.





Thank you, Barney S. ($10), for your much-appreciated generous contribution to this site–I am greatly honored by your continuing support and readership.

Go to my main site at www.oftwominds.com/blog.html
for the full posts and archives.

More articles from Charles Hugh Smith….

Banks versus the Farms

September 27, 2012 by · Leave a Comment 

The Daily Reckoning

We spent yesterday in Perth presenting at the Pastoralists and Graziers Association (PGA) annual convention. It was a packed house in the morning session. They weren’t there to listen to the droning and self-serving speech of one of WA’s politicians (we’ve already forgotten who). Rather, it was Andrew Forrest commanding the crowds’ attention.

He spoke just before we did. It was an eloquent speech…well received by the crowd.

Let’s just say there was a little more space in the room when we got up to have our say. More on that shortly?

First, let’s put the recent market sell-off into a visual context. Here’s a chart of the S&P500. After surging higher on the back of ‘QE to insanity’ (or is it infinity?), the world’s largest stock market index is in the process of giving up those gains.

S&P500 – Topping Out?

S&P500 - Topping Out?

Source: StockCharts


Could it be that money printing doesn’t really solve anything and investors are panicking at the lack of follow through buying? Is it that US stocks are highly overvalued and Wall Street has run out of robot buyers to push prices even higher? Or, is it just a regular pullback from a strong rally? After all, the index surged ahead of the 50-day moving average (blue line) and is well above the 200-day moving average (red line).

So even though we think the whole stock market thing is a rigged charade, this pullback looks run-of-the-mill so far. It’s too early to tell whether this is the beginning of something more ominous. If the index breaks decisively below the 1,400 level, it will represent what Slipstream Trader Murray Dawes refers to as a ‘false break of the highs’. Our advice if that happens? Panic.

What about the Aussie market? Well it’s really struggled to push through the 4,400 level. Back in August 2011, the ASX200 plunged through 4,400 points on the way to 3,800. Since that time, it has fought its way back to 4,400 a few times, only to turn back down. It occurred in October 2011, and March, August and September 2012.

Will it have another go soon and finally break above the market ‘ceiling’, or are we on our way back to 4,000? Murray reckons 4,300 is a pretty important region. If we break back down through there, see advice from above.

ASX200 – Bumping Up Against the 4,400 Ceiling

ASX200 - Bumping Up Against the 4,400 Ceiling

Source: BigCharts


So what was going on at the PGA Conference yesterday? One of the main themes was the huge amount of red tape strangling the industry.

One speaker, a cattle farmer, told the story of his attempts to invest in an Australian based supply chain. One link in that chain is a ‘boning’ facility, a place where meat is cut up and readied for export (most of WA’s primary agriculture, grains, cattle etc, heads overseas and earns Australia valuable export dollars).

In response to his attempts to set up the facility in Australia, the bureaucrats lined up a series of hoops to jump through. In contrast, a similar application with the Singaporean government resulted in a positive response within weeks, an advantageous tax regime, and an offer of a site close to the airport.

How ironic that Singapore is largely a government run city-state! But maybe Singapore is just open and honest about it. Their bureaucrats get things done. Australia’s economy is increasingly government controlled and influenced. We just masquerade as a market based economy.

We should point out that the PGA is a group that espouses free market principles. It was instrumental in bringing about an end to the dominance of monopoly organisation AWB (Australian Wheat Board). And one of its primary aims is to bring about further deregulation of the wheat industry. So it’s no surprise that the conference contained many tales of debilitating bureaucracy and regulation.

Even Andrew Forrest chimed in with his own hoop jumping story, which involved an extensive approval process just to bring some underground water up to the farm.

Anyway, as an industry outsider we reflected on the difficulties farmers face in trying to earn a living, compared to the cosy world of the financiers. When farmers get into trouble from a bad crop or poor hedging decisions, the bank will take the farm. When a bank gets into trouble from a bad crop (contracting credit growth) or from poor lending decisions, it gets protection from the central bank and, if needed, the government.

Which just goes to show how ‘financialised’ the world has become. Financiers are important not because they are ‘doing God’s work’, as Goldman Sachs CEO Lloyd Blankfein once said, but because they have gotten so out of control that if one fell it would create a domino effect.

Why has global finance gotten out of control? Because we are at the end of the current financial systems’ lifecycle. The whole, post-1971 ‘system’ is characterised by recessions, followed by a reduction of interest rates and more credit growth, which creates economic growth. As the system evolved, recessions became shorter or non-existent as governments and central banks fought tooth and nail to avoid any sort of contraction.

As a result, this system of debt growth leading to economic growth has left most of the developed world with zero interest rates and weighed down by debt. It’s not a coincidence, it’s how the system works. Increasing debt growth pushes interest rates lower and lower so the system can survive.

And because there’s so much debt, authorities can’t afford to let the system contract. If it did, it would bring about a depression.

We made that point, in a roundabout sort of way, in our presentation yesterday. Called, Agriculture, China, and the Limits of Debt-Based Growth, we tried to explain how the debt-based global financial system was slowly but surely coming to an end.

Contrary to what we’re told, the system is not deleveraging. It’s not improving. Following the tech bubble bust in the early 2000s, the US had a mortgage bubble, fuelled by a 120% increase in mortgage debt from 2003-07.

When that bubble popped, the household sector began to de-lever, but the government sector juiced up the credit (debt) growth to offset the private sector contraction. From 2007-12, federal government debt expanded by US$6 trillion, or 117%.

It’s completely unproductive debt growth. It’s government spending in the best Keynesian tradition – to prop up consumption. But it delivers very little in the way of growth and does nothing to get the economy back on the path of sustainable growth.

The world really is hitting the limit of debt-based growth. The fact that Bernanke is trying to reinflate the housing bubble to improve employment should tell you that.

That has implications for Australia. We are a debtor nation. For decades we’ve lived beyond our means. Over the decades we’ve accumulated a net international liability position of $880 billion. The interest bill on that position means we have a chronic ‘net interest deficit’. In the June quarter it was nearly $10 billion.

That’s why we need foreign investment in this country. Irrespective of all the emotional arguments about whether we should accept it or not, the bottom line is our standard of living would collapse if Barnaby Joyce got his way and closed Australia’s doors to foreign investment.

But what will happen to Australia in a global monetary re-set? If we’re nearing the limits of debt-based growth, are we approaching round two of the global credit crisis? In round one, foreign money left Australia almost overnight.

Only China’s massive stimulus saved the day, along with our own government throwing money at the problem. But ours is a structural problem, one that relies on foreign creditors forever accepting our paper promises of eventual repayment. And it’s a problem that will rear its head after the ameliorating effects of short term stimulus wear off.

We’re approaching that point again. The charts aren’t signalling danger just yet. But keep on close eye on those levels we discussed.

Regards,

Greg Canavan
for The Daily Reckoning Australia

From the Archives…

The Sharks Amongst the School
21-09-2012 – Greg Canavan

Bernankonomics 101
20-09-2012 – Greg Canavan

There’s Going To Be a Fight
19-09-2012 – Dan Denning

The World’s #1 Money Printer
18-09-2012 – Bill Bonner

The Video That Started All the Controversy
17-09-2012 – Dan Denning

Similar Posts:

More articles from The Daily Reckoning….

Second Prize in a Beauty Pageant

September 27, 2012 by · Leave a Comment 

The Daily Reckoning

Goodbye QE boom… we hardly knew ye.

And good riddance! You were never reliable. Never real. Never worth a damn.

US stocks fell a little more. Most foreign markets headed down too – scarcely a week after the biggest money-printing announcements in history…

Europe’s doing it. Japan’s doing it. America’s doing it. Even Brazil is doing it… sort of. Brazil recently announced ‘stimulus’ measures to help boost growth.

But debt-financed stimulus doesn’t work… not in this economy. This is an economy with too much debt already.

And that’s why the stock market has had a rendezvous with disaster… ever since the crisis began in ’07-’08. This is a Great Correction. And in a real correction, stocks should sell off until they’re cheap.

Why? Because that’s what happens in a correction. Prices correct. They go down to levels that are so low the mistakes and bad investments are wiped out. At the bottom, the survivors are bargains again.

In the ’30s, for example, US stocks fell below ten times earnings. And again in the early ’80s, the Dow traded as low as five times earnings.

And in Japan, stocks lost about 75% of their value… and stayed down. They’re still down 22 years after the crisis began.

So why haven’t US stocks kept their appointment with doom and gloom? Two reasons.

First, because the feds flooded the roads and tunnels leading out of Wall Street. There was so much cash and credit, stocks couldn’t get where they were supposed to go.

Second, because the companies used the crisis to cut overheads, staff, and expenses leaving them with the highest earnings in years.

We’re down in Brazil today… where the economy really has been growing. Economists say Brazil’s growth is slowing, but over the last five years this economy has produced two new jobs for every job the US lost.

São Paulo is like downtown LA… but many times larger… busier… more chaotic… faster-moving… and growing. There are skyscrapers in every direction we look, hundreds of them. There aren’t many construction cranes, but there are plenty of new buildings. And helicopters, you see them overhead all the time.

On the TV is a beauty contest. But this is not the country fair queen they’re looking for. Instead, the contestants all wear string bikinis… and the focus is on one part of the anatomy only. It’s called the “bum bum beauty contest” where the judges actually use a ruler to measure the girls’ charms.

We went over to the gleaming new headquarters of Facebook today… Facebook has 50 million users in Brazil, one fourth of the population. And last year, computers passed TV sets as the number one Christmas gift.

‘The story here is a middle-class success story,’ our contact explained. ‘There are millions of people who are entering the middle classes. They’ve got decent jobs, good wages, rising household incomes, cars… and computers.’

Very different from the US, where the middle class is shrinking. Household earnings for middle-class families have been stagnant for nearly 20 years. Household net worth has gotten whacked too – first by the stock market… and then by housing.

The idea of the American dream was that if you got a good education and bought a house. You couldn’t miss. But ’tweren’t so. Here Robert Samuelson explains:

‘A study from economists at the Kansas City Federal Reserve reports: Fewer than 60 percent of college freshmen graduate within 6 years; student debt now totals about $1 trillion; for 25 percent of borrowers, annual repayments exceed $4,584; default rates are almost nine percent. ‘Defaulted borrowers may be sued, tax refunds may be intercepted, and/or wages may be garnished,’ the report notes.

‘The plugging of homeownership – the quintessential symbol of ‘making it’ – is another perverse pathway. True, homeownership is a laudable goal; it stabilizes neighborhoods, for example. But the promotion went overboard. Lax lending standards lured people into buying homes they could not afford, contributing to the 2007-09 financial crisis. Again, victims were the intended beneficiaries; since 2007, at least five million Americans have lost homes through foreclosure, reports CoreLogic.’

A collapsing middle class and a Great Correction are not good for the stock market. According to John Hussman, the outlook for stock prices – according to his proprietary model – has never been worse. QE money printing doesn’t really improve the economy. And real companies depend on the real economy to grow.

Don’t expect to make any money on your stocks over the next ten years, he says.

And this week, Jeremy Grantham told the world that today’s high earnings are “freakish”. Abnormal, in other words. And what we know about abnormally high earnings is that they soon revert to normal… and then abnormally low.

The combination of a funky, correcting economy, shrinking middle class and mean-reverting earnings is likely to hit the stock market like an iceberg hit the Titanic.

Our advice: stay close to the lifeboats.

Regards,

Bill Bonner
for The Daily Reckoning Australia

From the Archives…

The Sharks Amongst the School
21-09-2012 – Greg Canavan

Bernankonomics 101
20-09-2012 – Greg Canavan

There’s Going To Be a Fight
19-09-2012 – Dan Denning

The World’s #1 Money Printer
18-09-2012 – Bill Bonner

The Video That Started All the Controversy
17-09-2012 – Dan Denning

Similar Posts:

More articles from The Daily Reckoning….

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