May 042018
 
 May 4, 2018  Posted by at 8:32 am Finance Tagged with: , , , , , , , , , , , , , ,  


Herri met de Bles c1510-after 1555 Saint Jerome medidating

 

Fed’s QE Unwind Accelerates Sharply (WS)
The Root of It All (Batnick)
Tesla Is A Zombie Company (F.)
With No Letup In Home Prices, The California Exodus Surges (MW)
Demand For US Soybeans Remains Strong Despite China (CNBC)
US Charges VW Ex-CEO With Conspiracy And Fraud (G.)
Mueller’s Questions for Trump Show Folly of Special-Counsel Appointments (NR)
Why We Need To Be Propagandized For Our Own Good (CJ)
Neocons Form Brand New Russia-Bashing ‘Think’ Tank (RI)
UK Pushes To Strengthen Anti-Russia Alliance (G.)
Nobel Prize For Literature Postponed Amid Swedish Academy Turmoil (BBC)
Jacinda Ardern Pledges Shelter For All Homeless People Within Four Weeks (G.)

 

 

As most voices seem convinced QT would be madness.

Fed’s QE Unwind Accelerates Sharply (WS)

The QE Unwind is ramping up toward cruising speed. The Fed’s balance sheet for the week ending May 2, released this afternoon, shows a total drop of $104 billion since the beginning of the QE Unwind in October – to the lowest level since June 11, 2014. During the years and iterations of QE, the Fed acquired $3.4 trillion in Treasury securities and mortgage-backed securities. The mortgages underlying those MBS are guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. The “balance sheet normalization,” as the Fed calls it, was nudged into motion last October. But the pace accelerates every quarter until it reaches up to $50 billion a month in Q4 this year.

This would trim the balance sheet by up to $420 billion this year, and by up to $600 billion in 2019 and every year going forward, until the Fed considers the balance sheet to be adequately “normalized” — or until something big breaks, whichever comes first. [..] The balance of Treasury securities fell by $17.6 billion in April. This is up 60% from March, when $11 billion “rolled off.” Since the beginning of the QE-Unwind, $70 billion in Treasuries “rolled off.” Now at $2,395 billion, the balance of Treasuries has hit the lowest level since June 18, 2014.

[..] Residential MBS are different from regular bonds. Holders receive principal payments on a regular basis as the underlying mortgages are paid down or are paid off. At maturity, the remaining principal is paid off. Over the years, to keep the MBS balance from declining, the New York Fed’s Open Market Operations (OMO) has been continually buying MBS. But settlement of those trades occurs two to three months later. The Fed books the trades on an as-settled basis. The time lag between the trade and settlement causes the large weekly fluctuations on the Fed’s balance sheet. And it also delays when MBS that “rolled off” actually disappear from the balance sheet.

[..] Total assets on the Fed’s balance sheet dropped by $30 billion in April, and by $104 billion since the beginning of the QE-Unwind, to $4,356 billion. This is the lowest since June 11, 2014. Note that total assets are now down by $160 billion from the peak in January 2015:

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“The poor stay poor, the rich get rich. That’s how it goes. Everybody knows.”

The Root of It All (Batnick)

Steven Pinker wrote, “In almost every year from 1992 through 2015, an era in which the rate of violent crime plummeted, a majority of Americans told pollsters that crime was rising. In late 2015, large majorities in eleven developed countries said that “the world is getting worse.” But crime isn’t rising, and the world is objectively getting better. And while life is improving at the macro level, at the micro level, people aren’t feeling so great. So what gives? We tend to expect the worst as a way to insulate ourselves from disappointment. Life is not about good or bad, it’s about better or worse, so if things don’t turn out as bad as we imagine, we’re pleasantly surprised. If you were asked to think about how your life could improve, a few things might come to mind.

But imagine how your life could get worse, and a barrage of negative possibilities fills your brain. The risk and reward of every day life is asymmetrical. This is why being a pessimist feels safe and being an optimist feels reckless. [..] While the news certainly isn’t doing anyone any favors, there are legitimate reasons why people don’t feel like things are getting better. For too many, they aren’t. The chart below shows the change in real income since 1980. This chart is the root of all the negative things facing our society. People in the top 20% saw their income increase by 60%. People in the bottom 20% saw their income rise by just 5% over the same time. As Leonard Cohen said, “The poor stay poor, the rich get rich. That’s how it goes. Everybody knows.”

Real income increased 38% from 1980-2016, or just 0.87% per year, and 70% of that increase went to people in the top 20%. Things are better, especially around the world, but in our country, way too many people are getting left behind. Extreme poverty is collapsing, but relative poverty is exploding, and everything in life is relative. If things don’t feel better than they were two hundred years ago, it’s because people compare themselves to their neighbors, not to their ancestors.

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As simple as that.

Tesla Is A Zombie Company (F.)

Tesla’s quarter was terrible from a financial perspective, as I had expected. The controlling figure I use, operating cash flow (operating loss plus depreciation minus capital expenditures,) was reported as -$836 million in the quarter, which very nearly approximates one quarter of 2017’s full year cash outflow of $3.4 billion. Things are not improving at Tesla from a financial perspective, and the second quarter is likely to be just as bad as the first. For the third consecutive quarter, Tesla posted negative EBITDA (-$180 million) and if this were any other company, there would be an active death watch on the Street. Tesla’s bonds have dropped sharply in today’s trading, now quoted at 87 cents on the dollar.

This is not surprising given that Tesla is not even remotely close to earning enough profit to cover its interest expense, which management estimated would be $160 million in the second quarter. Tesla added $346 million to its now $10 billion debt pile in the quarter, and the management’s weasel-worded projection of “positive net income excluding non-cash stock based compensation in Q3 and Q4” would still leave Tesla short of covering its debt service costs, by my calculations. So, from a financial perspective, Tesla is a zombie company. There is simply no justification for Tesla’s current market capitalization of $47.2 billion, and the market eventually figures these things out. It’s actually been a slow burn for Tesla shares, not a plummet, but that can be just as painful.

On September 12, 2014, Teslashares closed at $279.20 and the Nasdaq Composite closed at 4567.60. As of this writing, Tesla is trading at $279.04 and the Nasdaq is trading at 7011.00. So that’s where the value destruction Musk has wrought is evident. His shares are down slightly in a period in which his peer companies have collectively risen 53.5%.

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Housing bubbles break communities.

With No Letup In Home Prices, The California Exodus Surges (MW)

Over a million more people moved out of California from 2006 to 2016 than moved in, according to a new report, due mainly to the high cost of housing that hits lower-income people the hardest. “A strong economy can also be dysfunctional,” noted the report, a project of Next 10 and Beacon Economics. Housing costs are much higher in California than in other states, yet wages for workers in the lower income brackets aren’t. And the state attracts more highly-educated high-earners who can afford pricey homes. There are many reasons for the housing crunch, but the lack of new construction may be the most significant.

According to the report, from 2008 to 2017, an average of 24.7 new housing permits were filed for every 100 new residents in California. That’s well below the national average of 43.1 permits per 100 people. If this trend persists, the researchers argued, analysts forecast the state will be about 3 million homes short by 2025. California homeowners spend an average of 21.9% of their income on housing costs, the 49th worst in the nation, while renters spend 32.8%, the 48th worst. The median rent statewide in 2016 was $1,375, which is 40.2% higher than the national average. And the median home price was — wait for it — more than double that of the national average.

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Globally, supple has a hard time keeping up with demand. Everybody involved knows this.

Demand For US Soybeans Remains Strong Despite China (CNBC)

Demand for U.S. soybeans remains strong, regardless of worries China could target the crop in retaliation over Trump administration tariffs. China has canceled several shipments of U.S. soybeans in the last month, raising questions over whether the country is taking preemptive action against the U.S. by reducing purchases. But analysts say the reduction is a minor amount and is not that surprising from a seasonal perspective. The “U.S. accounts for 37 percent of total soybean exports throughout the world. Beyond Brazil, there’s really nobody else,” said Rich Nelson, director of research at Allendale, an agricultural market research and trading firm. “Despite the trade concerns, there’s really nobody else. You’re just simply not going to have a massive decline in U.S. soybean exports,” he said.

Chinese cancellations of U.S. soybean orders for the week ended April 26 resulted in a decline of 133,700 metric tons in net sales to China, USDA Foreign Agricultural Service data showed Thursday. But 66,000 metric tons of those soybeans were sent to Vietnam instead, the data showed. Meanwhile, the U.S. sold 82,700 metric tons of soybeans in new sales to Mexico, 68,800 to Taiwan, 60,000 to Argentina and 52,600 to the Netherlands. Although Argentina is the third-largest exporter of soybeans, a severe drought has reduced production by 7 million tons to 40 million, according to USDA estimates. “That just goes to show we’re not dependent on China for soybean exports,” said Michael Stumo, head of Coalition for a Prosperous America, a nonprofit representing the interests of those in manufacturing, agriculture and labor unions.

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Germany doesn’t extradite its citizens.

US Charges VW Ex-CEO With Conspiracy And Fraud (G.)

US authorities have charged Volkswagen’s former chief executive officer Martin Winterkorn with conspiracy and wire fraud in relation to the car company’s efforts to cheat on US diesel emissions tests. Winterkorn, who resigned in 2015 as the scandal was revealed, conspired to defraud the US and violate the Clean Air Act, federal laws designed to control air pollution, according to an indictment unsealed on Thursday in a Michigan federal court. Five other VW executives were also charged in the indictment. He becomes the highest-ranking executive to be charged over “dieselgate” – a scheme where VW used software to trick government emissions testers.

“The indictment unsealed today alleges that Volkswagen’s scheme to cheat its legal requirements went all the way to the top of the company,” said US attorney general Jeff Sessions. “These are serious allegations and we’ll prosecute this case to the full extent of the law.” When news of the scheme broke Winterkorn said he was “stunned that misconduct on such a scale was possible in the Volkswagen Group”. He denied any knowledge of the scandal – which was used to evade pollution limits on nearly 600,000 diesel vehicles. Last December, Oliver Schmidt, a senior Volkswagen executive, was jailed for seven years and fined $400,000 for his part in the scheme. Schmidt, who had returned to Germany, was arrested while on holiday in Florida. VW pleaded guilty as a corporation in March, agreeing to pay a record $4.3bn in fines.

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“If Bob Mueller wants that kind of control over the executive branch, he should run for president. Otherwise, he is an inferior executive official who has been given a limited license — ultimately, by the chief executive — to investigate crime. If he doesn’t have an obvious crime, he has no business inventing one, much less probing his superior’s judgment. He should stand down.”

Mueller’s Questions for Trump Show Folly of Special-Counsel Appointments (NR)

I am assuming the authenticity of the questions that Special Counsel Robert Mueller reportedly wants to ask President Trump. The questions indicate that, after a year of his own investigation and two years of FBI investigation, the prosecutor lacks evidence of a crime. Yet he seeks to probe the chief executive’s motives and thought processes regarding exercises of presidential power that were lawful, regardless of one’s view of their wisdom. If Bob Mueller wants that kind of control over the executive branch, he should run for president. Otherwise, he is an inferior executive official who has been given a limited license — ultimately, by the chief executive — to investigate crime. If he doesn’t have an obvious crime, he has no business inventing one, much less probing his superior’s judgment. He should stand down.

The questions, reported by the New York Times, underscore that the special counsel is a pernicious institution. Trump should decline the interview. More to the point, the Justice Department should not permit Mueller to seek to interrogate the president on so paltry and presumptuous a showing.

When should a president be subject to criminal investigation? It is a bedrock principle that no one is above the law. The Framers made clear that this includes the president. But, like everything else, bedrock principles do not exist in a vacuum. They vie with other principles. Two competing considerations are especially significant here. First, our law-enforcement system is based on prosecutorial discretion. Under this principle, the desirability of prosecuting even a palpable violation of law must be balanced against other societal needs and desires. We trust prosecutors to perform this cost-benefit analysis with modesty about their mission and sensitivity to the disruption their investigations cause.

Second, the president is the most essential official in the world’s most consequential government. That government’s effectiveness is necessarily compromised if the president is under the cloud of an investigation. Not only are the president’s personal credibility and capability diminished; such an investigation discourages talented people from serving in an administration, further undermining good governance. The country is inexorably harmed because a suspect administration’s capacity to execute the laws and pursue the interests of the United States is undermined.

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Caitlin Johnstone on the Atlantic Council.

Why We Need To Be Propagandized For Our Own Good (CJ)

I sometimes try to get establishment loyalists to explain to me exactly why we’re all meant to be terrified of this “Russian propaganda” thing they keep carrying on about. What is the threat, specifically? That it makes the public less willing to go to war with Russia and its allies? That it makes us less trusting of lying, torturing, coup-staging intelligence agencies? Does accidentally catching a glimpse of that green RT logo turn you to stone like Medusa, or melt your face like in Raiders of the Lost Ark? “Well, it makes us lose trust in our institutions,” is the most common reply. Okay. So? Where’s the threat there? We know for a fact that we’ve been lied to by those institutions. Iraq isn’t just something we imagined. We should be skeptical of claims made by western governments, intelligence agencies and mass media. How specifically is that skepticism dangerous?

Trying to get answers to such questions from rank-and-file empire loyalists is like pulling teeth, and they are equally lacking in the mass media who are constantly sounding the alarm about Russian propaganda. All I see are stories about Russia funding environmentalists (the horror!), giving a voice to civil rights activists (oh noes!), and retweeting articles supportive of Jeremy Corbyn (think of the children!). At its very most dramatic, this horrifying, dangerous epidemic of Russian propaganda is telling westerners to be skeptical of what they’re being told about the Skripal poisoning and the alleged Douma gas attack, both of which do happen to have some very significant causes for skepticism.

When you try to get down to the brass tacks of the actual argument being made and demand specific details about the specific threats we’re meant to be worried about, there aren’t any to be found. Nobody’s been able to tell me what specifically is so dangerous about westerners being exposed to the Russian side of international debates, or of Russians giving a platform to one or both sides of an American domestic debate. Even if every single one of the allegations about Russian bots and disinformation are true (and they aren’t), where is the actual clear and present danger? No one can say. No one, that is, except the Atlantic Council.

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The entire MSM can’t get the job done?!

Neocons Form Brand New Russia-Bashing ‘Think’ Tank (RI)

A group of neocon heartthrobs have banded together with an eclectic array of Russiagaters to form a visionary organization committed to protecting Western democracy. You can also pre-order their book, according to their website. Chaired by pompous chess wizard turned Kremlinologist Garry Kasparov, the brand-new Renew Democracy Initiative (RDI) is the latest three-letter-initialism non-profit devoted to “the defense of democratic freedom and prosperity.” The trailblazing think tank has already sent shockwaves through Washington, DC and every European capital. Celebrated war cheerleader Max Boot, who serves on RDI’s board of directors, announced the creation of this highly original organization in a Washington Post op-ed.

Interestingly, the unveiling started with a laundry list of 10 other groups that are already “protesting Trump and championing democracy.” So why does the world need RDI, then? Because RDI is different – some might even say “special.” Unlike the dozens of other well-financed bastions of status-quo thinking, RDI aims to “unite both the center-left and center-right” by promoting “liberty, democracy and sanity in an age of discord.” And where will this much-needed sanity come from? From RDI’s all-star team of important intellectuals and free thinkers, of course – some of whom just happen to be really tight with the other 10 groups mentioned in Boot’s WaPo piece. Dear Mr. Boot: does fighting Putin with the Committee to Investigate Russia allow enough spare time to fight Putin with the Renew Democracy Initiative? Curious minds want to know.

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It’s contagious.

UK Pushes To Strengthen Anti-Russia Alliance (G.)

The UK will use a series of international summits this year to call for a comprehensive strategy to combat Russian disinformation and urge a rethink over traditional diplomatic dialogue with Moscow, following the Kremlin’s aggressive campaign of denials over the use of chemical weapons in the UK and Syria. British diplomats plan to use four major summits this year – the G7, the G20, Nato and the European Union – to try to deepen the alliance against Russia hastily built by the Foreign Office after the poisoning of the former Russian double agent Sergei Skripal in Salisbury in March. “The foreign secretary regards Russia’s response to Douma and Salisbury as a turning point and thinks there is international support to do more,” a Whitehall official said.

“The areas the UK are most likely to pursue are countering Russian disinformation and finding a mechanism to enforce accountability for the use of chemical weapons.” Former Foreign Office officials admit that an institutional reluctance to call out Russia once permeated British diplomatic thinking, but say that after the poisoning of Skripal and his daughter, Yulia, that attitude is evaporating. A cross-party alliance in parliament has developed which sees the question of Russian corruption no longer through the prism of finance, but instead as a security and foreign policy threat, requiring fresh sanctions even if this causes short-term economic damage to the UK.

[..] For some old hands in the Foreign Office with deep experience of Russia, however, demonising Russia is a disastrous strategy. Sir Anthony Brenton, the British ambassador to Russia between 2004 and 2008, insists a fruitful common agenda with Moscow on issues such as nuclear disarmament, Islamist terrorism and cyberwarfare is still possible. “What on earth was her majesty’s foreign secretary doing comparing the Russian World Cup with Hitler’s 1936 Olympics?” he asked. “If you are looking for a single statement really calculated to infuriate the Russians there it is, or indeed the defence secretary telling Russia to shut up. Elementary diplomacy goes a long way with the Russians and we need to get back to that.

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Still feels like a weird story.

Nobel Prize For Literature Postponed Amid Swedish Academy Turmoil (BBC)

The organisation that decides the Nobel Prize for Literature has said it will not announce an award this year, after it was engulfed in a scandal over sexual assault allegations. The Swedish Academy has been in crisis over its handling of allegations against the husband of a member. She has since quit, as have the academy’s head and four other members. The academy says it will now announce the 2018 winner along with the 2019 winner next year.

The scandal is the biggest to hit the prize since it was first awarded in 1901. The academy said the decision had been made due to a lack of public confidence. Some academy members had argued that the prize should proceed to protect the tradition, but others said the institution was in no state to present the award. Apart from six years during the world wars, there has been only one year when the prize was not awarded. No worthy winner was found in 1935.

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You go girl. The only right thing to do.

Jacinda Ardern Pledges Shelter For All Homeless People Within Four Weeks (G.)

The New Zealand government has promised to get the country’s homeless population off the streets and into shelter in time for winter. In a joint announcement on Friday, housing minister Phil Twyford and prime minister Jacinda Ardern announced a NZ$100m emergency housing package to tackle the ballooning problem. An estimated 40,000 people live in cars, tents and garages amid a chronic housing shortage in the nation of 4.7 million people. “We’re pulling out all the stops to support people in need and urgently increase housing supply this winter,” said housing minister Phil Twyford. “Our government will make sure everyone is helped to find warm, dry housing this winter.”

With winter starting on 1 June in the southern hemisphere, less than four weeks away, the government has put out an urgent call for anyone with additional accommodation that may be suitable to house homeless people. Seasonal worker accommodation such as shearers quarters, private rental properties, motor camps and maraes (Maori meeting houses) would all be considered. New Zealand has the highest rates of homelessness in the OECD, with more than 40,000 people living on the streets, in emergency housing or in substandard conditions. Per capita New Zealand’s homeless population is almost twice as bad as Australia, which is placed third on the list. More than half of New Zealand’s homeless population live in Auckland but it is also growing in smaller cities such as Rotorua, Tauranga, Queenstown and Wellington.

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Jul 252017
 
 July 25, 2017  Posted by at 8:34 am Finance Tagged with: , , , , , , , , , ,  Comments Off on Debt Rattle July 25 2017


Vincent van Gogh Sunflowers 1887

 

The Next Financial Crisis Is Parked Out Front (G.)
Bank of England Warns of ‘Spiral Of Complacency’ on Household Debt (G.)
How Big Of A Deleveraging Are We Talking About? (Roberts)
IMF: US Looks Weaker, Rest Of The World Picks Up Economic Slack (CNBC)
Bloated London Property Prices Fuel Exodus (G.)
The Foreclosure ‘Pig’ Moves Through The Housing-Crisis ‘Python’ (MW)
Australian Housing Market At Risk Of Crash – UBS Research (CNBC)
It’s Time To Rethink Monetary Policy (Rochon)
Scandals Threaten Japanese Prime Minister Shinzo Abe’s Grip On Power (G.)
Brussels To Act ‘Within Days’ If US Sanctions Hurt EU Trade With Russia (RT)
EU Divided On How To Answer New US Sanctions Against Russia (R.)
US ‘May Send Arms’ To Ukraine, Says New Envoy (BBC)
Tsipras and Varoufakis Go Public With Spat (K.)
Alexis Tsipras’s Mixed Messages Over Appointing Me As Finance Minister (YV)
Greece Plans Return To Bond Market As Athens Sees End To Austerity (G.)
Greek Spending Cuts Prettify Budget Data (K.)

 

 

Can’t let a headline like that go to waste. More on the topic in the 2nd article.

The Next Financial Crisis Is Parked Out Front (G.)

Good morning – Warren Murray here with your Tuesday briefing. Britain’s rising level of personal debt has prompted a warning from the Bank of England about dire consequences for lenders and the economy. There are “classic signs” that the risks involved in car finance, credit cards and personal loans are being underestimated as financial institutions make hay while the sun shines, says Alex Brazier, the Bank’s director for financial stability. The economy defied expectations when it grew strongly in the six months after the EU referendum. But that was partly fuelled by consumers racking up their credit cards and loans, as lenders offered easier terms and longer interest-free deals. Much higher levels of borrowing compared with income are now being allowed, at a time when household incomes have only marginally risen.

As the anniversary of the global financial meltdown approaches, Brazier has suggested current low rates of default on personal credit may have again caused banks to become blinkered to the potential for disaster. Back in 2007, “banks – and their regulators – were blind to the basic fact that more debt meant greater risk of loss”. “Lenders have not entered, but they may be dicing with, the spiral of complacency. The spiral continues, and borrowers rack up more and more debt. “[In 2007] complacency gave way to crisis. Companies and households were unable to refinance their debts. The result was economic disaster.”

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The BoE creates huge bubbles, and afterwards starts warning about them. Typical central bank behavior.

Bank of England Warns of ‘Spiral Of Complacency’ on Household Debt (G.)

The Bank of England has told banks, credit card companies and car loan providers that they risk fresh action against reckless lending as it warned of a looming “spiral of complacency” about mounting consumer debt. In its toughest warning yet about the possibility of a rerun of the financial crisis that devastated the economy 10 years ago, Threadneedle Street admitted it was alarmed about the increase in the amount of money being borrowed on easy terms over the past year. “Household debt – like most things that are good in moderation – can be dangerous in excess”, Alex Brazier, the Bank director for financial stability, said in a speech in Liverpool. “Dangerous to borrowers, lenders and, most importantly from our perspective, everyone else in the economy.”

Brazier’s said there were “classic signs” of lenders thinking the risks were lower following a prolonged period of good economic performance and low losses on loans. The first signs of the Bank’s anxiety about consumer debt came from its governor, Mark Carney, a month ago, but Brazier’s comments marked a ratcheting up of Threadneedle Street’s rhetoric. “Lenders have been the lucky beneficiaries of the benign way the economy has evolved. In expanding the supply of credit, they may be placing undue weight on the recent performance of credit cards and loans in benign conditions,” Brazier said. The willingness of consumers to take on more debt to fund their spending helped the economy grow strongly in the six months after the EU referendum, a period when the Bank expected growth to fall sharply.

Over the past year, Brazier said, household incomes had grown by just 1.5% but outstanding car loans, credit card balances and personal loans had risen by 10%. He added that terms and conditions on credit cards and personal loans had become easier. The average advertised length of 0% credit card balance transfers had doubled to close to 30 months, while advertised interest rates on £10,000 personal loans had fallen from 8% to around 3.8%, even though official interest rates had barely changed.

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More great work by Lance. if these graphs and numbers don’t scare you, look again.

How Big Of A Deleveraging Are We Talking About? (Roberts)

Debt, if used for productive investments, can be a solution to stimulating economic growth in the short-term. However, in the U.S., debt has been squandered on increases in social welfare programs and debt service which has an effective negative return on investment. Therefore, the larger the balance of debt becomes, the more economically destructive it is by diverting an ever growing amount of dollars away from productive investments to service payments. The relevance of debt growth versus economic growth is all too evident as shown below. Since 1980, the overall increase in debt has surged to levels that currently usurp the entirety of economic growth. With economic growth rates now at the lowest levels on record, the growth in debt continues to divert more tax dollars away from productive investments into the service of debt and social welfare.

It now requires nearly $3.00 of debt to create $1 of economic growth.

In fact, the economic deficit has never been greater. For the 30-year period from 1952 to 1982, the economic surplus fostered a rising economic growth rate which averaged roughly 8% during that period. Today, with the economy growing at an average rate of just 2%, the economic deficit has never been greater.

But again, it isn’t just Federal debt that is the problem. It is all debt. As discussed last week, when it comes to households, which are responsible for roughly 2/3rds of economic growth through personal consumption expenditures, debt was used to sustain a standard of living well beyond what income and wage growth could support. This worked out as long as the ability to leverage indebtedness was an option. The problem is that eventually, the debt reaches a level where the level of debt service erodes the ability to consume at levels great enough to foster stronger economic growth. In reality, the economic growth of the U.S. has been declining rapidly over the past 35 years supported only by a massive push into deficit spending by households.

[..]The massive indulgence in debt, or a “credit induced boom”, has now begun to reach its inevitable conclusion. The debt driven expansion, which leads to artificially stimulated borrowing, seeks out diminishing investment opportunities. Ultimately these diminished investment opportunities lead to widespread malinvestments. Not surprisingly, we clearly saw it play out in “real-time” in 2005-2007 in everything from sub-prime mortgages to derivative instruments. Today, we see it again in mortgages, subprime auto loans, student loan debt and debt driven stock buybacks and acquisitions.

When credit creation can no longer be sustained the markets will begin to “clear” the excesses. It is only then, and must be allowed to happen, can resources be reallocated back towards more efficient uses. This is why all the efforts of Keynesian policies to stimulate growth in the economy have ultimately failed. Those fiscal and monetary policies, from TARP and QE to tax cuts, only delay the clearing process. Ultimately, that delay only potentially worsens the inevitable clearing process. That clearing process is going to be very substantial. With the economy currently requiring roughly $3 of debt to create $1 of real, inflation-adjusted, economic growth, a reversion to a structurally manageable level of debt would involve a nearly $35 Trillion reduction of total credit market debt from current levels.

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Difference: BOJ and ECB still buy trilions in ‘assets’.

IMF: US Looks Weaker, Rest Of The World Picks Up Economic Slack (CNBC)

Despite cutting the economic growth outlook for the U.S. and U.K., the IMF kept its global growth forecast unchanged on expectations the euro zone and Japanese growth would accelerate. In the July update of its World Economic Outlook, the IMF forecast global economic growth of 3.5% for 2017 and 3.6% for 2018, unchanged from its April outlook. That was despite earlier cutting its U.S. growth projection to 2.1% from 2.3% for 2017 and to 2.1% from 2.5% for 2018, citing both weak growth in the first quarter of this year as well as the assumption that fiscal policy will be less expansionary than previously expected. A weaker-than-expected first quarter also spurred the IMF to cut its forecast for U.K. growth for this year to 1.7% from 2.0%, while leaving its 2018 forecast at 1.5%.

But slowdowns in the U.S. and U.K. were expected to be offset by increased forecasts for many euro area countries, including Germany, France, Italy and Spain, where first quarter growth largely beat expectations, the IMF said. “This, together with positive growth revisions for the last quarter of 2016 and high-frequency indicators for the second quarter of 2017, indicate stronger momentum in domestic demand than previously anticipated,” the IMF said in its release. It raised its euro-area growth forecast for 2017 to 1.9% from 1.7%. For 2018, it increased its forecast to 1.7% from 1.6%.

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The Guardian has the guts to claim that people don’t move out because they don’t have the money to stay, but because they want to get on the f*cking property ladder.

Bloated London Property Prices Fuel Exodus (G.)

In the Kent seaside town of Whitstable, long-term residents call them DFLs – people who have moved “down from London”, sometimes for the lifestyle but more often for cheaper housing. The number of people fleeing the capital to live elsewhere has hit a five-year high. In the year to June 2016, net outward migration from London reached 93,300 people – more than 80% higher than five years earlier, according to analysis of official statistics. A common theme among the leavers’ destinations is significantly cheaper housing, according to the estate agent Savills, which analysed figures from the Office for National Statistics and the Land Registry. Cambridge, Canterbury, Dartford and Bristol are reportedly among the most popular escape routes for people who have grown tired of London and its swollen property prices.

The most likely destination for people aged over 25 moving from Islington is St Albans in Hertfordshire, where the average home is £173,000 cheaper. People moving from Ealing to Slough – the most popular move from the west London borough – stand to save on average £241,000. Among all homeowners leaving London, the average house price was £580,000 while the average in the areas they moved to was £333,000. The exodus is not just of homeowners, but of renters too. Rents in London have soared by a third in the last decade, compared to 18% in the south-west, 13% in the West Midlands and 11% in the north-west of England.

The only age group that has a positive net migration figure in the capital is those in their twenties, the research found. Everyone else, from teens to pensioners, is tending to get out. Since 2009, the trend has been steadily increasing among people in their thirties with 15,000 more people in that age bracket leaving every year than at the end of the last decade – a 27% rise. The phenomenon is being driven by a widespread desire to “trade up the housing ladder”, something that is all too often impossible in London according to Lucian Cook, Savill’s head of residential research. “Five years ago people would have been reluctant [to move out] because the economy wasn’t as strong and some owners didn’t want to miss out on house price growth [in London],” he said.

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Pretending it’s the last of the pig. We’ll see about that.

The Foreclosure ‘Pig’ Moves Through The Housing-Crisis ‘Python’ (MW)

As the effects of the housing crisis further recede, markers of distress are declining, with one notable exception: Among the batches of severely delinquent mortgages bought by institutional investors, foreclosures are on the rise. The trend is a reminder of the reasons many community advocates resisted allowing institutional investors to buy delinquent mortgages in government auctions that began in 2010. Wall Street, those advocates said, shouldn’t be rewarded for its role in creating the housing crisis with the chance to buy for pennies on the dollar the very assets whose values it dented. The government auctions promised a risk-sharing solution that would benefit nearly everyone: Homeowners whose mortgages had been bought dirt-cheap could get loan modifications, investors would get profitable assets, and communities would see tax revenues restored and neighborhoods revitalized.

But that win-win-win scenario may bring little relief to the most distressed among those troubled assets. A new Attom Data analysis for MarketWatch shows increasing foreclosures in the mortgages auctioned by the government. A subsidiary of private-equity firm Lone Star Investments, for example, has foreclosed on nearly 2,000 homeowners this year, through early July, and has increased foreclosures every year since 2013. And a Goldman Sachs subsidiary called MTGLQ, which has more than doubled foreclosures each year from 2014 to 2016, may do the same again this year, based on early 2017 data. Those figures stand in stark contrast to the housing market overall, where foreclosures fell 22% in the second quarter, touching an 11-year low of just over 220,000.

The institutional-investor foreclosure figures are a small fraction of the total, noted Daren Blomquist, Attom’s senior vice president of communications. And they don’t surprise investors who intentionally snatch up the most distressed mortgages available because their elevated risk promises higher yield. Attom Data does show an uptick in foreclosures by other lenders, though not all participated in the government auctions. But they’re a reminder that a decade after the housing downturn began, the pockets of foreclosures that still pop up represent the worst of the worst, prompting even those questioning the program to agree that some foreclosures were inevitable, no matter who owned the mortgages. Analysts call the current crop of foreclosures “the last of the pig moving through the python.”

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All bubble countries now face the issue. There’s no way out. So they’ll deny their bubble for a while longer.

Australian Housing Market At Risk Of Crash – UBS Research (CNBC)

The Australian housing market has peaked and could crash if the country’s central bank raises rates by too much or too quickly according to researchers at the Swiss bank, UBS. Property in Australia has boomed and the most recent government data marked growth in residential property prices at 10.2% year on year for the 2017 March quarter. In a note Monday, UBS Economist George Tharenou said any rash interest rate action from the Reserve Bank of Australia (RBA) could trigger a crash. “We still see rates on hold in the coming year, amid macroprudential tightening on credit growth and interest only loans. “Hence we still see a correction, but not a collapse, but if the RBA hikes too early or too much (as flagged by its hawkish minutes), it risks triggering a crash,” Tharenou warned.

Housing starts fell 19% in the first quarter of the year and May’s mortgage approvals also slid 20%. After a multi-year boom, the cost of an average home in the country now sits at 669,700 Australian dollars ($532,000) but Tharenou said price growth is certain to slow. “Despite weaker activity, house prices just keep booming with still strong growth of 10% y/y in June. However, this is unsustainably 4-5 times faster than income. “Looking ahead, we still see price growth slowing to 7% y/y in 2017 and 0-3% in 2018, amid record supply & poor affordability,” the economist added.

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Raising rates into a gigantesque bubble. No problem.

It’s Time To Rethink Monetary Policy (Rochon)

July 12 marks the date the Bank of Canada ignored common sense and increased its rate for the first time in seven years. Economists are largely divided on whether this was a good move, but in my opinion this was an ill-informed decision, largely based on the usually strong first quarter data, which may prove unsustainable in the longer term. In turn, it raises important questions about the conduct of monetary policy and the need to rethink the role and purpose of central bank policy. For the record, I don’t think there is much to fear from a single increase to 0.75% from 0.50, though it will have an immediate impact on mortgage rates — some Canadians will pay more for their homes. However, it is the prospect of what that move represents that sends chills down this economist’s spine.

As we know all too well, central banks never raise rates once or twice, but usually do so several times. Indeed, the consensus among economists is that there will be at least two more raises before the end of 2018, bringing the bank rate to 1.25%. This is still low by historical standards, but the raises begin to add up. I expect many more rate hikes through 2019 and 2020. You see, the Bank of Canada believes the so-called natural rate is 3%, which means we could possibly see nine more interest rate increases. Imagine the damage that will do. Yet, according to their own model, this rate is the “neutral” or “natural” rate and should have no far reaching impact. Try telling that to Canadians who have consumer debt and a mortgage. Clearly, there is nothing “neutral” about these rate increases. This alone is a reason to rethink monetary policy.

Second, the Bank of Canada targets inflation, and has been officially since 1991, a fact it reminds us of all the time. All other objectives, including economic growth and unemployment, or even household debt and income inequality, are far behind the principal objective of trying to keep the inflation rate on target. There is much to say about this, including whether interest rates and monetary policy in general are the best tool to deliver on the inflation crusade. Even if we accept this, inflation is currently at a near two-decade low. In other words, where’s the inflation beef? Inflation does not represent a current threat, and there are no inflationary pressures in the economy, which raises the question: Why raise rates?

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With Abenomics dead, so is Abe.

Scandals Threaten Japanese Prime Minister Shinzo Abe’s Grip On Power (G.)

Shinzo Abe is fighting for his future as Japan’s prime minister as scandals drag his government’s popularity close to what political observers describe as “death zone” levels. Apart from clouding Abe’s hopes of winning another term as leader of the Liberal Democratic Party (LDP) when a vote is held next year, the polling slump also undermines his long-running push to revise Japan’s war-renouncing constitution. Abe, who returned to the prime ministership four and a half years ago, was long seen as a steady hand whose position appeared unassailable – so much so that the LDP changed its rules to allow Abe the freedom to seek a third consecutive three-year term at the helm of the party. “He is no longer invincible and the reason why he is no longer invincible is he served his personal friends not the party,” said Michael Thomas Cucek, an adjunct professor at Temple University Japan.

Abe’s standing has been damaged by allegations of favours for two school operators who have links to him. The first scandal centred on a cut-price land deal between the finance ministry and a nationalist school group known as Moritomo Gakuen. The second related to the approval of a veterinary department of a private university headed by his friend, Kotaro Kake. Abe has repeatedly denied personal involvement, but polls showed voters doubted his explanations, especially after leaked education ministry documents mentioned the involvement of “a top-level official of the prime minister’s office” in the vet school story. Abe attempted to show humility in a parliamentary hearing this week by acknowledging it was “natural for the public to sceptically view the issue” because it involved his friend. “I lacked the perspective,” he said. Experts doubt that Abe’s contrition, combined with a planned cabinet reshuffle next week, will do much to reverse his sagging fortunes.

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The limits of the anti-Russia craze.

Brussels To Act ‘Within Days’ If US Sanctions Hurt EU Trade With Russia (RT)

The EU should act “within days” if new sanctions the US plans to impose on Russia prove to be damaging to Europe’s trade ties with Moscow, an internal memo seen by the media says. Retaliatory measures may include limiting US jurisdiction over EU companies. An internal memo seen by the Financial Times and Politico has emerged amid mounting opposition to a US bill seeking to hit Russia with a new round of sanctions. The bill, if signed into law, will also give US lawmakers the power to veto any attempt by the president to lift the sanctions. The document reportedly said European Commission chief Jean-Claude Juncker was particularly concerned the sanctions would neglect the interests of European companies. Juncker said Brussels “should stand ready to act within days” if sanctions on Russia are “adopted without EU concerns being taken into account,” according to the FT.

The EU memo also warns that “the measures could impact a potentially large number of European companies doing legitimate business under EU measures with Russian entities in the railways, financial, shipping or mining sectors, among others.” Restrictions against Russia come as part of the Countering Iran’s Destabilizing Activities Act, targeting not only Tehran, but also North Korea. Initially passed by the Senate last month, the measures seek to impose new economic measures on major sectors of the Russian economy. The draft legislation would also introduce individual sanctions for investing in Gazprom’s Nord Stream 2 gas pipeline project, outlining steps to hamper construction of the pipeline and imposing sanctions on European companies which contribute to the project.

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So EU vs US, and EU vs EU. The problem seems to be that US companies could profit from the sanctions, as European ones suffer.

EU Divided On How To Answer New US Sanctions Against Russia (R.)

European Commission preparations to retaliate against proposed new U.S. sanctions on Russia that could affect European firms are likely to face resistance within a bloc divided on how to deal with Moscow, diplomats, officials and experts say. A bill agreed by U.S. Senate and House leaders foresees fines for companies aiding Russia to build energy export pipelines. EU firms involved in Nord Stream 2, a 9.5 billion euro ($11.1 billion) project to carry Russian gas across the Baltic, are likely to be affected. Both the European Union and the United States imposed broad economic sanctions on Russia’s financial, defense and energy sectors in response to Moscow’s annexation of Crimea from Ukraine in 2014 and its direct support for separatists in eastern Ukraine. But northern EU states in particular have sought to shield the supplies of Russian gas that they rely on.

Markus Beyrer, director of the EU’s main business lobby, Business Europe, urged Washington to “avoid unilateral actions that would mainly hit the EU, its citizens and its companies”. The Commission, the EU executive, will discuss next steps on Wednesday, a day after the U.S. House of Representatives votes on the legislation, knowing that the U.S. move threatens to reopen divisions over the bloc’s own Russia sanctions. Among the European companies involved in Nord Stream 2 are German oil and gas group Wintershall, German energy trading firm Uniper, Anglo-Dutch Royal Dutch Shell, Austria’s OMV and France’s Engie. The Commission could demand a formal U.S. promise to exclude EU energy companies; use EU laws to block U.S. measures against European entities; or impose outright bans on doing business with certain U.S. companies, an EU official said.

But if no such promise is offered, punitive sanctions such as limiting the access of U.S. companies to EU banks require unanimity from the 28 EU member states. Ex-Soviet states such as Poland and the Baltic states are unlikely to vote for retaliation to protect a project they have resisted because it would increase EU dependence on Russian gas. An EU official said most member states saw Nord Stream 2 as “contrary or at least not fully in line with European objectives” of reducing reliance on Russian energy. Britain, one of the United States’ closest allies, is also wary of challenging the U.S. Congress as it prepares to leave the EU and seeks a trade deal with Washington. In fact, the EU’s chief executive, Jean-Claude Juncker, has few tools that do not require unanimous support from the bloc’s 28 governments.

The Commission could act alone to file a complaint at the World Trade Organisation. But imposing punitive tariffs on U.S. goods would require detailed proof to be gathered that European companies were being unfairly disadvantaged — a process that would take many months. Diplomatic protests such as cutting EU official visits to Washington are unlikely to have much effect, since requests by EU commissioners for meetings with members of Trump’s administration have gone unanswered, EU aides say.

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Let’s hope they don’t try.

US ‘May Send Arms’ To Ukraine, Says New Envoy (BBC)

The new US special representative for Ukraine says Washington is actively reviewing whether to send weapons to help those fighting against Russian-backed rebels. Kurt Volker told the BBC that arming Ukrainian government forces could change Moscow’s approach. He said he did not think the move would be provocative. Last week, the US State Department urged both sides to observe the fragile ceasefire in eastern Ukraine. “Defensive weapons, ones that would allow Ukraine to defend itself, and to take out tanks for example, would actually to help” to stop Russia threatening Ukraine, Mr Volker said in a BBC interview.

“I’m not again predicting where we go on this, that’s a matter for further discussion and decision, but I think that argument that it would be provocative to Russia or emboldening of Ukraine is just getting it backwards,” he added. He said success in establishing peace in eastern Ukraine would require what he called a new strategic dialogue with Russia.

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Undoubtedly not the last we hear of this.

Tsipras and Varoufakis Go Public With Spat (K.)

The coalition on Monday rejected calls for an investigation to be launched into the first months of the government’s time in power, as a dispute between Prime Minister Alexis Tsipras and ex-finance minister Yannis Varoufakis over that period in 2015 became public. “The evaluation of this period has to be conducted with political criteria, not myth-making or gossip,” said government spokesman Dimitris Tzanakopoulos, who accused Varoufakis of trying to advertise his recent book via the “systemic media” he once attacked. Tzanakopoulos’s comments came after Tsipras gave an interview to The Guardian in which he admitted making “big mistakes” in the past and suggested that Varoufakis’s plan for a parallel payment system could not be considered seriously.

“Yanis is trying to write history in a different way,” said Tsipras. “When we got to the point of reading what he presented as his plan B it was so vague, it wasn’t worth the trouble of even talking about. It was simply weak and ineffective.” The former minister immediately responded to the premier’s comments by claiming they displayed a “deep incoherence,” as Varoufakis claims that he had made Tsipras aware of the plan before he came to office yet the SYRIZA leader still chose to appoint him to the cabinet. “Either I was the right choice to spearhead the ‘collision’ with the troika of Greece’s lenders because my plans were convincing, or my plans were not convincing and, thus, I was the wrong choice as his first finance minister,” he wrote in a letter to The Guardian.

New Democracy called for judicial and parliamentary investigations into the claims made by Varoufakis, as well as by former energy minister Panayiotis Lafazanis. The latter claimed in a radio interview on Saturday that he had secured an advance payment from Russia for a gas pipeline to be used to held fund Greece if it left the euro. “Varoufakis and Lafazanis described with clarity the SYRIZA leadership’s plans to take Greece out of the eurozone,” said the conservatives in a statement. “If these plans were seen through to the end, the country would have found itself in a dramatic situation like Venezuela, with unforeseeable social consequences.”

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Makes sense.

Alexis Tsipras’s Mixed Messages Over Appointing Me As Finance Minister (YV)

[..] the Greek prime minister, Alexis Tsipras, having admitted to “big mistakes”, was asked if appointing me as his first finance minister was one of them. According to the interviewer, Mr Tsipras said “Varoufakis … was the right choice for an initial strategy of ‘collision politics’, but he dismisses the plan he presented had Greece been forced to make the dramatic move to a new currency as ‘so vague, it wasn’t worth talking about’”. Given that I presented my plans to Mr Tsipras for deterring the troika’s aggression and responding to a potential impasse (and any move by the troika to evict Greece from the eurozone) before we won the election of January 2015, and I was chosen by him as finance minister (one presumes) on the basis of their merit, his answer reflects a deep incoherence.

Either I was the right choice to spearhead the “collision” with the troika of Greece’s lenders because my plans were convincing, or my plans were not convincing and, thus, I was the wrong choice as his first finance minister. Arguing, as Mr Tsipras does, that I was both the right choice for the initial confrontation and that my plan B was so vague it wasn’t worth the trouble of even talking about is disingenuous, albeit insightful, for it reveals the impossibility of maintaining a radical critique of his predecessors while adopting the Tina (There Is No Alternative) doctrine.

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A brand new line of lipstick for farm animals.

Greece Plans Return To Bond Market As Athens Sees End To Austerity (G.)

Athens has outlined plans to return to the financial markets for the first time since 2014, with a plan to sell new five-year bonds to investors. Existing Greek five-year bonds were trading at 3.6% on Monday morning compared with 63% at the height of the Greek financial crisis in 2012 when the finance ministry was unable to pay public sector wages and there were riots in the streets. Following the announcement that Athens would be returning to the market, the yield fell to 3.4%. The Greek finance ministry has set a goal of a 4.2% interest rate on the new bond. But banking sources believe that level will be hard to achieve and say an interest rate of between 4.3% to 4.5% is much more likely. Government sources say valuation will take place on Tuesday 25 July.

The market test is crucial to Greece for not only judging sentiment of the market, from which it has been essentially exiled since the start of its economic crisis, but also for weaning itself off borrowed bailout funds. Speaking after the bond issue was announced, the EU’s economy commissioner, Pierre Moscovici, described the public spending cuts imposed on Greece since it almost went bust as “too tough” but “necessary”, adding there was now “light at the end of austerity”. Reuters reported that Greece had employed six banks – BNP Paribas, Bank of America Merrill Lynch, Citigroup, Deutsche Bank, Goldman Sachs and HSBC – to act as joint lead managers for a five-year euro bond “subject to market conditions”. Greek ministers will provide more details on Monday afternoon about how much it hopes to borrow, and on what terms.

If the issue is successful, it could help Greece, which is still coping with a debt to GDP ratio of 180%, to exit its long cycle of austerity and rescue packages. Late on Friday, S&P upgraded its outlook on Greek government debt from stable to “positive”, thanks partly to renewed hopes that the country’s creditors could finally grant it debt relief.

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And here’s how it’s done.

Greek Spending Cuts Prettify Budget Data (K.)

Delays in the funding of hospitals, social spending cuts and low expenditure on the Public Investments Program served to prettify the picture of the state budget over the first half of the year, producing a primary surplus of 1.93 billion euros, Finance Ministry figures showed on Monday. At the same time budget revenues posted a marginal increase over the target the ministry had set for the January-June period. However, the big challenge for the government starts at the end of this month with the payment of the first tranche of income tax by taxpayers, followed later on by the Single Property Tax (ENFIA) and road tax at the end of the year.

In total the state will have to collect 33 billion euros by the end of the year, which is considerably higher than in the second half of 2016. According to the H1 budget data, the primary surplus amounted to 1.936 billion euros, against a primary surplus of 1.632 billion in the same period last year, and a target for 431 million for the year to end-June. Expenditure missed its target by 1.15 billion euros, amounting to 22.86 billion in the first half. Compared to last year it was down 757 million euros. Hospital funding missed its target by 265 million.

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