Jun 012014
 June 1, 2014  Posted by at 1:58 pm Finance Tagged with: , ,  18 Responses »

Library of Congress Maya Angelou, Caribbean Calypso Festival, New York 1957

In a recent article, the Wall Street Journal uncovers a big problem in the US housing market, albeit, curiously, without necessarily identifying it as a problem. It would be nice if Americans could trust their once most trusted media to give them the best possible covering of a topic, but the Wall Street Journal apparently prefers to pick the side of, well, Wall Street. The problem not presented as one is the resurgence of American homes as ATMs, of borrowing against a property’s perceived value through home equity loans or home equity lines of credit (Helocs).

The article claims that lenders are being “conservative” since they’re merely handing out 85% LTV instead of the 100% ones they once did, but how conservative that is really depends on the future expectations of the values. And that’s one area where very little is conservative anymore. If lenders can only convince borrowers that the housing market has recovered, they can do their favorite business again: hook mortgagees into major debt increases. That shouldn’t be too much of an issue if only they can show their clients lines like this:

According to the Federal Reserve, net household equity stood at about $10 trillion in the fourth quarter of last year, up 26% from the prior year.

When I first read that, I had to check if they weren’t perhaps referring to the city of London, but sure enough, this is supposed to be about American housing. If it were anywhere near the truth, I don’t understand why Federal Reserve chief Janet Yellen was so cautious about housing prospects a few weeks ago, saying problems “could prove more protracted than currently expected.” If a 26% rise in equity in one year makes her express herself in such negative terms, you wonder what it would take to make her more optimistic. What also makes it hard(er) to believe are falling home sales and mortgage originations, price rises that exist only in the highest price ranges, plus a flood of other data that have come in recently. But there it is, printed in the Wall Street Journal , so why not take out that loan? Why not act as if the past decade, and the crisis it gave birth to, never happened? After all, people want loans, and bankers want commissions.

US Borrowers Tap Their Homes at a Hot Clip (WSJ)

A rebound in house prices and near-record-low interest rates are prompting homeowners to borrow against their properties, marking the return of a practice that was all the rage before the financial crisis. Home-equity lines of credit, or Helocs, and home-equity loans jumped 8% in the first quarter from a year earlier, industry newsletter Inside Mortgage Finance said Thursday. [..] … this year’s gains are the latest evidence that the tight credit conditions that have defined mortgage lending in recent years are starting to loosen. Some lenders are even reviving old loan products that haven’t been seen in years in an attempt to gain market share.

In 2013, lenders extended $59 billion of Helocs and home-equity loans. The last pre-boom year near that level was 2000, when lenders extended $53 billion, according to Inside Mortgage Finance. “We’re seeing much more aggressive marketing campaigns [for Helocs] by banks in locations where home prices have risen,” said Amy Crews Cutts, chief economist at Equifax Inc.[..] “We expect to see quite an uptick in Heloc activity” in the spring …

Some individual banks have seen their Heloc originations rise much faster than the national average. Bank of America, which has increased marketing for Helocs, said customers opened $1.98 billion in Helocs in the first quarter, up 77% from the first quarter of 2013. Matt Potere, who leads Bank of America’s home-equity business, said [..] “The driver is increased customer demand,” Mr. Potere said. “It’s an effect of higher consumer confidence and improving home values.”

Are we sure that “the driver is increased customer demand”, not “much more aggressive marketing campaigns [for Helocs] by banks”? Or is this just two elements coming together in a happy coincidence that will benefit everyone, a real win-win?

[..] During the housing boom, Helocs were a source that many consumers tapped to remodel their homes, buy new cars and boats, travel and send their children to college. Lenders often let them borrow up to 100% of their home’s value, in the expectation that prices would continue to rise. However, when prices fell and borrowers weren’t able to repay, banks faced steep losses.

This time, lenders seem to be offering Helocs only to borrowers with good credit in locations where home values have risen, said Keith Gumbinger, vice president of mortgage-information site HSH.com. During the boom, homeowners could borrow up to 100% of their home’s value, said Mr. Gumbinger. Now it is most common to see a maximum of 80% and sometimes 85%, he said. “Relative to where they were, lenders are still very conservative,” said Mr. Gumbinger. “Will the excesses of yesterday return? Only time will tell.”

Even if we would take that at face value, which we don’t, the question remains where home values are going. There can’t be too many people left who haven’t figured out that it’s the Fed’s hugely expensive QE programs that have lifted asset prices to where they are today, even if they don’t understand why extending QE ad infinitum would be very counter-productive, and is therefore of the table. If that were not so, then, unless the present generation of central bankers were absolute geniuses, it would be hard to explain why their pre-decessors didn’t do what they now do, decades ago. Whether that is clear or not, it would seem only logical to see what asset prices do when QE is gone, both for investors and for home owners. If we can agree that QE has distorted prices of all assets, then home prices must have been distorted too. And if the present record stock exchanges are any indication, it’s a safe bet that they are heavily overvalued. So loans against what some may see as the present ‘value’ of a home are entered into based on – probably greatly – distorted assessments. Lenders mind that less than owners should; and what does BofA care? They’re too big to fail anyway.

[..] “It’s really about the stabilization of the real-estate market and property values going up. It gives us more comfort as to the value of the homes – the equity is there and the client profiles look strong,” said Tom Wind, executive vice president of home lending at EverBank, based in Jacksonville, Fla. [..] Some lenders are even bringing back “piggyback” loans, which serve as a second mortgage and cover part or all of the traditional 20% down payment when purchasing a house. Piggybacks nearly vanished during the mortgage crisis.

Piggybacks bring back the 100% LTV loan. It may not be entirely subprime, but we’re well on the way there.

Banks have been emboldened to originate new Helocs in part because new regulatory requirements completed this year and last year make it less burdensome to do so. And in an era where interest rates are expected to rise in the future, some lenders say they prefer Helocs over some other home-equity products because interest rates on Helocs rise as interest rates rise, making the products potentially more profitable.

Oh well, there you are. Regulators have weakened regulations once again, always a good first step towards trouble. Lenders can now aim for those ‘potentially more profitable products’ again, that have already brought us so much joy in this new century. And got millions of American families unceremoniously thrown out of their homes. What’s not to like?

Ian Feldberg planned to open a $200,000 Heloc this week with Belmont Savings Bank to help pay his son’s college tuition. The medical-device scientist purchased his home in Sudbury, Mass. for a little over $1 million in 2004, and estimates that its value dipped as low as $800,000 during the financial crisis. However, after applying for the line of credit, he found that its value had completely recovered. “I’m very pleased about that.

A medical-device scientist with a million dollar home who can’t afford college tuition. If that isn’t a sign of the times, what is?

To summarize, if that’s still necessary, home prices, like prices for all assets, are way higher than they would have been without QE. And still 20% of mortgage holders can’t afford to even sell their homes, let alone upgrade. But already lenders are waving promises of cheap money in front of their faces again. Have we not learned anything at all from the depths of the crisis? The answer is a resounding No. We can still fool ourselves and each other into a form of mass psychosis, thinking we’re much richer than we are, and act accordingly. It’s enough to make one that much more despondent about the future of this failed experiment that was once the land of the free. If you know what’s good for you, ignore things like this WSJ article, and if you can’t be free, at least be debt-free. Because after the fake asset values of the illusionary economy fall back to earth, the debt will remain. And y’all will feel a lot less wealthy.

US Borrowers Tap Their Homes at a Hot Clip (WSJ)

A rebound in house prices and near-record-low interest rates are prompting homeowners to borrow against their properties, marking the return of a practice that was all the rage before the financial crisis. Home-equity lines of credit, or Helocs, and home-equity loans jumped 8% in the first quarter from a year earlier, industry newsletter Inside Mortgage Finance said Thursday. The $13 billion extended was the most for the start of a year since 2009. Inside Mortgage Finance noted the bulk of the home-equity originations were Helocs. While that is still far below the peak of $113 billion during the third quarter of 2006, this year’s gains are the latest evidence that the tight credit conditions that have defined mortgage lending in recent years are starting to loosen. Some lenders are even reviving old loan products that haven’t been seen in years in an attempt to gain market share.

In 2013, lenders extended $59 billion of Helocs and home-equity loans. The last pre-boom year near that level was 2000, when lenders extended $53 billion, according to Inside Mortgage Finance. “We’re seeing much more aggressive marketing campaigns [for Helocs] by banks in locations where home prices have risen,” said Amy Crews Cutts, chief economist at Equifax Inc., a firm that tracks consumer-lending trends. She said Heloc originations picked up in recent months as consumers began home-improvement projects. “We expect to see quite an uptick in Heloc activity” in the spring, she said. Unlike home-equity loans, in which the borrower receives a lump sum, borrowers can draw on Helocs as needed. They can sometimes take a tax deduction on the interest from the credit line.

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The Housing Bust And The American Psyche (Harrop)

Real estate mania lives on at the HGTV cable channel, where house shoppers still holler for granite on their kitchen islands and his-and-her sinks in their en-suite bathrooms. But in the non-TV reality of middle-class America, the bloom is definitely off the real estate rose. The rose isn’t dead, mind you. Surveys show an enduring desire to own one’s home, despite the trauma left by the real estate meltdown and recession. But the love is not what it was. So customer demand continues, Jane Zavisca, a University of Arizona sociologist, told me, “but not homeownership at all costs.” Young people who’ve seen others’ lives ruined by the pain of foreclosure seem especially wary of taking on a mortgage, according to Zavisca, who studies attitudes toward home owning.

More on the psychology later. Economists worry that the depressed housing sector is hampering a robust recovery. Federal Reserve Chairwoman Janet Yellen recently testified before Congress that housing remains a cloud on an otherwise promising economic horizon of stronger hiring and amped-up consumer spending. True, some formerly shattered markets — in Phoenix, Las Vegas and parts of California, for example — have much improved. But nationally, the sign of a housing recovery seen a year ago now appears to have been a blip. And the problems in the sector aren’t going away.

What’s wrong is this: At the end of March, 19% of “homeowners” with mortgages — nearly 10 million households — were “underwater.” That means they owed more on their house than they could sell their house for. These numbers come from the real estate website Zillow. That sounds a lot better than the 31% owing more than their house was worth near the height of the misery in 2012. But it doesn’t count the legions of homeowners barely above water. Many lack the financial breathing room to sell; they’d have to first find some extra cash.

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Homeowners Struggle To Pay Mortgages On Houses Of All Sizes (LoHud)

In the Lower Hudson Valley, one of the most affluent regions of the country, where one in five homes costs a million dollars, there are thousands of homeowners still struggling to pay their mortgages, often facing foreclosure. They’re from all income brackets, living in those million-dollar homes, modest Capes, condos and Colonials. The reasons vary, but most often there is a major life change: job loss, divorce, a death in the family, or a serious illness that causes a homeowner to get behind on their mortgage or property taxes. Foreclosure filings are at record highs in Westchester and Rockland, with Westchester experiencing filings that are triple what they were last year. Behind the numbers are people faced with the possibility of losing their homes.

LaDonna Thompson Hutchins got behind in her monthly payments. Hutchins, a 30-year Manhattan postal worker, lives in a two-family house in Mount Vernon that her grandmother and mother bought in 1978; both have since died. With mounting medical bills and personal stress, Hutchins missed some mortgage payments and her lender took action, refusing to accept any payments until the arrears were paid in full. Now she owes $210,000, mostly in late fees and attorney costs and is working with a counselor to reduce the payments and get back on track. The balance on her mortgage is $466,000. “It’s my mistake. I refinanced a couple of times and fell behind,” Hutchins said. “I am making the money and they won’t give me a chance.” She rents out a 3-bedroom unit and basement studio in the house for income. “This is my house. Mount Vernon is my home.” [..]

Foreclosure is hitting most socio-economic groups and most neighborhoods, said Peter Spino Jr., a White Plains-based lawyer who represents homeowners in similar situations. “We are seeing recurring spikes in the (foreclosure) numbers,” he said. “And it is climbing the economic ladder. The wealthy, who were able to stave off (legal action) because they had resources, have had those resources depleted.” One court official told him there have been weeks with 70 filings, which is “extraordinary,” he said. “The hardships are horrific. But a lot of people are getting loan modifications and saving their homes,” Spino said. “If you have the income to support a loan modification you can get a loan modification. But you have to remember that in Westchester the taxes are so high that you have to also estimate about $1,000 a month for taxes and insurance.”

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The Linoleum Economy (Peter Tchir)

Before reading further, just pause and think about what linoleum means to you. If flooring isn’t your thing, go ahead and think about Formica cabinets or anything else that fits the genre. To me, it is something functional, which looks okay from a distance, but doesn’t stand up well to closer inspection. It conveys the disappointment of something that looked good, but turns out only to be a thin veneer covering cheap particle board. That is how I see the economy right now. I think that at the moment we are getting a bit of a “bounce” from the disastrous first quarter, but that it is far lower than it should be if the underlying economy was strong. Even worse, is I think there is a real chance that the economy slows again, driven by a weakness in housing, and the Fed has very few useful tools left, if that happens. But before going into more detail on why I have that view of the economy and what I think it means for the market, let’s look at what others are thinking.

The 2007 Recession: I won’t spend more than a moment on this, but I still find it “perplexing” if not insane, that the recession that started in December 2007 wasn’t “identified” until December 2008. We were only told that we had been in a recession for a year AFTER Lehman failed and AIG was bailed out. I understand the saying “better late than never” but seriously, this is a bit ridiculous. It really shouldn’t have taken a -765,000 NFP print to confirm to the powers that be, that the economy had already been sucking wind for a year. I am not saying that the same thing is happening again, but I would not be handing out any awards for seeing what is right before your eyes to the group of prognosticators responsible for seeing bad things in the economy.

Q1 2014 GDP: Which brings us right to Q1 2014 GDP. I do not know what the expectations were back in January of this year. But I do know that by the time the first release of GDP came out, we all knew the weather had been bad.

Expectations had been ratcheted down to 1.5%, yet the number was an appallingly low 0.1%. A huge miss. As more data came out, the economists could refine their forecasts. They came in at -0.5% and once again the estimates were too optimistic as the actual number was -1.0%. Maybe not quite as embarrassing as the initial miss, but…

While I have heard some “positives” like inventory build will help Q2, I have heard any things that show we may have gotten lucky to “only” be at -1%. It seems many people were surprised how much of a “positive” impact Obamacare had on the numbers. There is also a debate that is getting louder by the day, that the real inflation rate is higher than the reported inflation rate, artificially making Real GDP seem higher than it is. Fool me once, shame on you, fool me twice, shame on me. They had two chances to get this number right and missed both times by being too optimistic. Why are we so eager to believe the optimism most share for the first quarter? The fool me once phrase resonates with me right now. I promise I am almost done picking on our “ability” to forecast GDP, but I cannot resist showing this one last chart on the street’s view of GDP.

GDP is fully expected to bounce back to just over 3% for Q2 and then settle into a nice cozy run rate of 3.0%. All is good, right? Not so fast. The data just looks careless. The prior 5 quarters have been 1.1%, 2.5%, 4.1%, 2.6%, and -1%. The average isn’t anywhere close to 3% and the numbers have shown no consistency. I would be much more comfortable with the chart if I saw some peaks and valleys in the estimates. I would like to see some evidence in the data that the estimates include any seasonal adjustment issues the data is experiencing (post Lehman, many adjustments seem to fail frequently as they are not good at adapting to 7 standard deviation moves). Maybe there is something that should be helping drive one quarter versus another quarter. (Obamacare? Heck even a new iPhone).

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The scourge of the markets: you got to try and make money somewhere, even if you know that may not be the wise thing to do. Where means is confused with end.

You’re All Whales in Bond Market Now With Trading Volume Slump (Bloomberg)

It’s getting easier for a smaller group of bulls in the U.S. Treasury market to create angst for the bears. That’s because government-debt trading volumes have slumped to 18% below the decade-long average, Federal Reserve data show. As Brean Capital LLC’s Peter Tchir wrote this week: “There is no liquidity even in the mighty Treasury market.” So as 10-year Treasury yields plunged toward the lowest level in almost a year, a smaller group of active traders may have had a much bigger influence over the $12 trillion market that determines rates on everything from auto loans to corporate debt.

The move in government bonds has defied predictions from Wall Street’s biggest banks for higher borrowing costs, with 10-year Treasury yields falling to 2.47% from 3% at the end of 2013. “With less trading capital to commit in fixed income, the dominant flow can appear bigger than it actually is,” Jim Vogel, a fixed-income strategist at FTN Financial (FTN) in Memphis, Tennessee, wrote in a May 28 note. U.S. government-bond trading has declined even as the size of the market tripled in the last decade. Trading volumes fell to an average $429 billion a day in the week ended May 21, Fed data show. That’s down from daily averages of $502 billion this year and about $566 billion back in 2007.

One reason for the slowdown is there aren’t as many obvious sellers of the notes. The Fed has been buying U.S. bonds for years, making it the biggest single owner of the debt. Other central banks have locked the bonds away in their vaults across the globe. Another reason is banks have less incentive to trade the debt. They’re reducing fixed-income inventories in response to risk-curbing regulations, such as the U.S. Dodd-Frank Act’s Volcker Rule, which limits the amount of their own money they may use to buy and sell riskier securities. Many are paring fixed-income staff, too, in the face of lower trading revenues.

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Bond Rally Sparks Little Joy as Bears See ‘Painful’ Capitulation (Bloomberg)

From the Americas to Asia, and from Europe to the Middle East, the $100 trillion bond market this year is turning into one for the record books. Returns on fixed-income securities of all types, from government to corporate and asset-backed debt, averaged 3.97% through the first five months of 2014 as of May 29, matching the record set in 2003 based on the Bank of America Merrill Lynch Global Broad Market Index. As bond prices rallied, yields as measured by the gauge fell to the lowest in a year. Rather than sparking celebration, the rally is causing much angst. That’s because many investors were betting on the opposite to happen as the global economy strengthened, leading central banks to start employing tighter monetary policies. Instead, growth slowed, signs of disinflation emerged in Europe and tensions between Ukraine and Russia sparked demand for the safety of fixed-income assets.

“It’s been a very painful week for a lot of people,” Elaine Stokes, a money manager who helps oversee the about $22 billion, Boston-based Loomis Sayles Bond Fund, said May 29 in a phone interview. “The big move we’ve seen recently, in the last couple of weeks, in the lowering of the yield base, is really a bit of a capitulation.” The Bloomberg Global Developed Sovereign Bond Index shows yields declined to an average 1.28%, the lowest since May 2013, as those on Austrian, Belgian, French, Irish and Spanish debt decreased to records. Treasury 10-year note yields – the global benchmark – fell this month by the most since January and Japanese yields slid to the least in 12 months.

Investors have been buffeted by a U.S. economy that shrank more than forecast in the first quarter and signals from the European Central Bank that it’s prepared to ease as German unemployment unexpectedly rose last month. Bank of Japan Board Member Sayuri Shirai said in a May 29 speech that unprecedented easing may continue beyond next year and downplayed optimism that inflation would reach its target in fiscal 2015. The Paris-based Organization for Economic Cooperation and Development cut its forecast for global growth, saying in its semi-annual report on May 6 that the world economy will expand 3.4% this year instead of the 3.6% predicted in November. All of that is good news for bonds, forcing investors to unwind trades betting on losses. Futures traders have been positioned for a rise in 10-year U.S. yields since August.

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Yay! More debt! With yields as low as they are, it’s tempting.

Spain To Unveil $8.6 Billion Stimulus Package (AP)

Spain’s prime minister says his government will unveil a stimulus package worth $8.6 billion to boost competitiveness. In another sign that the country is emerging from five years of economic hardship, Mariano Rajoy said his plan “aims to mobilize” €2.7 billion from the private sector and €3.4 billion from the public sector. He said Saturday corporate tax would be cut from 30% to 25%. Rajoy added that details will be revealed at a Cabinet meeting on Friday. Standard & Poor’s was the third credit rating agency to upgrade Spain’s sovereign credit grade on May 23 although Spain is still saddled with a massive 26% unemployment rate. Rajoy said Spain has created employment in the last two quarters.

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European Union Dream Threatened By Austerity And Disharmony (Observer)

The principal aim of the founding fathers of the European community was to ensure that there should never be another war between Germany and the rest, the most notable member of the rest being France. But a closely associated aim was to ensure general prosperity that, among other things, would not give rise to either the hyperinflation experienced in Germany after the first world war or the mass unemployment which created the conditions that gave rise to Hitler – who was democratically elected, but after that used undemocratic methods to remain in power.

The aim of the two prominent founding fathers, Jean Monnet and Robert Schuman, was to bring Europe closer together politically by economic means. The nightmare would be if the economic means adopted in recent decades served to pull Europe apart. One of the prominent successors, decades later, to Monnet and Schuman was Valéry Giscard d’Estaing who, as president of France in the second half of the 1970s, was a leading participant in the formation of the European monetary system and the exchange rate mechanism, the precursor to full monetary union and the euro.

It was noteworthy that in a recent interview with the Financial Times, Giscard observed: “It is said people are voting against Europe – that’s not true. They are voting against what Europe is doing wrong.” For Giscard, it is bad management, not the basic architecture, of the eurozone that is the problem. But if he studied the timely new book by Philippe Legrain, European Spring – Why Our Economies and Politics are in a Mess, he might be more inclined to accept that the fundamental structure of the eurozone is also to blame. Legrain, a former economic adviser to the president of the European commission, gives a vivid insider’s account of just how badly the European political and economic elite responded to the financial crisis.

As in the UK, the wrong diagnosis was made when laying so much of the blame on putatively excessive public spending – an analysis that may have applied to Greece, but not the others – as opposed to the credit crunch. Fiscal austerity was the wrong response, rendering the crisis much worse. The crisis was aggravated in the eurozone by the loss of such instruments as independence in the determination of monetary and exchange rate policy. But as Legrain forcefully points out, the UK’s freedom from such constraints did not prevent policymakers after 2010 from extending the crisis, with those three years of “flatlining”.

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China is trying to stem a tsunami with sandbags.

No, China Isn’t Really Rebalancing (Bloomberg)

“Tolerance” and “slowdown” clearly mean something different in Beijing’s dictionary. Since November, when the Communist Party announced epochal reforms, President Xi Jinping and Premier Li Keqiang have rarely missed a chance to say China must accept slower growth. Downshifting to a “new normal” is a necessary evil to regear the economy’s growth engines to services. Six months on, all they’ve done is add more and more stimulus to ensure no end to massive investment and exports. The first sign of slowdown intolerance came in early March when China did what optimists hoped it wouldn’t: announce another growth target. Every time data have suggested gross domestic product might slip below that 7.5% line, Beijing has been quick to rev the engine yet again.

Stimulus measures have included tax breaks, bigger investments in housing, faster spending on railways and other megaprojects, and front-loading of outlays at the provincial level. China’s largest regional economy, Guangdong, is allocating more than $10 billion to boost growth. The National Development and Reform Commission, the central economic-planning agency, is mulling a $16 billion-plus fund for transportation that will solicit some private investment. The central bank, meanwhile, has eased up on its war against excess credit, and the shadow-banking system is still enabling inefficient state-owned enterprises across the nation.

Does any of this sound like the actions of government ready to let GDP fall to 6%, let alone 5%? Hardly, which is why economists at Nomura and UBS are rethinking second-quarter growth forecasts. Credit Agricole economist Dariusz Kowalczyk reckons that the stimulus steps that we know about — I’m figuring there are many we don’t — will add 1%age point to Chinese growth. All this flies in the face of slowdown pledges and, by extension, restructuring efforts. The economy must decelerate to rein in the excessive borrowing that Marc Faber, publisher of the Gloom, Boom & Doom report, calls a “gigantic credit bubble” and hedge fund manager Jim Chanos of Kynikos Associates is shorting.

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China Manufacturing PMI Jumps; What’s Wrong With This Chart? (Zero Hedge)

Despite all the shadow banking system hand-wringing, macro-data-collapsing, real-estate-bubble-bursting, stock-market-tumbling reality facing China, somehow, China’s official government manufacturing PMI just printed 50.8 – its highest in 2014 and the 20th month of expansion in a row. Given the mini-stimulus efforts of the government, perhaps it is not surprising that the official (more SOE-biased) data signals all-clear (when HSBC’s PMI is still in contraction for the 5th month in a row). The employment sub-index fell to a 3-month lows and the Steel industry’s output and new orders has cratered… So what’s wrong with this chart?

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Draghi looks set to finish off what’s left of the eurozone by adding debt to injury.

Mario Draghi Faces Moment Of Truth To Steady Eurozone (Observer)

The meeting will be held on the day before the 70th anniversary of the Allied landings in Normandy, but make no mistake: Thursday is D-day for the European Central Bank. That’s D as in Draghi, because after all of the ECB governor’s silver-tongued manipulation of the market – all the nudges, winks and hints – the financial markets now require Mario Draghi to do more than just talk. Expectations are high, probably unrealistically so. After the bloody nose received by mainstream parties in last week’s elections to the European parliament, former US treasury secretary Larry Summers had some harsh things to say on US news network CNN about the mess that policymakers had made of things: “The European common market, European monetary union, was an elitist project that was driven by elites, that led to consequences that were entirely unpredicted by elites, that have been catastrophic for millions of people.”

Draghi can do little to rekindle love for the idea of ever-closer union in Europe – a project damaged, perhaps beyond repair, by recession, unemployment and austerity. Nor is he in a position to eradicate the structural problems of the euro – its one-size-fits-all interest rates, its inbuilt deflationary tendencies – that have been obvious since its creation. These are beyond his remit. The “elite” lambasted by Summers has to decide whether to press ahead with closer fiscal integration – a centralised budget that might make the single currency work better – in the face of clear voter hostility to greater unity. Instead, the ECB meeting will have a less ambitious, but still crucial, agenda.

As Investec economist Philip Shaw puts it, Europe’s central bank has four key objectives this week: “To ease policy to meet its inflation target; to prevent inflation expectations from being dislodged to the downside and increasing the risks of deflation; to stem upward pressure on the euro; and to secure and preferably speed up the recovery, possibly by encouraging credit flow.”

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No, really?!

U.S. Accused of Destroying Spy Records Sought as Evidence (Bloomberg)

Years of phone and Internet records collected under anti-terror surveillance programs and sought as evidence in a lawsuit were destroyed by the U.S., the Electronic Frontier Foundation said. The government wiped out the records without getting approval from the federal judge overseeing the case, who ordered the evidence preserved, Cindy Cohn, legal director of the San Francisco-based cyber rights advocacy group, said in a court filing today. The court should now assume the missing records would have shown the government spied on the EFF’s clients, who are challenging the programs, Cohn said. “We are simply asking the court to ensure that we are not harmed by the government’s now-admitted destruction of this evidence,” Cohn said in a e-mail.

The EFF’s 2008 lawsuit was one of the earliest to question secret spying programs put in place after the 2001 terrorist attacks, claiming the National Security Agency intercepted phone communications in violation of wiretapping laws. It cited documents provided by a former AT&T Inc. telecommunications technician allegedly showing the company routed copies of Internet traffic to a secret room in San Francisco controlled by the NSA. The government destroyed three years of telephone records seized between 2007 and 2012 and seven years worth of Internet records it seized between 2004 and 2011, the EFF said in court papers today. The group said in a statement the government admitted the destruction in recent court filings.

The government understood the lawsuit to challenge presidentially-approved programs authorizing warrantless surveillance, not surveillance authorized by a special court in Washington that was leaked last year, Justice Department lawyers said in a May 9 court filing. The EFF has filed a separate lawsuit challenging NSA surveillance first disclosed in documents leaked by former security contractor Edward Snowden. The NSA in March was blocked by the federal judge in San Francisco overseeing the case from destroying phone records collected from surveillance because they might be relevant to the lawsuit.

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Not sure about this, Simon.

Why America Is In Decline (Simon Black)

Along with history, travel is by far one of the best teachers. Formal education in classrooms can be stifling to the mind. It makes people believe that the world actually conforms to all the snazzy theories we read about. But there’s no economic textbook on the planet that can come close to showing you how the world really works. It’s not about stocks and flows, efficient markets, or official statistics. None of that stuff really matters. The world runs on people. And even though our politicians go out of their way to highlight the differences among us, human beings all over the world are fundamentally the same. We all love our children. We cheer for our favorite teams. We work hard to put food on the table for our families. We get frustrated with where we’re at in life. And we desire to achieve more.

This desire to achieve is fundamental to all humanity. Human beings aspire. We push ourselves to accomplish more and improve our stations in life. And this desire spans generations. Parents always want their children to enjoy a better life than they had. And they work their butts off to ensure this happens. This isn’t exclusively a western phenomenon. All over the world, the need to provide a better life for one’s children is practically a subtext to the social contract. And people in developing countries want exactly the same thing. They’re succeeding. A child born in China today will have a far richer life than his/her parents and grandparents. And in my travels to over 100 countries over the last 10+ years, I’ve seen other frontier and developing markets that are bursting at the seams in a similar trend. Myanmar. Colombia. Tanzania. Georgia. Sri Lanka. Botswana. Indonesia. Mongolia.

The growth rates in these places are staggering, and you can see first-hand the hundreds of millions of people being lifted out of poverty. In these developing countries, they look across the water to the West and can see a rich and consumptive lifestyle. They want this lifestyle, especially for their children. They’ve spent decades toiling in factories, saving money, and building for the future. It’s time to cash in. Decades ago, the vast majority of wealth and production was in the West– specifically the United States. Most people across Asia and Latin America were absolutely impoverished, and felt honored just to be able to work hard and export a product to the US. Today, it is those same countries (particularly in Asia) that now hold the majority of the world’s wealth and production. And it is their growth that pulls the global economy along.

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Now, that’s a number.

US Gasoline Consumption Plummets By Nearly 75% (Jeff Nielsen)

Regular readers are familiar with my narratives on the U.S. Greater Depression, and (in particular) some of the government’s own charts which depict this economic meltdown most vividly. The collapse in the “civilian participation rate” (the number of people working in the economy) and the “velocity of money” (the heartbeat of the economy) indicate an economy which is not merely in decline, but rather is being sucked downward in a terminal (and accelerating) death-spiral. However, even that previously published data, and the grim analyses which accompanied it could not prepare me for the horror story contained in data passed along by an alert reader. U.S. “gasoline consumption” – as measured by the U.S. Energy Information Administration (EIA) itself – has plummeted by nearly 75%, from its all-time peak in July of 1998. A near-75% collapse in U.S. gasoline consumption has occurred in little more than 15 years.

Before getting into an analysis of the repercussions of this data, however, it’s necessary to properly qualify the data. Obviously, even in the most-nightmarish economic Armageddon, a (relatively short-term) 75% collapse in gasoline consumption is simply not possible. Unless we were dealing with a nation whose economy had been suddenly ripped apart by civil war, or some small nation devastated by a massive earthquake or tsunami; it’s simply not possible for any economy to just disintegrate that rapidly, without there being some ultra-powerful exogenous force also at work.

So how can this raw data, produced by the government itself, be explained? To begin with; the government chooses to measure U.S. gasoline consumption in a very odd manner: by measuring the amount of gasoline entering the domestic supply-chain rather than by measuring actual consumption at the other end of the supply-chain – i.e. “at the pump”. Why does the U.S. government, which (among other things) leads the world in the manufacture of statistics not produce any simple/direct measurement of gasoline consumption? How can the St. Louis Fed produce nearly 100 different charts on gasoline and diesel prices (for any/every price-category which can be imagined by these statistics geeks), but not a single chart on gasoline supply/demand? There are several reasons for this unbalanced, anomalous, and simply absurd statistical methodology.

First of all; the reason why the U.S. government produces a near-infinite number of charts on prices is because prices are what the Gamblers (i.e. bankers) use as the basis for their $100’s of trillions in gambling in the rigged casinos which the bankers call “markets”. While supply/demand data is of utmost importance in the real world; the banker-gamblers don’t dwell in the real world. As regular readers already know; their derivatives casino, alone, is roughly twenty times as large as the entire global economy. To the bankers; the “real world” is nothing but fodder for their insane gambling. Why use this data, at all, since it is such an inferior/distorted means of measuring U.S. gasoline consumption? Because the EIA uses exactly the same data to publish its own “estimates” of U.S. gasoline consumption:

Note: Product supplied measures the amount of gasoline that went into the supply chain and is used as a proxy for gasoline consumption.

The other half of this ridiculous statistical hodge-podge, where endless quantities of trivial/irrelevant price data are trumpeted, while any/all data which actually measures the (real) economy is suppressed (if not buried entirely) displays a government desperately trying to hide this massive economic collapse. If you choose to measure the amount of gasoline leaving U.S. refineries and entering domestic inventories and call this “gasoline consumption”; you can hide the actual collapse in gasoline consumption – until those retail inventories are overflowing, and there is simply no more room in the storage tanks.

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Isn’t that strange? Where’s the pent-up demand?

Homebuyers With Another Shot at Low Rates Still Don’t Buy (Bloomberg)

This was supposed to be the year that U.S. mortgage rates soared. Instead, they’re retreating. Interest rates unexpectedly fell this year after the Federal Reserve began scaling back the stimulus that held borrowing costs near record lows since 2011. After five weeks of declines, rates for 30-year fixed loans are at 4.12%, the lowest in seven months, Freddie Mac said yesterday. The housing market, in the season that’s traditionally its busiest, can use the help, even if it’s short-lived. Soaring home prices and a one%age point spike in rates from May to August last year cut into affordability and slowed the real estate recovery. While the falling borrowing costs have forced economists at the National Association of Realtors and Moody’s Analytics Inc. to lower forecasts, they still expect 30-year rates to lurch closer to 5% by the end of the year.

“It’s a temporary window of opportunity for buyers in that a year from now rates will be higher,” said Mark Zandi, chief economist for Moody’s Analytics in West Chester, Pennsylvania. “The housing market could use it given how it’s gone sideways. But I wouldn’t count on these low rates for very long.” The decline in borrowing costs has so far done little to spur sales, which have been weighed down by tight credit and lower-than-normal inventory levels. Contracts to buy previously owned houses in the U.S. increased 0.4% in April, less than economists estimated. They fell 9.2% from a year earlier, the National Association of Realtors said yesterday. Loan applications for home purchases were down 15% last week from the same period a year earlier, according to a Mortgage Bankers Association index.

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Oh wait, there it is(n’t).

US Household Formation Rate Plunges To 30-Year Low (Stockman)

Cool-Aid drinkers like the Keynesian bozos at The Atlantic (The Most Overlooked Statistic in Economics Is Poised for an Epic Comeback: Household Formation) have been gumming ever since the 2009-2010 bottom that household formation will come springing back. Recall that during the decade before the financial crisis new household formation averaged about 1.5 million per year, but has since dropped by two-thirds to about 500k. Its obviously all about student debt serfs who have moved back into mom and dad’s basement and who flip hamburgers on weekends for enough change to get by on. Yet this condition was held to be a transient artifact of the financial crisis and the recession which followed—an aberration that went unexplained but which was also firmly dismissed as a 100-year flood type event.

So the blustering insistence that kids would soon leave mom and dad’s basement and that the household formation rate would leap out of the sub-basement of its historical trend line actually crystalizes the circular illogic of the whole Keynesian case. The supposition was that we function in a timeless and ever repeating business cycle which fiscal and monetary stimulus inexorably (and magically) arouses from its slumping phase. Accordingly, it is always and everywhere only a matter of time before a “stimulated” economy achieves “escape velocity”, thereby causing the growth of jobs, income and spending to accelerate. The latter, in turn, always has and would again fuel “normal” household formation rates. From there it would be off to the races—with a subsequent virtuous cycle of more households generating more demand for new housing starts, construction jobs, income, spending and all the rest of the magic.

But this whole happy scenario is really just another case of the legendary economist who proposed to ascend from a 50 foot hole by announcing, “assume we have a ladder”. The Keynesians did not explain why an economy with $59 trillion of credit market debt and stranded at peak leverage ratios across all sectors— households, business and public sectors alike—would suddenly break into a sprint, and thereby pull along a food chain of earners, spenders and household formers. They didn’t address that crucial matter, of course, because the Keynesian models contain no balance sheets—just flows of what in cycles past were freshly minted household credit and spending power, and which now amount to some mysterious ether called “accommodation”.

Stated differently, what the Keynesian models resolutely ignore is this cardinal fact: After 40-years of a giant debt party in America, damage has been done! There is no escape velocity because there is no escape from a condition in which too much consumption, borrowing and get-rich-quick speculation has led to a drastic impairment of capitalism’s ability to generate genuine economic growth and new wealth. In any event, the Q1 numbers are out, and the household formation rate has taken another turn south—to a gain of less than 200k over the past 12 months or barely 15% of its heyday average. Indeed, in contrast to the sizzling snap-back to 2 million or more annually expected by the Keynesian modelers, the current rate is now at a 30-year low! Yes, immense damage has been done. And monetary planning is only making it far worse.

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Let him.

QE In Financial Drag: Draghi’s New ABCP Monetization Ploy (Stockman)

You can smell this one coming a mile away:

The European Central Bank and Bank of England on Friday outlined options to reinvigorate the market for bundled bank loans, which was “tarnished” by the global financial crisis, saying a better-functioning market for asset-backed securities can help boost lending to the private sector, particularly small businesses.

Yes, the ECB is now energetically trying to revive the a market for asset-backed commercial paper (ABCP)—-the very kind of “toxic-waste” that allegedly nearly took down the financial system during the panic of September 2008. The ECB would have you believe that getting more “liquidity” into the bank loan market for such things as credit card advances, auto paper and small business loans will somehow cause Europe’s debt-besotted businesses and consumers to start borrowing again—- thereby reversing the mild (and constructive) trend toward debt reduction that has caused euro area bank loans to decline by about 3% over the past year. What they are really up to, however, is money-printing and snookering the German sound money camp. That is, the ECB is getting set to launch QE in financial drag by purchasing or discounting ABCP while loudly proclaiming that it’s not “monetizing” any stinking sovereign debt!

And that gets to the heart of monetary central planning. It doesn’t matter what the central bank buys with the digital credits it transfers to sellers. Purchasing government debt, Fannie Mae securities, IBM bonds or corporate equities, as has been done by the BOJ and Bank Of Israel under the new Fed Vice-Chairman, has a common effect. That is, it raises the price of the purchased “assets” relative to what would obtain in the unfettered market, and injects fiat liquidity into the financial system in a manner that promotes speculation and excessive risk-taking. Thus, if some clever Wall Street operators could figure out how to bundle sea shells and securitize them, central bank purchase of the resulting ABCP would be no different than purchase of treasury notes or Fannie Mae paper.

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The Global Death Cross Just Got Deathier (Zero Hedge)

In the immortal words of Cher: “Do you believe in life after QE; I can feel something inside me say, “I really don’t think you’re strong enough, Now.”

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Climbing A Wall Of Cliches (Nick Colas)

If clichés reflect overly common (if therefore unappreciated) wisdom, then we finally have a good explanation for why risk assets continue to rally. No, there are actually not “More buyers than sellers” – money flows are negative over the last month for both U.S. equity mutual funds and ETFs. And forget about investors “Downgrading on valuation” as stocks climb higher and higher; truth be told, that’s not even really a thing (unless you work on the sell side). Nope, this is a “Flight to quality”, “don’t fight the Fed”, “never short a dull market” environment with “easy comps” from a long rough winter. Want to call a top somewhere around here? Remember that “Markets discount events 6 months in the future.” A “Santa Claus rally” in June? That would fit the one cliché we know is actually the market’s True North: it will do exactly what hurts the most “Smart” investors. And that would be to rally further as the doomsayers double down and the timid cling to their bonds and cash.

“You don’t want to live in a world where the Federal Reserve can’t move stock markets.” That is one of the most important observations I have heard in this business, and it came from a grizzled old veteran some 15 years ago. The venue was one of those interminable “Idea dinners” and we young pups had been sniping about the whole “Follow the Fed” approach to equity analysis. The old lion eventually swatted away our objections with his simple observation. And he was exactly right. If the Fed can’t move markets with its balance sheet and a little time, then you might as well hit up Youtube/Google for “How to skin a squirrel” and “bartering for surplus ammo”.

So how did the famous phrase “Don’t fight the Fed” become such a derided and devalued cliché? The short answer is that many overused phrases are still true. That’s why they end up so often repeated in the first place. Don’t play with matches. Don’t run with scissors. Cross at the green, not in between (that’s a little 1970s NYC cliché trivia there). All good guidance, but over time and with repetition even the catchiest phrases turn from useful aphorism to forgettable, time wasting, and moldy word play.

Wall Street phrases are especially susceptible to the reverse metamorphosis of swan-to-duckling. For all its supposed sophistication, finance is still anchored in oral traditions more than most 21st century occupations. In what other industry does a leading light go by the moniker “Oracle of…”? After all, the original Oracle sat in Delphi, believed in the pantheon of Greek gods, and anchored her (yep, the Oracle was a young woman) cultural identity to the stories of the blind and illiterate Homer. The modern one dispenses comforting wisdom anchored in a native optimism about human innovation and faith in capital markets.

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The wrath of QE in general too.

The Wrath of Abenomics: Sales Collapse, Inflation Soars (TPit)

Even the soothsayers and Abenomics spin doctors expected a downdraft after Japan’s consumption tax was jacked up to 8% from 5%, effective April 1. But not this. The tax hike had been pushed through parliament by Prime Minister Shinzo Abe’s predecessor. It was supposed to save Japan. But no one wants to pay for government spending. The tax proved to be so unpopular that Prime Minister Noda and his government were unceremoniously ousted at the end of 2012. Japan is in terrible fiscal trouble. Half of every yen the government spends is borrowed, now printed by the Bank of Japan. Expenditures can’t be cut, apparently, and government handouts to Japan Inc. had to be increased. Yet something had to be done to keep the gargantuan deficit from blowing up the machinery altogether, and it was done to those who spend money.

The consumption tax is very broad, impacting goods and services bought by businesses and individuals, from haircuts and vegetables to construction materials. So the 3-percentage-point increase would be levied on much of the economy. But here is the thing: money that people and companies keep in the bank earns nearly nothing, and even a crappy 10-year Japanese Government Bond yields less than 0.6% per year. But if buyers frontloaded major purchases by a few months or even a year to beat the consumption-tax increase – buying that refrigerator or heavy-duty truck a year earlier than they normally would, for example – they’d save 3% of the purchase amount. That’s pure income. And tax-free for individuals. The biggest no-brainer in Japanese financial history.

Every company and individual frontloaded whatever was sufficiently practical and substantive, and whatever they could afford. It started late last year and culminated in the January-March quarter. As a result, GDP soared at an annual rate of 5.9%, a phenomenal accomplishment for Japan. The Japanese have been through this before. Ahead of the prior consumption-tax hike from 3% to 5% effective April 1, 1997, consumers and businesses went on a buying binge of big-ticket items. The economy boomed for a couple of quarters, then woke up with a terrific hangover as spending on durables by businesses and consumers ground to a halt, and the economy skittered into a nasty recession that lasted a year and a half!

But this time, it’s different. On March 23, about a week before the tax hike would take effect, the Nikkei polled corporate executives as they were still floating on a sea of optimism from all the money that rampant frontloading was bringing in faster than they could count. They weren’t concerned: 70.2% said that sales would remain stable or decline no more than 5% in fiscal 2014, which started April 1; 55.4% said the economy, supported by strong consumer spending, would improve by September, and 74.3% saw that happening no later than December. So no big deal. Alas, the Ministry of Economics, Trade, and Industry just released a dose of reality. Total retail sales in April plunged 19.8% from March and were down 4.4% year over year. But this includes sales of perishable and small items not suited for frontloading, and convenience-store sales (which rose a smidgen). In stores where people buy durable goods, such as appliances, watches, or cars, sales were awful.

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The illusionary economy.

The Big Hoax Of The Wall Street Hype Machine (TPit)

The S&P 500 index keeps bumbling from one all-time high to the next as corporations are issuing record amounts of debt to spend record amounts on buying back their own shares: $160 billion in the first quarter alone, according to CapitalIQ. Borrowing money to buy back shares and hyping it ceaselessly as “returning value to the shareholders” is the most effective way to manipulate up the stock, even if revenues are declining quarter after quarter. In this climate of ZIRP, any major corporation can do it. The heavy buying during these low-volume times pushes up shares, the hype surrounding the buybacks pushes up shares, expectation of more buyback announcements pushes up shares, the mere idea that shares are being pushed up pushes up shares…. And in the end, the buybacks lower the share count for the all-important EPS ratio.

The game works wonderfully. Though a game is all it is. It’s not an investment in productive capacity, marketing, or expansion projects. It’s not an investment in people. It’s not an investment that will bring future revenues or earnings or efficiencies. It’s not an investment at all. It just blows a lot of cash on manipulating the one number that the entire world is focused on. But it’s not even actual earnings as reported under GAAP that is the focus of all attention. It’s an estimate of “forward,” ex-bad-items, adjusted, pro-forma “earnings,” so an entirely fictitious number, helpfully provided by the Wall Street hype machine through its analysts and eagerly disseminated by the media.

That gloriously fictitious 12-month “forward” ex-bad-items, adjusted, pro-forma “earnings” per share then becomes the denominator in the 12-month “forward” P/E ratio, which, according to FactSet, currently stands at 15.4. But just how far off the wall have these fictitious numbers been in the past? In its latest report, FactSet shed some light on this by comparing analysts’ estimates for earnings growth as of June 1 for Q4 of the same year, for the years 2010, 2011, 2012, and 2013. And it found, without explicitly saying so, that these projections are consistently the biggest hoax out there.

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Bond, Stock Rally Shows Need to Be Prepared -to Be Wrong- (Bloomberg)

During the first two World Wars, Boy Scouts sold U.S. bonds to help finance the fighting. If they were still at it today, there’d be a lot of merit badges to pass out globally after every bond market in the world rose in May. The Scouts never were called upon to sell stocks, and they certainly weren’t needed this month as the MSCI All-Country World Index jumped almost 2% and the value of the planet’s equities reached a record $64 trillion. Emerging markets led the gains in stocks as benchmark indexes in India, Russia, Hungary and Argentina jumped at least 8%. The Scout motto, of course, is “always be prepared.” So as the final sand of the market’s month slips through the hour glass, it’s a good time to reflect on how some investors and pundits were well prepared for all the wrong things in May.

In the Treasury market, conventional wisdom was to expect higher yields by now as we bid adieu to quantitative easing. (Or if you prefer the parlance of Internet commenters: bid adieu to imaginary Monopoly money printed by central banksters to puff up prices and make us so complacent we won’t notice when they come to grab our guns. Wake up, sheeple!) A Bloomberg survey of analysts in February called for the 10-year Treasury rate to jump this quarter to 3.15%, which would’ve been the highest since 2011. Instead, the yield fell steadily through May and touched an almost one-year low of 2.40%. Sovereign rates reached record lows in Spain and Italy amid speculation European central banksters would puff up prices with imaginary euros so no one notices when they come to grab their Vespas and Nebbiolo.

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That’s the euro for you.

Spain Sees 500% Rise In ‘Very Long-term Unemployment’ (RT)

Over one million people in Spain – the eurozone’s fourth largest economy – haven’t had a job since 2010, according to a report by Spain’s National Statistics Institute. Although this number continues to rise, the government says it’s witnessing recovery. The numbers, published on May 23, show that “very long-term unemployment” in the country has risen by more than 500% since 2007. That year, about 250,000 Spaniards were unemployed after losing their job at least three years prior. That number drastically rose to 1.27 million in 2013 – 234,000 more than in 2012. Generally, long-term unemployment includes jobless workers who have not been employed for more than 27 weeks.

The recent study shows that this category in Spain has transformed to very long-term unemployment, with hundreds of thousands people without a job for at least three years, and is now represented by over 23% of the total jobless population in Spain. The number is much higher than in other countries in the region at the same economic level, with another recent study showing that 26% of the country’s population is on government benefits in Spain – the second highest total in the EU after Greece. Still, politicians claim the nation emerged from years of on-and-off recession in mid-2013 and the situation continues to improve. On May 29, Spain reported its fastest economic growth since 2008, when the ten-year property bubble burst and prompted a financial crisis.

With millions of people searching for work in vain in the eurozone’s fourth largest economy (behind Germany, France, and Italy), the International Monetary Fund said this week that the country’s recovery is here to stay. “Spain has turned the corner,” the IMF’s annual report on the country’s economy stated. Earlier this year, Spain’s Economy Minister Luis de Guindos told parliament that in 2013 the economy saw the fastest growth the country had seen in six years. A couple months later, a study by Spain’s second biggest bank, BBVA, said that unemployment rates would take over a decade to recover to pre-crisis levels.

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In Spanish Riots, Anguish of Those Recovery Forgot (NY Times)

Four nights of rioting here in Spain’s tourism capital have highlighted the country’s persistent social tensions and belied signs of relief from a fragile economic recovery, which has yet to alleviate rampant joblessness. The rioting started on Monday when Barcelona’s City Hall ordered the eviction of squatters from Can Vies, a warehouse abandoned by the city’s transport authority. The site, in the Sants district, was taken over by squatters 17 years ago and turned into a makeshift social center. City officials said they wanted to reclaim the site for a park. After attempts to clear the site, protesters threw stones, barricaded streets, smashed bank and shop windows, and set fire to garbage containers and a television van. The rioting has since spread to other parts of the city, and police officers have arrested scores of people. On Friday, City Hall backed down and said in a statement that plans for the demolition of the site would be halted to help “favor a climate of dialogue.”

The squatters nonetheless pledged to continue their protests and to rebuild the half-destroyed center over the weekend. Joan Maria Solé, deputy director of the Federation of Neighborhood Associations of Barcelona, said the attempt to replace the Can Vies building with “a hypothetical park or green area” showed that City Hall was insensitive to the widening income gap among residents. Since hosting the Olympic Games in 1992, Barcelona has become one of Europe’s biggest tourism hubs, with a record 7.5 million visitors last year. The rise in tourism has helped Barcelona weather the economic crisis that hit Spain in 2008 better than many cities. Over all, the city of Barcelona’s unemployment rate is nearly 18%, roughly 8%age points lower than the national average, although there are big discrepancies between the city’s poorest and richest neighborhoods.

“Barcelona is full of contradictions, especially between those who are now unemployed and those who are just focused on earning even more from tourism,” Mr. Solé said. Can Vies, he added, “is unfortunately a more realistic image of Barcelona than the brand City Hall tries to sell.” The rioting this week echoed similar episodes elsewhere in Spain and in Turkey, where plans by Istanbul’s mayor to redevelop a popular public square set off weeks of protests last year. In January, the Gamonal district of Burgos, in northern Spain, was the scene of prolonged street fighting over plans by City Hall to remodel an avenue and remove many of its free parking spaces at a time of deep cuts in other areas of public spending. The plan was eventually shelved. Mr. Solé described Can Vies as “something of a symbol for the deprived.” As in Burgos, he added, “it is the kind of spark that can set ablaze a fire that has long been simmering.”

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But how long for?

How China Hides Its Tumbling Housing Market: It Simply Ignores It (Zero Hedge)

Recently we showed that in order to goose its fading all-important housing market (to China housing is like the stock market to the US: both mission-critical bubbles designed to give a sense of comfort and boost the “wealth effect”), China has first resorted to zero money down mortgages across various markets, and secondly to such gimmicks as “buy one floor, get one free.” However, that’s only part of the story. Even worse is what is not being disclosed to the general public: such as the true state of the housing market in China. Because according to a recent report on Sina, quoted on Investing In Chinese Stocks, when it comes to revealing just how bad things are domestically, Chinese developers are simply pulling a page out of biotech ETF playbooks, and simply not reporting price drops greater than 15%! From Investing In Chinese Stocks (ICS):

Taking a page from the climate scientists who hid the cooling trend in global temperatures, Hangzhou government will hide the cooling trend in the real estate market. Any price decline more than 15% below the list price will not be entered into the online registry. Developers are not forbidden from cutting prices and no sales will be stopped, though at least one developer expressed concern that advance sales permits may not be issued if the price cuts are deemed too large.

In other words, clear the market supply imbalance, but don’t see at market clearing prices, got that? Good luck. ICS goes on to show an example on the ground of just how profound the chaos is on the ground in China now that homes are suddenly in an air pocket with no (immediate) bailout coming from the government: according to at least one real estate agent, price cuts alone would be enough to kill his firm, and that is assuming sale pick up in the first place.

Hangzhou held a 4-day real estate exhibition recently. Attendance was 230,000, but only 32 homes were sold. These numbers are an improvement from 2013 and 2012 though. One state-owned developer said that price cuts cannot cure the market. The government must step in and ease buying restrictions, ease borrowing limitations, reduce bank reserve requirements, allow people to borrow for second and third homes, etc., in order to instill confidence in the market. The developer also said the media and experts were giving one sided reports, causing more chaos in the market, while buyers are more strongly adopting the wait and see attitude. He said buyers have no bottom line, if you cut 10%, they want 15%, if you cut 15% they want 20%. His firm has used price cuts of 10% and he hasn’t sold a home in 3 months. He said with government support, they can survive, but small private firms are not so confident.

A real estate agent said that even if sales pick up, price cuts will kill the firm. He said the government is more nervous than the industry because if land sales stop, they might not even be able to pay the wages of government workers. He expects, and hopes, the government will do something to rescue the market.

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We know how to take care of ourselves.

Toxins Accelerate Human Aging Process (NatGeo)

Why do our bodies age at different rates? Why can some people run marathons at the age of 70, while others are forced to use a walker? Genes are only part of the answer. A trio of scientists from the University of North Carolina argue in a new paper that more work needs to be done on “gerontogens”—factors, including substances in the environment, that can accelerate the aging process. Possible gerontogens include arsenic in groundwater, benzene in industrial emissions, ultraviolet radiation in sunlight, and the cocktail of 4,000 toxic chemicals in tobacco smoke. Activities may also be included, like ingesting excessive calories, or suffering psychological stress. Writing in Trends in Molecular Medicine, Jessica Sorrentino, Hanna Sanoff, and Norman Sharpless argue that focusing on such factors would complement more popular approaches like studying molecular changes in old bodies and searching for genes that are linked to long life.

“People have focused on slowing aging, which always struck me as premature,” says Sharpless. Even if scientists announced tomorrow that they’d discovered an antiaging pill, he says, people would have to take it for decades. “Getting [healthy] people to take medicine for a long time is challenging, and there are always side effects,” Sharpless says. “If you identify stuff in the environment that affects aging, that’s knowledge we could use today.” Twin studies have suggested that only around 25% of the variation in the human life span is influenced by genes. The rest must be influenced by other factors, including accidents, injuries, and exposure to substances that accelerate aging. “The idea that environmental factors can accelerate aging has been around for a while, [but] I agree that the study of gerontogens has lagged behind other areas of aging research,” says Judith Campisi of the Buck Institute for Research on Aging.

She adds that scientists have become more interested in these substances in recent years after learning that many types of chemotherapy, and some anti-HIV drugs, can speed the onset of age-related traits like frailty and mental decline. The quest to identify gerontogens is partly a quest to find better way of measuring biological age. There are several options, each one imperfect. Researchers could look in the brain and measure levels of beta-amyloid, a protein linked to Alzheimer’s disease, but these levels would not reflect aging in other parts of the body. They could measure the length of telomeres—protective caps at the end of our DNA that wear away with time. But doing so is hard and expensive, and telomere length naturally varies between people of the same age.

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May 062014
 May 6, 2014  Posted by at 3:08 pm Finance Tagged with: , ,  6 Responses »

Russell Lee 3-room shack of hired man for tenant farmer and family of 10, Dickens, Iowa 1936

Hurray! Americans have found a new source of spending money; after ATM-draining their home equity till even the roofs were underwater, and maxing out every single little shred of plastic they could lay their hands on, “families looked around for what was left”, and now it’s time to empty out 401(k)’s until there’s really nothing left at all anymore. Then it’ll be recovery or die, presumably. But a recovery is not going to happen, and certainly not for society’s bottom rung. Oh well, maybe there’s some form of slavery they can enter into. Not surprisingly, the US government is quite content with this new development:

Early Tap of 401(k) Replaces Homes as American Piggy Bank

“They get hit with the penalty at exactly the time when they’re the most vulnerable,” said Reid Cramer, director of the Asset Building Program at the NAF, which tries to improve savings for lower-income families. “So it’s a real double-whammy.” For decades, Americans’ homes were their piggy banks. As values rose, they refinanced or took out second mortgages. Since the housing collapse of 2008, that’s often no longer an option.

The IRS collected $5.7 billion in 2011 from penalties, meaning that Americans took out about $57 billion from retirement funds before they were supposed to. [..] Adjusted for inflation, the government collects 37% more money from early-withdrawal penalties than it did in 2003. Meanwhile, the amount of home-equity loans outstanding was $704 billion in 2013, down 38% from the 2007 peak, according to Federal Reserve data.

“They didn’t have access to the home equity that they had in the past”, Cramer said. “And families looked around for what was left and they actually drained the value from the 401(k).” In 2011, 5.7 million tax returns, or about 4% of all U.S. households, reported paying penalties on early withdrawals. The government collected more than enough money from these penalties to fund the National Oceanic and Atmospheric Administration.

But wait, there’s hope. Eternal hope. Karen Weise for BusinessWeek reports in a piece filled with joyful glee that Americans who still have a home are less underwater than they used to be:

America’s Underwater Homeowners Are Afloat Once Again

At the bottom of the housing crash, more than a third of all homeowners owed more than their houses were worth. They were plunged underwater by a combination of collective overborrowing during the housing bubble and plummeting prices during the crash. Bit by bit over the years, homeowners have been climbing out of that hole, and new data from Black Knight Financial Services show that borrowers are approaching a threshold that will see only one in 10 U.S. borrowers underwater on home loans.

But not so fast, I beg of thee. Let’s see what’s brought about this happy news. Karen does know something:

Foreclosures wiped away the mortgages of many of the most indebted. In January 2010, 10% of borrowers owed at least 50% more than their homes were worth. By January 2014, that number fell to 2% of borrowers.

Hmm. That puts a bit of a dent in the joy, doesn’t it? The last number I’ve seen for total foreclosures in the US since the wrecking ball came down is about 7 million. If we may assume the majority of those were the deepest underwater loans out there, it’s no wonder that A) there are fewer “owners” underwater, and B) the average amount owed has gone down. On top of that, there’s something else that murks the numbers:

Cash buyers have flooded the markets, making up more than a quarter of all home sales in March. That means homes that were once financed with debt are now paid for entirely with equity.

By now I don’t feel all that joyful anymore, but Karen has less scruples. She came to write a happy piece, and she’ll stick with that idea. For the rest of us, what this comes down to is that the tens of thousands of all-cash purchases by the likes of America’s biggest homeowner, private equity fund Blackstone, have not only lifted prices, they also make numbers of average debt owed look much better. Just don’t tell the better-looking “owners” that Blackstone cut its purchases by 90% recently, and other all-cash buyers will follow suit, if they haven’t already. A simple matter of supply and demand, investment and return.

Average debt owed went down because the “worst offenders” of the subprime craze were foreclosed on, home prices rose somewhat because institutional investors stepped in to scoop up foreclosed properties, banks sit on huge numbers of homes they don’t want to finalize the foreclosure process on lest they have to transfer the losses to their books, and mortgage rates are only now coming up from a very low bottom. All factors that distort the picture.

The proof in the pudding: If these factors did not strongly influence the numbers we’re seeing, one number would be very different: the amount of home-equity loans. If things were really that much better now, banks would be more than happy to let people borrow more, not less, against their homes. They’re not. And that’s as good a sign of what is real and what’s not as we should need.

So count on a huge wave of Americans draining their 401(k)’s and other pension provisions, because many don’t have anywhere else to turn anymore. And don’t forget that much more even than home-equity loans, early 401(k) withdrawals are signs of desperation. They’re not used to buy granite kitchen tops or trips around the world or flashy foreign cars. Your typical early 401(k) withdrawal is about survival. About people who look around for what is left, and find nothing else.

Early Tap of 401(k) Replaces Homes as American Piggy Bank (Bloomberg)

Premature withdrawals from retirement accounts have become America’s new piggy bank, cracked open in record amounts during lean times by people like Cindy Cromie, who needed the money to rent a U-Haul and start a new life. Her employer, the University of Pittsburgh Medical Center, had outsourced Cromie’s medical transcription work. Cromie said the move cut her income by as much as 60%, at times leaving her with minimum-wage pay. So, last year, at age 56, she moved about 90 miles from her home in Edinboro, Pennsylvania, into her mother’s basement. To make ends meet as she moved and then quit the job, Cromie pulled out $2,767 from her retirement savings. “We made two trips and it just got to be real expensive,” she said. “That money, it was a security that I needed.”

Still unemployed, Cromie is trying to avoid tapping what’s left of her retirement savings – $7,000 that would be subject to taxes and a 10% extra penalty if she touches it in the next two to three years, before she turns 59 1/2. It’s a small number that’s part of a much larger picture: The Internal Revenue Service collected $5.7 billion in 2011 from penalties, meaning that Americans took out about $57 billion from retirement funds before they were supposed to. The median size of a 401(k) is $24,400 as of March 31, with people older than 55 having $65,300, according to Fidelity Investments. Those funds can disappear quickly in retirement, and the early withdrawals indicate that the coming retirement crisis could be even more acute than expected.

“They get hit with the penalty at exactly the time when they’re the most vulnerable,” said Reid Cramer, director of the Asset Building Program at the New America Foundation, which tries to improve savings for lower-income families. “So it’s a real double-whammy.” For decades, Americans’ homes were their piggy banks. As values rose, they refinanced or took out second mortgages. Since the housing collapse of 2008, that’s often no longer an option. Taking money from a 401(k) – and worrying about the consequences later – became a more attractive alternative and a record number of Americans made early withdrawals in 2010.

Adjusted for inflation, the government collects 37% more money from early-withdrawal penalties than it did in 2003. Meanwhile, the amount of home-equity loans outstanding was $704 billion in 2013, down 38% from the 2007 peak, according to Federal Reserve data. “They didn’t have access to the home equity that they had in the past,” Cramer said. “And families looked around for what was left and they actually drained the value from the 401(k).” In 2011, 5.7 million tax returns, or about 4% of all U.S. households, reported paying penalties on early withdrawals. The government collected more than enough money from these penalties to fund the National Oceanic and Atmospheric Administration. As economic conditions deteriorate, such withdrawals spike, as they did in 1991, 2002 and 2007. The inflation-adjusted penalty collections declined 5% in 2011, the last year for which complete data is available.

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Well, it’s still one bubble in the end.

Is the Housing Market Filled With 1,000 Mini Bubbles? (Wall St. Cheat Sheet)

The housing market is experiencing a case of deja vu. While the economy is still trying to recover from the credit meltdown that took place more than five years ago, home values in more than 1,000 cities and towns are already at or near their bubble-era peaks. According to a new analysis from Zillow, home values increased 5.7% year-over-year in the first quarter to an average of $169,800. In fact, home values have climbed higher on a year-over-year basis for 21 consecutive months. This has helped erase the losses of the housing bubble for 1,080 cities and towns across the nation. Seven of the largest 35 metros in the United States have already exceeded or will exceed their bubble peak levels by March 2015. [..]

Americans appear more than willing to forget about the disastrous housing bubble of yesteryear. Gallup recently found that 56% of Americans expect average home prices in their local area to increase, its highest reading since 2007, and up from only 33% two years ago. Meanwhile, 30% of Americans believe real estate is the best long-term investment option, compared to stocks and gold at 24%. Home values are rising, but fewer people are buying. The National Association of Realtors recently announced that total existing-home sales in March posted their seventh decline in the past eight months, representing the slowest pace since July. In a separate report, the U.S. Census Bureau said purchases of new single-family homes plunged 14.5% in March from the previous month.

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I don’t like the combination of “stubbornly-high unemployment rates” and “a crucial buying opportunity”. That can only exist in manipulated markets.

Market Reversal Alert (Michael Pento)

Scenario number one: Economic growth and inflation reach the Fed’s target levels and interest rates rise sharply on the long end of the yield curve to reflect the increase in nominal GDP. This will cause a selloff in the major averages, as the 10-Year Note jumps to 5% from its current level of 2.70%. Surging interest rates—the result of inflation and the end of QE rate suppression—will provide competition for stocks for the first time in seven years and a correction of around 10-20% occurs.

Scenario number two: The economy once again fails to make a meaningful recovery, and the overvalued market crumbles under the weight of anemic revenue and earnings growth that is woefully insufficient to support the current lofty PE ratios. Without the aid of massive money printing from the Fed, or a surge in GDP growth, a significant correction north of 20% is highly probably. Keep in mind revenue and earnings growth are less than half the historical average, and need to rapidly accelerate in order to justify the current level of the market.

For stocks prices to rise from this point, the economy must grow rapidly without causing interest rates to rise. This is a virtually impossible scenario, especially since the Fed is removing its bid for Treasuries. So, it’s either the economy doesn’t improve and stocks fall—because the Fed won’t reverse course and increase QE on a dime; or the economy improves and the interest rates spike spooks the market. Either way, the market goes down in the short term. I believe a bear market will ensue from weakening economic growth combined with the attenuation of Fed asset purchases. Further proof of our structurally-anemic economy, came when the BEA released data on April 30th that showed the economy grew at an annual growth rate of just 0.1% during Q1.

Our central bank is now buying $45 billion per month of MBS and Treasuries. Down from $85 billion at the start of this year. That number will be near zero in just a few months. Real estate and stock prices have already stopped rising and economic growth has almost completely stalled since the start of 2014. The bear market in equities and stubbornly-high unemployment rates should bring the Fed back into the debt monetization business shortly after the market crashes. This significant selloff should prove to be a crucial buying opportunity in which investors need to be preparing now to take full advantage of.

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Check. Check. Check. Check. Check. Check. Check. Check.

Eight Characteristics Of Stock Market Manias (GMO)

1. This-time-is-different mentality. Throughout history, successive market manias have been rationalized with the argument that history is no longer a reliable guide to the future. Both the “new era” of the 1920s and “new paradigm” of the 1990s were marked by a “this-time-is-different” mentality.

2. Moral hazard. Speculative bubbles tend to form when market participants believe that financial risk has been underwritten by the authorities.

3. Easy money. Great speculative bubbles have generally been accompanied by periods of low interest rates.

4. Overblown growth stories. Another common feature of a bubble is the overblown growth story. We witnessed this during the Dotcom bubble, ad nauseam.

5. No valuation anchor. The most speculative markets – from the 17th century Dutch tulip mania onwards – have been marked by the absence of any valuation anchor; when there’s no income to tether the speculator’s imagination, asset prices can become unbounded.

6. Conspicuous consumption. Asset price bubbles are associated with quick fortunes, rising inequality, and luxury spending booms.

7. Ponzi finance. Manic markets are often marked by a decline in credit standards.

8. Irrational exuberance. Valuation is the truest measure of speculative mood.

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Reform. Deregulation. Abe’s got a free copy of the IMF handbook.

Abenomics Third Arrow Creates Anxiety Among Japanese Workers (CNBC)

The prospect of labor market deregulation – a key feature of the third “arrow” of Prime Minister Shinzo Abe’s economic revival program – is creating anxiety amongst workers in Japan, says Nobuaki Koga, president of the Japanese Trade Union Confederation (Rengo). “We as workers are very much concerned about how that will be implemented. We have doubts about such a direction in policy and are quite concerned,” Koga told CNBC on the sidelines of the annual meeting of the Organisation for Economic Co-operation and Development (OECD) in Paris. Rengo is the nation’s biggest umbrella body for labor unions, representing over 6 million working men and women in Japan. “What we are hearing and seeing are only measures and ideas that will give anxiety and worries to people in terms of the security of their employment. Because of that, we oppose this [labor deregulation],” he said.

Freeing up the rigid labor market is seen as central to the government’s structural reform program. However, Abe has so far made little progress with pushing ahead labor reforms due to strong domestic opposition. Relaxing stringent job protections is seen as a step necessary to make Japanese companies more competitive and to attract foreign investment. Abe last week said he remains committed to make working conditions more flexible. “Over the past year we’ve realized how difficult it has been to do so. But we cannot grow without labor reforms. We are determined to make that happen,” Abe said in in a meeting with business leaders in London last Thursday.

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Financial innovation. Redux.

Here They Go Again: Wall Street Is Offering Debt-On-Debt-On-Debt! (Stockman)

Here’s how the daisy chain of debt works— short form. LBO’s issue debt—loads of it. Leveraged buyouts are now being priced at typical top-of-the-bubble ratios of 10X cash flow (“adjusted EBITDA”). The portion of these LBO debt towers that consists of bank term loans and revolver facilities is sold to freshly minted financial conduits called CLOs (for Collateralized Loan Obligations) which are not real companies and which do not have any money! No problem. What happens is that credit hedge funds and Wall Street trading desk hit a computer key, open a new spreadsheet window, wrap it in legal boilerplate, provide this newly minted CLO with a credit line and then start bidding for available LBO paper in the junk loan market.

When they have accumulated enough offers, they slice and dice the resulting portfolio of LBO loans, and issue multiple tiers of debt– with these new slices being rated from AAA to junk against the loans listed on the spreadsheet. So we now have a spreadsheet, a part-time “portfolio manager” and hundreds of millions of the latest CLO toxic waste. For 95 weeks running, there was no want of buyers for this CLO issued paper. In its infinite wisdom, the Fed drove interest rates on CDs and high quality paper to nearly zero—–so the scramble for “yield” was on. Soon Grandpa was being forced to buy a high yield mutual fund in order to pay the light bills.

But now LBO risks are soaring due to recklessly escalating deal prices and also because the LBO kings are stepping-up their patented late cycle cash strip-mining operations in the form of “leveraged recaps” funded with new “cov lite” debt. So even yield starved retail investors have begun to turn tail and run. During the last two weeks there were actually outflows from high yield mutual funds. That leaves a big gap in the market, however. The CLO jockeys are still banging out new spreadsheets, but buyers for the sliced and diced CLO paper are suddenly getting scarcer. Still, no problem! Here’s why. Wall Street is back in the business of lending money at the Fed’s gifted rate of zero plus a modest 80 basis point spread—so that the fast money can buy CLO paper on 9 to 1 leverage. There is your triple shuffle.

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We want QE! We want your citizens’ money!

OECD Calls For ECB To Cut Rates Immediately (WSJ)

The European Central Bank should immediately cut its benchmark interest rate, and may even then have to take additional measures to end a period of too low inflation in the euro zone, the Organization for Economic Cooperation and Development said Tuesday. In its twice-yearly Economic Outlook report, the Paris-based research body once again lowered its forecast for global economic growth, since it now expects a number of large developing economies to be more sluggish than it anticipated when it last published projections in November. The OECD said the global economy is in a less perilous state than it has been in recent years, and that policy makers “can now switch from avoiding disaster to fostering a stronger and more resilient recovery.”

But it added that growth is still more likely to be weaker than forecast, and faces a number of potential impediments, ranging from the impact on developing economies of a normalization of U.S. monetary policy, to instability in China’s financial system and the relatively new danger posed by rising tensions between Russia, the U.S. and the European Union over the future of Ukraine. The research body raised its growth forecast for the euro zone, but warned there is a risk that it will slip into deflation – or a period of self-reinforcing price declines – unless the ECB acts swiftly.

In unusually direct language, the OECD said the ECB’s main refinancing rate “should be reduced to zero” from 0.25% now, while policy makers should “possibly” cut the deposit rate “to a slightly negative level.” The research body said interest rates should not be raised from those levels until the end of 2015 at the earliest. “In particular, we call on the European Central Bank to take new policy actions to move inflation more decisively toward target and to be ready for additional nonconventional stimulus if inflation were to show no clear sign of returning there,” said Rintaro Tamaki, the OECD’s acting chief economist. He noted that new, longer-term funding for banks and purchases of government and company bonds known as quantitative easing may be necessary.

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I don’t think so. it’d be great, but there’s too much resistance.

EU Eyes Financial Transaction Tax to Start in 2016 (Bloomberg)

European finance ministers are designing a financial-transaction tax on equities and derivatives that could start in 2016 for the 11 nations that have signed up to participate. French Finance Minister Michel Sapin said details could be presented by the end of this year, to take effect at the start of 2016. “A critical mass” is emerging among nations including France, Germany, Italy and Spain, he told reporters yesterday after euro-area ministers met in Brussels. Work on a transaction tax for the 11 willing countries began more than a year ago, after a European Union-wide proposal failed. So far, the participants have remained committed to the cause without finding agreement on how the tax could work.

The participants haven’t been able to agree on whether to tax all derivatives, only equity derivatives or none at all. Nations pushing for the levy are also split over who should get to collect it, a trading firm’s country of origin or the nation where trading takes place. Smaller countries have generally sought a broader tax that raises more revenue, while bigger nations have been willing to start on a smaller scale. EU Tax Commissioner Algirdas Semeta said in Vilnius yesterday that there isn’t a common approach on how to handle derivatives. Sapin said further work would pin down how the tax’s scope would take shape.

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Think it’s bad now?

China Property Value Concern Deepens (Bloomberg)

Chinese stocks trading in the U.S. snapped a four-day gain as E-House China Holdings led a drop in real-estate companies amid mounting concern that home sales in the world’s second-largest economy are slowing. The Bloomberg index of the most-traded Chinese stocks in the U.S. fell 0.5% to 99.65 yesterday, while a gauge of Shanghai property stocks was little changed today. The American depositary receipts of E-House, a real-estate agent, dropped as much as 6.1%. SouFun Holdings, which operates a real estate website, sank for the first time in three days. New Oriental Education & Technology Group tumbled the most on the ADR gauge as Deutsche Bank cut it to hold from buy.

Sales of new homes in 54 cities during the May 1 to May 3 holiday fell 47% from the same period in 2013 to the lowest level in four years, Centaline Group, parent of China’s biggest real-estate brokerage, said May 4. The report comes two weeks after the National Bureau of Statistics said the value of residential sales slumped 7.7% in the first quarter. “I am cautious toward the Chinese property market,” Elena Ogram, a Zurich-based investor at Bank Bellevue AG, who oversees $50 million in emerging-market assets including Chinese stocks, said by phone. “The government may take steps to support the market, but we are not expecting any rosy news.”

The iShares China Large-Cap ETF, the largest Chinese exchange-traded fund in the U.S., dropped 0.9% to $34.70. The Shanghai property stock index dropped 0.1% today, extending a four-day, 5.2% decline. E-House fell 3.3% to $8.91. SouFun retreated 2.7% to $12.25. Developers including China Vanke Co. and Greentown China Holdings Ltd. have cut prices, and discounts have spread from smaller cities with “a massive” oversupply to big cities including Shanghai and Guangzhou where demand remains strong, according to an April 28 report by China Real Estate Information Corp., a property data and consulting firm.

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Hey, just buy in London …

China’s Millennials Can’t Afford Homes in Beijing (BusinessWeek)

For many young professionals in Beijing, the dream of owning a home feels increasingly remote. Soaring home prices—driven in large part by the popularity of real estate as an investment vehicle in China—mean that even relatively successful young workers find it hard to climb onto the housing ladder in leading cities. According to a recent study by the University of International Business & Economics in Beijing, fewer than a quarter of college-educated, employed professionals in Beijing age 34 and younger are homeowners. Those with relatives in the capital city often reside with family members. Others rent apartments—paying, on average, 37% of their monthly income in rent.

Of those young respondents who were homeowners in Beijing, fully three-quarters said they received substantial help from their parents or other family members. And of those, 25% said their parents had paid the full price of their home outright in cash. The financial wherewithal of the prior generation is “playing a decisive role” in determining which young people are able to sign property deeds, as “support from parents is a crucial way to obtain a house,” the report concluded. In other words, class mobility is apparently shrinking—at least for young people trying to make it on their own in China’s most expensive cities.

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Hm. WHo are they going to sell it to? And at what price? And what happens to the double digit interest rate shadow loans?

China Provinces Eye Sales From $7 Trillion Asset Holdings (Bloomberg)

President Xi Jinping’s plans to open China’s state-owned enterprises to competition are spurring local officials to consider asset sales that could help rein in provincial and municipal debt. Businesses controlled by local administrations, which range from hotels to retailers to power generators, had assets of 43.8 trillion yuan ($7 trillion) as of the end of March, according to Ministry of Finance estimates. The southern provinces of Guangdong, which has the biggest regional economy, and Guizhou pledged this year to look at changes in ownership structures for their holdings in coming years.

With the central government setting direction, such as through the transfer of assets at Citic Group Corp. to its Hong Kong-listed unit, a “quiet wave” of stake sales by local authorities may come in 2015-16, according to Standard Chartered Plc. Productivity gains from revamping public-sector businesses would help China counter its investment-led slowdown. “The movement on this has happened at a surprisingly fast pace,” said Andrew Batson, an analyst in Beijing at researcher Gavekal Dragonomics who has covered China since 1998. “Local governments have these huge off-balance-sheet debts, so they have a much stronger incentive than the central government necessarily does to try to raise cash from asset sales.”

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Hello New Zealand.

China Imposes New Limits On Foreign Dairy Imports (NY Times)

The Chinese government has imposed new limits on foreign brands of milk powder and infant formula sold in China, according to reports on Monday by the state-run news media. The restrictions appear to be the latest attempt by the government to reduce the enormous demand for foreign-made dairy products and bolster the sales of domestic brands. The new restrictions require foreign makers of milk powder to register the products, as well as their manufacturing and storage centers, with the government before the products can be sold in China.

On Monday, The Beijing News released a list of the 41 foreign companies and manufacturing sites that have been registered so far. It includes subsidiaries of Nestlé, a Swiss company, in Germany and the Netherlands; Wyeth Nutrition, a company that Nestlé recently bought from Pfizer, in Ireland; Abbott Laboratories, an American company, in the Netherlands; and Nutricia, owned by Danone of France, in New Zealand, Germany and the Netherlands. The list could expand as more companies apply to register their products with China’s General Administration of Quality Supervision, Inspection and Quarantine.

The new rule officially went into effect last Thursday. A month before, the government began requiring foreign makers of milk powder to put Chinese-language labels on products intended for sale in China before the products were shipped to the country. The Beijing News quoted a dairy industry expert who said that the government was trying to stop “illegal” brands from being sold in China and to allow only large, trusted brands into the market. The demand in China for foreign-made infant formula and milk powder surged in 2008, when at least six babies died and more than 300,000 children fell ill after drinking milk products tainted with melamine, a toxic chemical used in manufacturing. Government officials prevented Chinese news organizations from reporting the deaths and illnesses until after the end of the Beijing Summer Olympics, leading to accusations of a government cover-up. Later, the government suppressed calls by grieving parents for a thorough investigation.

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UK Energy Too Cheap, Says Study (Guardian)

The government must urgently establish a strategic authority to oversee the future growth of Britain’s ageing energy infrastructure, a study argues on Tuesday . Academics at Newcastle University challenge the government’s market-based approach, saying the £100bn needed to secure energy security is not being delivered by a fragmented system that lacks central direction. The academics, led by Prof Phil Taylor, argue that the country needs a “systems architect” and that energy, at least for the bulk of the population, is too cheap, which is leading to waste.

While the Labour party has already said it wants an energy security board, one leading figure in the industry has said that Taylor was highlighting that “nobody is in charge” of the country’s energy policy. Before Tuesday’s launch of the university’s latest energy briefing note, Taylor, who leads its Institute for Research on Sustainability, said: “The current pricing model does not accurately reflect the high economic and environmental cost of generating, storing and distributing energy. In fact, because of the way energy is sold today, it becomes cheaper the more we use. This is unsustainable. “Although we must make sure people can afford to heat their homes, for the majority of us energy is actually too cheap – this is why we leave lights on, keep appliances running and use machines at peak times when energy costs more.”

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“The last refuge of the desperate”.

Self-Employment Surge Hides Real Story Behind Upbeat UK Job Figures (Guardian)

Coalition claims that “more people are in work than ever before” have been undermined by a report that shows the number of traditional employee jobs is falling or flatlining across the country – a phenomenon masked by an explosion in recorded self-employment which one economist describes as “the last refuge of the desperate”. Only London has shown a marked rise in employee jobs in the last six years, according to new analysis by the independent thinktank the Resolution Foundation, seen exclusively by the Guardian.

The research reveals that the total number of employed jobs fell in nine of 12 regions between 2008 and 2013, ranging from a drop of 156,000 posts in Scotland, to a fall of 24,000 in the east Midlands. The numbers of employee jobs in the south-east (-1,000) and eastern region (+4,000) remained virtually static, while in London, uniquely, 285,000 were created. Any increase in the number in work in other regions over the 2008 baseline, after four years of recovery, was due to rising rates of self-employment, which was up everywhere except Northern Ireland.

The number of self-employed jobs rose by 116,000 in the south-east, by 85,000 in London itself, by 67,000 in the east and by 61,000 in the west Midlands. The 58,000 additional self-employed posts in the south-west and 43,000 in the east Midlands were sufficient to offset the loss of employed jobs locally. The labour market economist and former Bank of England rate-setter David Blanchflower, who has studied trends in self-employment for many years, said: “Particularly after a prolonged downturn, there is a well-documented pattern of people failing as jobseekers and then moving into self-employment status, often out of desperation rather than anything more positive.”

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Don’t Brits still just like the idea of a ruling class?

Welcome To Britain, The New Land Of Impunity (Monbiot)

When I first worked in Brazil in the late 1980s, the country was widely described as o pais da impunidade – the land of impunity. What this meant was that there were no political consequences. Politicians, officials and contractors could be exposed for the most flagrant corruption, but they remained in post. The worst that happened was early retirement with a fat pension and the proceeds of their villainy safely stashed offshore. It is beginning to look a bit like that here. This is not to suggest that the people or companies I name in this article are crooked or corrupt; it is to suggest that the political class no longer seems to care about failure.

The failure works both ways, of course. As Polly Toynbee has shown, the Help to Work pilot projects, which G4S will run, reveal that it is a complete waste of time and money. Yet the government has decided to go ahead anyway, subjecting the jobless to yet more humiliation and pointlessness. Contrast the boundless forgiveness of G4S to the endless castigation for being unemployed. A record of failure reflects the environment in which such companies are hired: one in which ministers launch improbable schemes then look the other way when they go wrong. G4S had to pay back so much money for the phantom criminals it wasn’t monitoring because it had been doing it for eight years, and no one in government had bothered to check. There is no such thing as failure any more, just lessons to be learnt.

Accountability has always been weak in the UK, but under this government you must make spectacular efforts to lose your post. At the Leveson inquiry in May 2012, the relationship between the then culture secretary Jeremy Hunt and the Murdoch empire that he was supposed to be regulating was exposed in gory detail. He was meant to be deciding impartially whether to allow the empire to take over the broadcaster BSkyB, but was secretly exchanging gleeful messages with James Murdoch and his staff. We all knew what it meant. The emails, the Guardian observed, were likely to “sever the slim thread connecting Hunt to his cabinet job”. “After this he’s toast … it’s over for Hunt,” wrote Tom Watson MP. Ed Miliband said: “He cannot stay in his post. And if he refuses to resign, the prime minister must show some leadership and fire him.” We waited. Hunt remained culture secretary for another four months, then he was promoted to secretary of state for health.

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“You all know each other. You work together. You trade with each other. You are part of this little clique and we the ordinary taxpayer lose out on it.”

There’s No Proof That Privatisation Works, But Britain Keeps Selling (Guardian)

If you think the government might hesitate to sell other national assets after the Royal Mail fiasco, think again. The Land Registry, the office that certifies property ownership, a quasi-judicial function, is being readied for privatisation. It collates data on prices and transactions and catches fraudsters. It has cut its fees, scores 98% satisfaction and last year made a £98.7m profit for the Treasury – yet it’s part of this government’s £20bn asset sell-off. In the Royal Mail debacle, shares sold at £1.7bn rose to £2.7bn. The 16 investors chosen as “long-term” custodians included the most wolfish hedge funds, who sold the shares at once. Let’s hope that ends any pretence that shareholders look after companies.

What’s more, the investment arm of Lazards, key adviser to Vince Cable, was also given “priority” status. But Lazard Asset Management sold its entire stake within a week at a profit of £8m. Likewise Goldman Sachs, employed to facilitate the sale, told its investors share prices would hit 610p a month after advising the government to float at 330p. How well these companies deserved their tongue-lashing from Margaret Hodge: “You all know each other. You work together. You trade with each other. You are part of this little clique and we the ordinary taxpayer lose out on it.” This is a case of caveat vendor.

We should beware the inherent asymmetry when the state sells contracts and assets. On the government side, this is negotiating with a political gun at the head, conducted by inexperienced civil servants told to secure complex objectives, unable to walk away from already announced sell-offs. On the market side is rat-like native cunning impelled by profit, willingness to give mendacious assurances with one easy objective – to make money. Governments will always need to deal with markets for procurement and regulation – but that needs a strong, experienced civil service with equal cunning, not one cut by 30%, losing memory of past errors.

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Jim Kunstler quotes me…

Lying or Just Stupid? (Jim Kunstler)

• It’s not always easy to define what exactly is wrong with America, but what ever it is, it’s huge.
— Raúl Ilargi Meijer, The Automatic Earth.com

• Nobody knows, from sea to shining sea, why we’re having all this trouble with our Republic.
— Tom McGuane, Ninety-Two in the Shade

Despite its Valley Girl origins, the simple term clueless turns out to be the most accurate descriptor for America’s degenerate zeitgeist. Nobody gets it — the “it” being a rather hefty bundle of issues ranging from our energy bind to the official mismanagement of money, the manipulation of markets, the crimes in banking, the blundering foreign misadventures, the revolving door corruption in governance, the abandonment of the rule-of-law, the ominous wind-down of the Happy Motoring fiasco and the related tragedy of obsolete suburbia, the contemptuous disregard for the futures of young people, the immersive Kardashian celebrity twerking sleaze, the downward spiral of the floundering classes into pizza and Pepsi induced obesity, methedrine psychosis, and tattooed savagery, and the thick patina of public relations dishonesty that coats all of it like some toxic bacterial overgrowth. The dwindling life of our nation, where anything goes and nothing matters.

It’s not just the individual cluelessness of ordinary people leading lives too frantic for a moment’s reflection about anything, but the appalling institutional cluelessness of enterprises where you’d think combined intellects might tend toward a more faithful view of reality. But these days all we get is a low-order of wishful and clownish group-think, such as this item from today’s New York Times discussing a proposed reversal of Gazprom pipelines along the Ukraine / Slovakian frontier as the solution to the Kiev government’s fuel problem:

Nearly all the gas Washington and Brussels would like to get moving into Ukraine from Europe originally came from Russia, which pumps gas westward across Ukraine, into Slovakia and then on to customers in Germany and elsewhere. Once the gas is sold, however, Gazprom ceases to be its owner and loses its power to set the terms of its sale.

Get that? To avoid depending on Russian gas, they’re going to buy Russian gas from sources other than Russia. What New York Times editor can read this story without spraying her video display with coffee? What genius in John Kerry’s “Haircut-in-Search-of-a-Brain” State Department dreamed up this dodge? Who would think that you could improve a Chinese fire drill by tacking on a Polish blanket trick (i.e. trying to make your blanket longer by cutting a foot from the top and sewing it onto the bottom).

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I do look this.

New York City To Spend $41 Billion On Affordable Housing (CNBC)

New York City mayor Bill de Blasio has unveiled a 10-year plan—that will cost $41 billion—add 200,000 apartments to one of the most expensive and crowded housing markets in America. The plan aims to create enough housing to serve more than half a million New Yorkers. About 40% of the units will be newly built, while the remaining 60% will be “preserved”—which can mean anything from repairing and renovating existing affordable housing to protecting tenants from rising rents or eviction. It will also double the budget of the city’s Housing Preservation and Development agency, and will be funded through taxes, loans and money from private investors.

More than three quarters of these units will go toward households considered “low income” or poorer. About the 22% of the remaining apartments will go to moderate and middle-income New Yorkers, (which includes families of four making anywhere from $68,000 to nearly 140,000 annually). More than half of all New Yorkers pay more than 30% of their income toward rent, and about 35% of the city’s poorest—those who make less than about $42,000 a year—pay more than half of their income, according to figures cited in the plan. The complex plan will not just involve construction. The other initiatives include securing affordable housing in neighborhoods at risk of rising rents, providing tax incentives for building owners and subsidizing energy efficiency retrofits in existing buildings.

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When you read the entire article, a very peculiar picture emerges. German parliamentarians who are threatened with criminal liability in the US for wanting to hear Snowden?!

Merkel Sacrifices NSA Investigation For Unity On Ukraine (Spiegel)

In the world of diplomacy, moments of candor are rare, obscured as they are behind a veil of amicability and friendly gestures. It was no different last Friday at the meeting between US President Barack Obama and German Chancellor Angela Merkel in Washington. Obama welcomed Merkel by calling her “one of my closest partners” and a “friend” and took her on a tour of the White House vegetable garden as part of the four hours he made available. He praised her as a “strong partner” in the Ukraine crisis and thanked her many times for the close cooperation exhibited in recent years.

The birds in the Rose Garden sang happily as the president spoke. But then Obama made clear who had the upper hand in this wonderfully harmonious relationship. When a reporter asked why, in the wake of the NSA spying scandal, the no-spy deal between Germany and the US had collapsed, Obama avoided giving a clear answer. He also dodged a question as to whether Merkel’s staff is still monitored. Instead, he stayed vague: “As the world’s oldest continuous constitutional democracy, I think we know a little bit about trying to protect people’s privacy.” That was it.

Merkel, when asked if trust had been rebuilt following the NSA revelations, was much less sanguine. “There needs to be and will have to be more than just business as usual,” she said. If accepting defeat with a smile on one’s face is part of political theater, then Angela Merkel delivered a virtuoso performance. As recently as January, she delivered a sharply worded speech to parliament on the tactics used by US intelligence. “An approach in which the end justifies the means – one which employs every technical tool available – violates trust. It sows distrust.” She added: “I am convinced that friends and allies should also be able and willing to cooperate when it comes to defending against outside threats.”

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I’ll say it one more time: Shale is about land speculation, not energy. The energy part is only a passing phase.

No Gas No Problem for Shale Pipelines Backed by Private Equity (Bloomberg)

Pipeline companies have come down with shale fever. They’re so eager to grab a stake in the U.S. energy boom that they’re building transmission networks before getting the traditional commitment from drillers that anyone will actually use them. Instead of negotiating guarantees from drillers that they’ll pay fees or pump a minimum volume of oil and gas through their systems, pipeline companies such as Eagle Rock Energy Partners LP and Oryx Midstream Services LLC say they are signing agreements based on the acreage of the fields the producers plan to drill. Producers are getting away with it because there’s more competition to ship as domestic crude-oil output has risen to its highest level since 1988.

“There’s an assumption, and I’m not sure it’s exactly valid, that acreage will equal volume,” said Allen Gilmer, chairman and chief executive officer of Austin, Texas-based Drillinginfo Inc., which tracks wells. “I’d sure as heck want to have a volume consideration.” Six years into the shale-driven energy boom, pipeline companies, many of them backed by private-equity funds, are taking on the risk usually shouldered only by drillers — if the wells come in, they can reap a bonanza. If not, they face losses. Infrastructure firms have historically been less vulnerable to energy-price changes and unpredictable wells.

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Money trumps it all.

Rosneft And ExxonMobil Approve 4 Arctic Projects (RT)

Rosneft, one of the world’s largest oil companies, has given the go ahead on four Arctic projects with US oil giant ExxonMobil, despite the US government’s attempt to derail business relations with sanctions. The two companies will develop hydrocarbon reserves in the Arctic waters of Russia, including the Laptev and Chukchi Seas, Rosneft said in a statement Monday. The projects will explore and develop four licensed oil-rich reservoirs: the Anisinsk-Novosibirsk and Ust-Olenksk shelf sites in the Laptev Sea zone, as well as the North-Wrangel-2 and South-Chukchi shelf reserves, the statement said. No financial details were provided. Rosneft also plans to team up with Texas-based ExxonMobil to explore the remote Kara Sea in August.

Only Russian state-owned companies can obtain licenses to explore the Arctic, which has oil reserves estimated at 90 billion tons, or 13% of the world’s supply. Natural gas reserves stand at 1.67 trillion cubic meters, or 30% of the world reserves, and liquefied natural gas weigh in at 44 billion barrels, or 20% of potential reserves. Abundant and untapped, oil and gas above Russia offers a great investment opportunity, but at the same time, it is expensive and laborious to explore and drill in the harsh Arctic climate, which is only possible in three short summer months. The most recent round of US-led sanctions against the Russian economy put Igor Sechin, the CEO of Rosneft, but not the company, under sanctions. If further sanctions are pursued and the company itself is targeted, it could complicate business in Russia.

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Hey, it’s 86 years till 2100. Burn, baby, burn.

‘Uncorking’ East Antarctica Could Mean 10 Foot Sea-Level Rise (Discovery)

The melting of a small area of ice on the shore of East Antarctica could lead to sea level rise for thousands of years, reports a new study. The study appears in Nature Climate Change by scientists from the Potsdam Institute for Climate Impact Research (PIK). “East Antarctica’s Wilkes Basin is like a bottle on a slant,” said lead-author Matthias Mengel in a statement. “Once uncorked, it empties out.” A rim of ice currently holds back the largest region of marine ice on rocky ground in East Antarctica. Warming oceans could lead to loss of ice on the coast, while the air over Antarctica stays cold, the researchers say. If this rim is lost it could trigger sea-level rise of 300-400 centimeters (about 10-13 feet) the researchers report.

Sea level rise from Antarctica is projected to increase by 16 centimeters this century. “If half of that ice loss occurred in the ice-cork region, then the discharge would begin. We have probably overestimated the stability of East Antarctica so far,” said co-author Anders Levermann. Computer simulations of the region show it would take 5,000-10,000 years for the basin to discharge completely. But once started the basin would empty, even if global warming was halted. “This is the underlying issue here,” said Matthias Mengel. “By emitting more and more greenhouse gases we might trigger responses now that we may not be able to stop in the future.” Rising sea level could put coastal cities at risk, including Tokyo, Mumbai or New York, the researchers said.

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