Sep 232014
 
 September 23, 2014  Posted by at 11:28 pm Finance Tagged with: , , , ,  


Christopher Helin Service truck at Dodd warehouse, San Francisco 1919

Increasingly, the way the ‘booming recovery’ is presented to the public is so out there you could be pardoned for thinking someone is getting desperate. Like, really? Let’s start off with US housing. Here’s a few tidbits from a piece on Bloomberg today, and then we’ll compare that with something that’s 180º different, and I strongly suggest you be the judge. It’s not like you’ll be needing me to do the judging for you (not that you ever do, that’s not what I mean). I’ll give you a fair bit of quotes, just so you get a real good idea what exactly the picture is Bloomberg tries to paint here:

Housing to Outrun Capital Spending in Next Leg of US Growth

Residential investment grew at a 7.2% annualized rate in the second quarter and business outlays for equipment, structures and intellectual property rose at an 8.4% pace. Longer-run projections from Goldman Sachs show home construction will grow 10% to 15% by 2015-2016, while capital spending eases to about 5%. It’s a reminder of how “very different” this recovery is, Chief Economist Jan Hatzius said in an e-mailed response to questions.

“Normally, people think of housing as an early-cycle sector and capex as a late-cycle sector,” New-York based Hatzius said. “It is quite unusual for a housing recovery to lag a capital-spending recovery.” Given housing’s far-reaching ripple effects, an upturn in homebuilding would bring about a more viable expansion, and one that has a longer life, according to Ellen Zentner, a senior economist at Morgan Stanley in New York. Business outlays are more exposed to the ups and downs of global markets and tepid U.S. demand.

“Rather than waiting, waiting, waiting for an acceleration in capex, maybe modest growth is as good as it gets,” Zentner said. On the other hand, “we still have a lot of recovery left in housing.”

Homebuilding, which accounts for about 3% of gross domestic product compared with about 12% for capital spending, matters because of its “broader linkages that will feed back into the economy” to spur household spending, wealth, hiring, and confidence, said Michelle Meyer, senior U.S. economist at BofA.

So far, though, housing has yet to provide the “typical jolt,” she said. Residential investment has added 0.15% to GDP on average since the recovery began in June 2009. Business spending contributed 0.59 point. “It’ll be a bumpy housing recovery, but the path is higher,” Meyer said, citing tailwinds from improving employment, credit and historically low mortgage costs. “We just don’t have the housing stock we need to meet demand. Housing has by no means plateaued here.”

Companies will find reason to invest in the U.S. in the next decade, said Joe Carson, AllianceBernstein LP’s director of global economic research. The economy-wide spillover from the domestic energy boom is still nascent, state governments have a growing ability to fix aging infrastructure, and companies “will have to invest to grow” in order to boost profits, he said. All this will “unleash a powerful cycle” for business investment, helping stem the productivity slowdown that has restrained growth, Carson said.

The housing market probably has more potential. Beginning home construction has averaged a 976,000 annualized pace this year. Longer term, the demand for new houses may reach 1.5 million to 1.6 million a year, in part because millennials, those born after 1980, will start families and become more open to homeownership, according to Goldman Sachs analysts. Luxury-home builder Toll Brothers Inc. is hoping for better times ahead even as fragile consumer confidence and limited wage growth have led to “choppy seas and a sloppy boat ride” so far in this recovery, Robert Toll, the Horsham, Pennsylvania-based company’s chairman, said.

Based on trends over more than 40 years, “the industry should be building 50% more homes this year than its current pace to meet the increased population demographics,” Toll said on a Sept. 3 earnings call. “At some point, this pent-up demand will be released, which will add momentum to the entire housing market.”

That sounds boomy, doesn’t it? We’re preparing for lift-off, that’s what that says. But then Martin Andelman, aka Mandelman, had this a month ago on Aaron Krowne’s ML Implode site, h/t Dave Stockman. And then the picture changes, and looks, let’s say, somewhat different. Long quotes again, I’m sorry, but it’s because Mandelman is such a great writer.

Mortgage Originations Are Down by 60-70% Year-Over-Year… But Everything’s Okay

Mortgage originations for the first quarter of this year fell off a cliff. JPMorgan reported a decline of 71%, as I recall, and I think Citibank reported a drop of 66%. Now, the second quarter’s bloodletting has come in and the numbers are about the same… down more than 60% year-over-year, if memory serves and it often does. I’m not bothering to look any of these numbers up and doing this by memory because the details don’t matter… my point will be the same regardless of a few%age points in one direction or another on any given statistic. I’m close enough in all cases, anyway.

Forbes reported that the first quarter of 2014, “saw the lowest mortgage origination volumes since Q3 1997.” And the headline, “MBA Lowers Mortgage Originations Forecast”, came with a story explaining that “the updated refinance total is around 60% lower than 2013 refinance originations.” Even credit unions went straight into the tank this year, originating an annualized $42.6 billion in real estate loans in the first quarter, down from $102.9 billion in the first quarter of 2013, according to an Nation Credit Union Association (NCUA) press release.

Black Knight Financial Services released in March that loan originations were down 60% year-after-year, declining to the lowest level since November of 2008. And on August 12th, Origination News ran the headline: “The Refi Boom is Officially Over – And Won’t return Soon,” explaining that Freddie Mac has finally recognized that the refinancing boom that ended last summer… has ended… last summer… and that home sales this year have remained “lackluster.”

The Mortgage Bankers Association released its first 2014 forecast last October, predicting $1.2 trillion in total originations for the year, but those numbers were revised down in January and again in May. The current forecasts are for $1.01 trillion in total origination volume for the year. Last year total volume was $1.8 trillion, and $1.1 trillion of that volume came in the form of refis.

And finally, HARP origination volume has been down a staggering 70% year-over-year with only one third as many eligible loans remaining as compared with 2013. Estimates are that cash sales are running at 40% of sales, which combined with the data provided above, should tell you how few sales there actually are in the aggregate. My grandmother would say the mortgage industry is furchtbar, I would use a similar sounding word also beginning with the letter “F,” but we’d mean roughly the same thing.

Now, name another industry that’s ever seen year-over-year drops in sales volume like that. I’ve been trying to come up with one… maybe typewriter sales in 1996, 1987 or 1988? I don’t actually think there has ever been an industry that reported year-over-year declines in sales volume of 70%, and if there was, I’m betting the industry became the corporate equivalent of the Dodo bird sometime shortly after that.

In April of this year, the New York Times ran a story about, “Why the Housing Market is Still Stalling the Economy.” The author seemed to think housing is pretty darn important to our economic growth or malaise.

“Investment in residential property remains a smaller share of the overall economy than at any time since World War II, contributing less to growth than it did even in previous steep downturns in the early 1980s, when mortgage rates hit 20%, or the early 1990s, when hundreds of mortgage lenders failed.” “If building activity returned merely to its postwar average proportion of the economy, growth would jump this year to a booming, 1990s-like level of 4%… The additional building, renovating and selling of homes would add about 1.5 million jobs and knock about a%age point off the unemployment rate… That activity would close nearly 40% of the gap between America’s current weak economic state and full economic health.”

You don’t need to be any sort of economist to understand that people forming households would be a major driver of any country’s economic growth, right? I mean, all you’d have to do is look in my garage to figure out why that would be the case. If I weren’t married, I might not even own a full set of dishes. So, if household formation is running at 569,000 annually for the last 4-5 years, but was 1.35 million for the prior five years… well, how is everything okay?

So, the mortgage industry has seen originations fall in a single year by 60-70%, but the housing markets are okay, in fact they’re recovering all around us every day, and prices are up. Mortgage originations get more than cut in half over six months, but everything’s okay… GDP is still rising and the June jobs report was strong… because obviously the mortgage industry and housing doesn’t contribute to any of it. But that can’t be right, can it?

Any industry that experienced a 70% drop in sales would see bankruptcies popping like popcorn, but not this one. Not this industry… not mortgage originators. Somehow housing and mortgages have been painted with invisible ink, and can no longer be seen by anyone.

So there’s your US recovery, and as I said, you be the judge. Do we still have a lot of recovery left, or does a 60-70% drop in mortgage originations basically doom the industry?

Tokyo based Bill Pesek had a nice piece at Bloomberg of all places, about Australian real estate. He has Oz Treasurer Joe Hockey claim that “fundamentally, we don’t have enough supply to meet demand.” As if, fundamentally, nothing matters other than available ‘products’, as if available wealth or income don’t matter.

Irrational Exuberance Down Under

In “Australia: Boom to Bust,” Lindsay David sounds the alarm about an Australian housing bubble he argues makes the 12th-biggest economy a giant Lehman Brothers. His thesis can be boiled down to the number 9 – the ratio of home prices to income in Sydney. The multiple compares unfavorably with 7.3 in London, 6.2 in New York and 4.4 in Tokyo (Melbourne is 8.4).

Housing is one of the three pillars of the Australian economy, along with financial institutions and natural resources. Politicians and investors alike, David writes, don’t get “how deeply intertwined and connected” these sectors are and “how they can easily take each other down in a domino effect.” The most obvious trigger would be a Chinese crash that simultaneously hits bankers, miners and households hard.

I caught up with David last week in Sydney at a Bloomberg conference where I helped grill Treasurer Joe Hockey about these very topics. When I asked Hockey point blank whether Australia faced a huge property bubble, he dismissed the entire premise out of hand. “It is just an easy mantra for international commentators and for analysts based overseas to say, ‘Well, there’s a bit of a housing bubble emerging in Australia,’” Hockey retorted. “That is a rather lazy analysis because fundamentally we don’t have enough supply to meet demand.”

Two hours later, Australia’s central bank raised concerns about “speculative demand” that “could amplify the property price cycle and increase the potential for property prices to fall later.” [..]

There’s something dangerously wrong when Australia’s top economic official is blowing off fears of asset bubbles and heightened leverage. Hockey’s acerbic dismissal of the danger smacks of hubris. Home prices are seen rising between 8% and 12% in 2015 in Sydney and roughly 9% across Australia’s major cities. How can that make sense, in an already frothy market?

In a striking bit of serendipity, G-20 officials met in Australia over the weekend to chew over the very risks Hockey had just dismissed. The communique they issued concluded: “We are mindful of the potential for a build-up of excessive risk in financial markets, particularly in an environment of low interest rates and low-asset price volatility.”

Funny you should mention China (I’m sure you feel the same way). Obviously, there have been ‘rumors’ about challenges to Chinese growth for a while, but they get real now. China runs a lot of its industry on coal, but lately there’s not so much industry. Oh wait, let’s set this one up properly, with another one of Bloomberg’s happy pieces. And only then touch down on reality.

Manufacturing Rebound Relieves Growth Concerns in China

A Chinese manufacturing gauge unexpectedly increased this month, suggesting export demand is helping the economy withstand a property slump. The preliminary Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics was at 50.5, matching the highest estimates in a Bloomberg News survey of analysts and up from August’s final reading of 50.2. Asian stocks pared declines, the Australian dollar rallied and copper advanced.

“We thought the weakness would continue, but there is a slight pickup, so this is definitely positive for the market,” said Lu Ting, Bank of America Corp.’s head of Greater China economics in Hong Kong. Robust export demand is helping China weather a property slump. China’s trade surplus climbed to a record in August as exports rose on the back of increased shipments to the U.S. and Europe. New-home prices fell in all except two of the 70 cities monitored by the government last month, the statistics bureau said last week, the most since January 2011, when the go

Isn’t that great? We’re saved! Only, there’s this:

Chinese Coal Industry Deepens Push For Output Cuts

An industry body representing China’s coal-mining industry has vowed to continue its push for output reductions in a bid to lift power-station coal prices by 20% from their trough, according to state media. Wang Xianzheng, the chairman of the China National Coal Association, told an annual meeting of the Coal Industry Committee of Technology at the weekend that more than 70% of the country’s coal miners were losing money and had cut salaries. About 30% of the industry’s miners had not been able to pay their employees on time and a further 20% had cut salaries by more than 10%, the Economic Information Daily, a Xinhua-affiliated newspaper, reported on Monday.

Due to weak economic conditions, coal output fell 1.44% year on year in the first eight months of this year to 2.52 billion tonnes, while sales dropped 1.62% to 2.4 billion tonnes, the association’s figures show. Coal inventory last month stayed above 300 million tonnes for a 33rd month. However, the coal price has rebounded “slightly” this month as imports and stocks fell. China’s main coal ports recorded an 8.3% year-on-year decline in inventory at the end of last month, and the national import volume fell 27.4% year on year to 18.86 million tonnes, the association’s figures showed.

And no, China hasn‘t switched to wind or solar all of a sudden. Coal drives China’s boom, or has so far at least, and now its coal industry is hitting pretty bad limits. Beijing is trying to keep he illusion of a 7.4% growth rate alive, but that’s not going to work with its main energy source with coal output actually falling (not just growing less fast), is it? And it’s not just coal either. China has the global Big Iron Ore industry trying to topple its domestic production. Which is not only a lovely set-up for a trade war, it’s also a sure sign of a collapsing economy.

Big Miners Struggle To Tame China With Iron Ore Glut

Plans by the world’s top iron ore miners to knock out high-cost rivals with a flood of cheap ore have had some success, but are meeting resistance where they had hoped to make the biggest inroads – in China. A large number of small, high-cost Chinese mines have been forced to shut by a collapse in global prices but, overall, domestic output is increasing as the big state-backed producers expand or consolidate. “Those mines that belong to steel mills or to central government enterprises – and those that were constructed relatively early and where resources are good – all have room for survival,” said Lian Minjie, general manager of Sinosteel Mining, a subsidiary of one of China’s biggest state trading firms, at an industry conference this month.

And:

Iron Ore Industry Heads For Brutal Shakeout As Prices Collapse

A bloodbath in iron-ore prices could get much uglier before things turn around. And it’s not all China’s fault, either. While Chinese demand, a major force in the market, has slowed, big iron ore producers, including Brazil’s Vale, BHP Billiton, Rio Tinto and Fortescue plan to boost production and shipments despite the glut. Australian producers BHP Billiton, Rio Tinto and Fortescue aim to boost output by 170 million tons this year, equal to around 7% of 2013 global supply and 11% of global production outside China, notes Capital Economics. Vale and Anglo-American are also looking to increase output, too. Why are they boosting production in the face of falling demand?

“It’s because their marginal cost of production is much lower than many of the smaller players globally; and because they operate in different segments, they can absorb a large hit in iron ore mining profitability that others cannot survive,” said Ben Ryan, an analyst at Hedgeye Risk Management, in an email. “They’re ultimately admitting we’re in a downtrend in raw minerals mining (iron ore, copper, and coal) and the announcement to increase production despite prices [being down] 40% year-to-date works to squeeze lower cost producers on the way down. The expectation for the global supply increase works with the apparent decrease in demand to push prices lower. Eventually enough producers get squeezed out of the market and this supply/demand dynamic bottoms out then reverses.”

If I were Washington, I’d be telling Big Iron to be careful about declaring war on China. But then that’s just me. For all I know, this is just what Capitol Hill wants.

The point I try to make is that most of what you read in the press is so far away from what is really happening, it’s taken on absurd proportions.

No, US housing is not doing fine, and it doesn’t have a lot of upside potential. It has none. And no, Australia is not going to be fine, with its one-dimensional dependency on China, And also no, China is not what even western media try to make it out to be, China is drowning in a sea of debt.

The whole global economy is still falling to bits, and you’re about to fall with it. That’s all I’m trying to point out to you. Debt is bringing us down, and because we have tried to prevent that from happening by issuing more debt, we will plunge that much deeper and faster. And that’s not just one of multiple possible options, it’s the only one.

US Begs For More Growth, But Europe Remains Unmoved (MarketWatch)

Not for the first time in recent years, U.S. calls for Europe to help bolster the world economy are likely to get short shrift. Jack Lew is the latest U.S. Treasury secretary to fall into the traditional transatlantic abyss of economic-policy misunderstanding. Lew’s references at the weekend G-20 finance ministers meeting in Cairns, Australia, to “philosophical differences with our friends in Europe” is a delicate way of urging countries with current-account surpluses, led by Germany, to agree to boost short-term demand to stimulate growth. Lew’s actions mirror the frustration over Europe felt by his predecessor Tim Geithner, who eventually abandoned any attempt to browbeat the Europeans because he realized his entreaties were counterproductive. Underlining the force behind the U.S. campaign, the OECD has significantly downgraded major countries’ growth forecasts. Last week it reduced its prediction for the U.S. GDP rise this year to 2.1% from 2.6% in its previous forecast in May, for the euro area to 0.8% from 1.2%, and for Japan to 0.9% from 1.2%.

For the U.K. and Canada, the downgrades were much smaller: to 3.1% from 3.2%, and to 2.3% from 2.5%, respectively. The OECD called recovery in the eurozone “disappointing, notably in the largest countries: Germany, France and Italy”. It said “confidence is again weakening” and demand was “anemic,” calling on the European Central Bank to take “more vigorous monetary stimulus.” Underlining the lack of demand in Europe’s biggest economy, German domestic forecasters say Germany is on track for a current-account surplus of around €200 billion this year, the highest ever, more than 7% of gross domestic product. According to the European Commission, current- account surpluses of above 6% of GDP are sources of regional and international economic imbalance, yet Germany has registered surpluses of this size for eight of the nine years since 2006, the sole exception being 2009, when the surplus was 5.9%.

German officials have hinted that, if growth continues to disappoint, some form of override to next year’s official-declared goal of a balanced budget may be in store. A combination of lower taxes and higher discretionary spending in areas like infrastructure could be Berlin’s response to growth prospects badly dented by sanctions on Russian trade, moribund eurozone activity and a significant slowdown among the large emerging-market economies. Yet, as always, Berlin will be dragged into stimulus only with great reluctance — with the result that anything the Germans do will inevitably be too little and too late to do much good. The outlook for significant ECB quantitative easing meanwhile remains bedeviled by deep-seated legal and ideological differences with Germany.

Read more …

Read my piece Sep 22.

Ready for Rate Riot? Emerging Markets Set to Follow Fed (Bloomberg)

Investors bracing for higher interest rates from the Federal Reserve in 2015 need to expand their horizons or risk being caught off-guard. Bank of America Merrill Lynch economists suggest 12 of the 16 inflation-targeting emerging-market central banks they monitor will raise rates in the next year, and many will do so by more than markets anticipate. Mexico, Thailand, Hungary, and Israel are among the most likely to surprise, economists Marcos Buscaglia and Ana Madeira said in a Sept. 12 report to clients. Following the Fed, even at the risk of crimping growth, would represent an effort to prevent a spike of inflation and keep attracting foreign cash. Capital flows into emerging-market economies averaged $1.1 trillion a year from 2010 to 2013, compared with $697 billion from 2003 to 2007, according to the International Monetary Fund. That helps explain why nine of the 16 central banks reduced their key rates this year and another three kept them on hold.

A potential sign of things to come when the Fed does start tightening the monetary spigot: The Washington-based Institute of International Finance estimates emerging markets attracted just $9 billion in portfolio investments in August, down from an average of $38 billion over the prior three months. Buscaglia and Madeira, who expect the Fed to move in June, say while investors anticipate tighter policy in Brazil and South Africa, there will also be more aggressive increases elsewhere. Only Poland will have easier credit by the end of next year and low inflation will keep the Czech Republic and South Korea on hold, the economists predict. Whether there will be a repeat of 2013’s “taper tantrum” will depend on the Fed’s pace, said Pablo Goldberg, senior strategist at BlackRock Inc. “If it moves very fast then that brings some stress,” he told reporters in London today.

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The Dollar Becomes The Market’s Crystal Ball On US Rates (CNBC)

Forget stocks and bonds; the currency market is looking into the future of monetary policy. The dollar index is sitting at the highest levels since summer 2010, coming off a 10th consecutive week of gains. Data from the Commodity Futures Trading Commission showed last week that hedge funds and other large speculators are holding a decidedly bullish $31.42 billion net long position. So why the sudden and sharp move higher for the U.S. currency, even as the Federal Reserve last week said it would keep interest rates low “for a considerable time”? Arguably, the currency and bond market may have been more focused on the so-called dot plot, which showed some Fed officials projecting interest rates will have to rise faster when the time comes next year. After Fed Chair Janet Yellen made her case, the dollar index shot up with bond yields, and equities soared to new highs.

What’s behind the dollar’s muscularity? Economists say the greenback’s new fans are reacting to growing confidence in the U.S. economy. “The strength is telling you something about how the FX market is assessing the relative economic outlook in the U.S.,” according to Gluskin Sheff’s chief economist, David Rosenberg. At the same time, interest rates in the U.S. have remained relatively stable. They have risen modestly, but have failed to match the dollar’s torrid gains. The 10-year note yield, for instance, is off the low of 2.33% seen at the end of August. “There is no doubt that the dollar has moved more substantially than U.S. interest rates,” said Jens Nordvig, managing director and head of fixed income research and global head of currency strategy at Nomura. “From a global perspective, there is a bit of a conundrum. Why is the dollar so strong, when rates are so relatively stable?” Nordvig asked.

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Prospects Of US Rate Hikes Fuel Market Division (CNBC)

The divergence in play for much of this year is a theme likely to dominate in the days and months ahead. The market is grappling with the Federal Reserve and prospects of higher interest rates along with weak growth globally, or, as Cameron Hinds, regional chief investment officer at Wells Fargo Private Bank, put it, “Two negative arguments off of two different themes.” Last week, the Federal Open Market Committee repeated a pledge to hold interest rates near zero for a “considerable time” once the Fed is done with its asset-purchase program next month. The central bank also hiked its median estimate for the federal funds rate at the end of next year to 1.375% versus 1.125% in June. “Bonds are saying they don’t believe Fed will raise as quickly as what they (FOMC members) are saying,” Hinds said. “The bond and equity markets are in somewhat of a tug of war, with both signaling different market views as to when rate rises could occur,” said Peter Cardillo, chief market economist at Rockwell Global Capital.

The divergence trend is conspicuous in both markets and economies, with strength in the U.S. and U.K. standing in contrast to softer growth in Europe, and central bank policies on markedly differing courses as a result. “The U.S. Federal Reserve’s latest estimate of interest rates suggested a sooner-than-anticipated move away from ultralow rates. At the same time, a ‘no’ vote in last week’s Scottish referendum cleared the way for a rate hike by the Bank of England,” Russ Koesterich, global chief investment strategist at BlackRock, said in a research note. The European Central Bank is contending with very different problems of how to expand its balance sheet and provide more monetary accommodation, while prospects for a Fed rate hike in 2015 are already having an impact in the U.S. bond market, with the short end of the Treasury curve rising along with the dollar, a scenario that has helped push commodity prices lower.

Read more …

Draghi Sees ECB Becoming More Active in Fight for Euro (Bloomberg)

Mario Draghi says he won’t sit back and wait for stimulus to reach the economy. The European Central Bank president said a planned asset-purchase program shows that policy makers will steer the size of the institution’s balance sheet to avert deflation. In comments in Brussels yesterday, he underlined the need for that approach to revive the 18-nation economy. The ECB is moving to a more “active and controlled management of our balance sheet,” Draghi said in his quarterly testimony to European lawmakers. “Unacceptably high unemployment and continued weak credit growth are likely to curb the strength of the recovery. The risks surrounding the expected expansion are clearly on the downside.” Even after cutting borrowing costs for banks to record lows and offering long-term loans, Draghi is struggling to persuade them to take more ECB cash to finance lending to the real economy. In contrast to other major central banks, the ECB’s assets have shrunk by a third since 2012.

Policy makers “are determined to take back control,” said Richard Barwell, senior economist at Royal Bank of Scotland Group Plc in London. “Draghi seems convinced of the case for a major purchase program. I think he is rather less concerned about the questions of what they buy and whether they call it quantitative easing or credit easing; he’s more focused on how much they buy.” Economic growth in the euro area came to a halt in the second quarter and Draghi said yesterday that recent indicators have given no indication that the “sharp decline” in economic activity in the region has stopped. Purchasing managers indexes by Markit Economics to be published today will probably show manufacturing and services activity failed to accelerate this month, according to Bloomberg surveys of economists.

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Blah Blah!

ECB’s Draghi Says Ready To Use More Unconventional Tools (Reuters)

The European Central Bank stands ready to use additional unconventional tools to spur inflation and growth in the euro zone, ECB President Mario Draghi said on Monday. Speaking to the economic and monetary affairs committee of the European parliament, Draghi said the euro zone central bank’s Governing Council “remains fully determined to counter risks to the medium-term outlook for inflation”. “Therefore, we stand ready to use additional unconventional instruments within our mandate, and alter the size and/or the composition of our unconventional interventions should it become necessary to further address risks of a too prolonged period of low inflation,” Draghi said. Lower than expected demand last week for the ECB’s first offering of new long-term loans to banks, part of a stimulus programme aimed increasing lending to companies within the bloc, has raised expectations the ECB will eventually have to undertake asset purchases with new money or quantitative easing.

Read more …

Buy Buy!

Germany Inc. Splurges on US Deals Offering Escape From Europe (Bloomberg)

German companies are embarking on their biggest-ever acquisition spree in the U.S., chasing deals that promise innovation, growth and an escape route from crisis-ridden Europe. Merck yesterday agreed to acquire medical equipment manufacturer Sigma-Aldrich for more than $16 billion, in what would be the biggest acquisition in its 346-year history. Hours earlier, Siemens said it would buy Dresser-Rand, a provider of energy equipment based in Houston, for $7.5 billion. In two deals last week, SAP agreed to buy Concur Technologies for $7.4 billion, and ZF Friedrichshafen bid $11.7 billion for TRW Automotive. So far this year, German firms have announced about $65 billion in U.S. deals – almost 18 times the $3.7 billion in the same period of 2013 – eclipsing the sixfold increase in U.S. acquisitions by European companies overall. Hamstrung by sanctions on Russia and unrest in the Middle East, the corporate giants of Europe’s largest economy are using takeovers to reshape strategies and buy into a U.S. recovery that’s outpacing the rest of the developed world.

“Uncertainty about the long-term economic outlook for Europe is motivating companies to seek locations abroad for future investments, and North America is still one of the key targets for that,” said Christoph Kaserer, a professor and head of the department of financial management and capital markets at Munich’s Technische Universitaet. “We’ve already seen a number of such deals and there’s more to come for sure.” Merck, based in Darmstadt, is purchasing St. Louis-based Sigma-Aldrich to expand in chemicals used in research labs and pharmaceutical manufacturing and reduce its dependence on drug development. The acquisition will accelerate the family-controlled company’s shift away from developing pharmaceuticals, at a time when its Serono biotechnology business has struggled to create new products. Siemens, which is simultaneously selling its 50% stake in a household-appliances joint venture with Robert Bosch GmbH, is buying Dresser-Rand to participate in the shale-gas boom that’s driving the U.S. recovery, and is yet to materialize in Europe.

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READ!

Why Aren’t The British Middle-Classes Staging A Revolution? (Telegraph)

Why aren’t the middle classes revolting? Words you probably never thought you’d read in the Telegraph. Words which, as a Gladstonian Liberal, I never thought I’d write. But seriously, why aren’t we seeing scenes reminiscent of Paris in 1968? Moscow in 1917? Boston in 1773? My current fury is occasioned by the Phones4U scandal (and it really is a scandal). Phones4U was bought by the private equity house, BC Partners, in 2011 for £200m. BC then borrowed £205m and, having saddled the company with vast amounts of debt, paid themselves a dividend of £223m. Crippled by debt, the company has now collapsed into administration. The people who crippled it have walked away with nearly £20m million, while 5,600 people face losing their jobs. The taxman may also be stiffed on £90m in unpaid VAT and PAYE. It’s like a version of 1987’s Wall Street on steroids, the difference being that Gordon Gecko wins at the end and everyone shrugs and says, “Well, it’s not ideal, but really we need guys like him.”

I’m not financially sophisticated enough to understand the labyrinthine ins and outs of private equity deals. But I don’t think I need to be. Here, my relative ignorance is actually a plus. You took a viable company, ran up ridiculous levels of debt, paid yourselves millions and then walked away, leaving unemployment and unpaid tax bills in your wake. What’s to understand? We should be calling for your heads on a plate. This column is supposed to be a “lifestyle” column, not a “business” column. So, you might ask yourself, why am I writing about conscience-free private equity deals? Well, it’s because, assuming that you’re part of the broad middle class who make up the vast majority of the Telegraph’s readership, this is the most important lifestyle issue you’ll ever face. Instead of shrugging and saying, “This is the world we live in” you should be on the streets, you should be calling for this sort of thing to be a jailable offence, and you should want to see these guys up in front of parliament (or, better yet, in stocks) explaining why they made around £3,500 for every person they put out of a job.

Read more …

Big Miners Struggle To Tame China With Iron Ore Glut (Reuters)

Plans by the world’s top iron ore miners to knock out high-cost rivals with a flood of cheap ore have had some success, but are meeting resistance where they had hoped to make the biggest inroads – in China. A large number of small, high-cost Chinese mines have been forced to shut by a collapse in global prices but, overall, domestic output is increasing as the big state-backed producers expand or consolidate. “Those mines that belong to steel mills or to central government enterprises – and those that were constructed relatively early and where resources are good – all have room for survival,” said Lian Minjie, general manager of Sinosteel Mining, a subsidiary of one of China’s biggest state trading firms, at an industry conference this month. After rapid expansion, global miners such as Rio Tinto and BHP Billiton had expected swathes of high-cost Chinese iron ore capacity to shut, helping to arrest a price decline of around 40% this year.

Iron ore ended last week at $81.70 a ton and Li Xinchuang, deputy secretary general of the China Iron and Steel Association, told a conference on Monday it could hover around $80 over the long term. Morgan Stanley has forecast a drop to $70 before a rally to $90 by year-end. Rio Tinto said this month it expected 125 million tons of capacity to be taken out around the world in 2014 and that 85 million tons had already been cut, notably in China, Indonesia, Iran, South Africa and Australia. Even so, output in China in the first eight months of 2014 rose 8.5% from a year before to a record 986 million tons, according to the National Bureau of Statistics. “Many mines aren’t closing down because they are part of the production chain of the big steel mills and they are usually located quite close to the steel production facilities,” said a manager with a private iron ore producer in southern China’s Hainan province.

Read more …

Iron Ore Industry Heads For Brutal Shakeout As Prices Collapse (The Tell)

A bloodbath in iron-ore prices could get much uglier before things turn around. And it’s not all China’s fault, either. While Chinese demand, a major force in the market, has slowed, big iron ore producers, including Brazil’s Vale, BHP Billiton, Rio Tinto and Fortescue plan to boost production and shipments despite the glut. Australian producers BHP Billiton, Rio Tinto and Fortescue aim to boost output by 170 million tons this year, equal to around 7% of 2013 global supply and 11% of global production outside China, notes Capital Economics. Vale and Anglo-American are also looking to increase output, too. Why are they boosting production in the face of falling demand? “It’s because their marginal cost of production is much lower than many of the smaller players globally; and because they operate in different segments, they can absorb a large hit in iron ore mining profitability that others cannot survive,” said Ben Ryan, an analyst at Hedgeye Risk Management, in an email.

“They’re ultimately admitting we’re in a downtrend in raw minerals mining (iron ore, copper, and coal) and the announcement to increase production despite prices [being down] 40% year-to-date works to squeeze lower cost producers on the way down. The expectation for the global supply increase works with the apparent decrease in demand to push prices lower. Eventually enough producers get squeezed out of the market and this supply/demand dynamic bottoms out then reverses.” The situation illustrates the very low cost base for the biggest producers. Caroline Bain, senior commodity analyst at Capital Economics, noted earlier this month that iron ore from Australia’s Pilbara region costs just $20 to $25 a ton to extract. Even with freight costs and royalties, the final cost come in at around $50 to $60 a ton, she calculates. That compares with an average production cost of around $110 a ton in China, she said.

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Money-Bleeding Chinese Coal Industry Deepens Push For Output Cuts (SCMP)

An industry body representing China’s coal-mining industry has vowed to continue its push for output reductions in a bid to lift power-station coal prices by 20% from their trough, according to state media. Wang Xianzheng, the chairman of the China National Coal Association, told an annual meeting of the Coal Industry Committee of Technology at the weekend that more than 70% of the country’s coal miners were losing money and had cut salaries. About 30% of the industry’s miners had not been able to pay their employees on time and a further 20% had cut salaries by more than 10%, the Economic Information Daily, a Xinhua-affiliated newspaper, reported on Monday.

Due to weak economic conditions, coal output fell 1.44% year on year in the first eight months of this year to 2.52 billion tonnes, while sales dropped 1.62% to 2.4 billion tonnes, the association’s figures show. Coal inventory last month stayed above 300 million tonnes for a 33rd month. However, the coal price has rebounded “slightly” this month as imports and stocks fell. China’s main coal ports recorded an 8.3% year-on-year decline in inventory at the end of last month, and the national import volume fell 27.4% year on year to 18.86 million tonnes, the association’s figures showed.

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Russia And China Forming Closer Ties: Total CFO (CNBC)

U.S. and European Union sanctions against Russia are having the unintended consequence of helping the nation form closer bonds with China, according to Patrick de la Chevardière, the chief financial officer of oil major Total. Since the annexation of Crimea back in March, and Moscow’s alleged backing of pro-Russian rebels in the east of Ukraine, the West has moved to stifle lending to the country with a series of penalties. These sanctions have changed the global landscape for the energy sector, Chevardière said. “Russia and China are close together. “As far as what I can see today, this is the result of what is currently happening,” he told CNBC on Tuesday. “It’s already changed the Russian position towards China; they are opening the door to China in their industry. They are selling gas and oil to China which was not the case three years ago.”

While this is not an immediate concern for Total, which owns a Russian subsidiary, it could hit Europe, which continues to rely on Russia for oil and gas despite growing tensions between the two regions. The sanctions have affected the oil major, making it difficult for the company to invest in Russia because of the rules regarding financing in U.S. dollars. Chevardière said this was not “peanuts” and had hit an important part of the business. It is currently trying to raise financing streams for future projects in the region, he added. This week, the French company announced plans to sell off more assets and overhaul exploration after it cut its 2017 oil output target to 2.8 million barrels of oil per day, from a previous 3 million per day.

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BlackRock Urges Changes in ‘Broken’ Corporate Bond Market (Bloomberg)

BlackRock, the world’s biggest money manager, said the marketplace for corporate bonds is “broken” and in need of fixes to improve liquidity. BlackRock, a major competitor in the bond market with $4.3 trillion in client assets, urged changes including unseating banks as the primary middlemen in the market and shifting transactions to electronic markets. Another solution BlackRock proposed: reducing the complexity of the bond market by encouraging corporations to issue debt with more standardized terms. Banks have retained their stranglehold on corporate debt trading despite years of effort by BlackRock and other large investors to eliminate their oligopoly. The top 10 dealers control more than 90% of trading, according to a Sept. 15 report from research firm Greenwich Associates. To BlackRock, the dangers of price gaps and scant liquidity have been masked in a benign, low interest-rate environment, and need to be addressed before market stress returns.

“These reforms would hasten the evolution from today’s outdated market structure to a modernized, ‘fit for purpose’ corporate bond market,’” according to the research paper by a group of six BlackRock managers, including Vice Chairman Barbara Novick and the head of trading, Richie Prager, posted on the New York-based firm’s website today. Rules issued in 2010 by the Basel Committee on Banking Supervision and the Dodd-Frank Act passed by Congress prompted Wall Street bond dealers to cut their inventories of the debt, even as the market has expanded. With their capacity to act as market makers greatly reduced, the old over-the-counter market has been rendered outdated, according to BlackRock.

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Barbarism Versus Stupidism (Jim Kunstler)

In my lifetime, the USA has not blundered into a more incoherent, feckless, and unfavorable foreign policy quandary than we see today. The US-led campaign to tilt Ukraine to Euroland and NATO — and away from the Russian-led Eurasian Customs Union — turned an “intelligence” fiasco into a strategic humiliation for the Obama White House. Notice that the story has vamoosed utterly from the American media headlines, even when the Russian Engineers’ Union issued a report last week asserting that the Malaysian Airlines Flight MH17 was most likely shot down by 30mm cannon fire from Ukrainian military aircraft. The USA State Department didn’t deign to refute it because doing so would have drawn attention to the fact that it was the only plausible explanation for what happened.

Likewise, the campaign to paint Vladimir Putin as Stalin-in-a-judo-robe never really reached take-off velocity, since by all appearances he was the most rational and cool-headed actor on the geopolitical stage, following logical and long-established national interests. If the West had just left Ukraine alone, and allowed it to join the Eurasian Customs Union, that basket-case nation would have been Russia’s economic ward. Now the US and the EU have to support it with billions in loans that will never be paid back. Meanwhile, our European allies have been snookered into a set of economic and financial sanctions against Russia that guarantees they’ll be starved for oil and gas supplies in the winter months ahead. Smooth move. So, the reason that all this has vanished from the news media is that it’s game-over in Ukraine. We busted it up, and can do more with it, and pretty soon the rump Ukraine region run out of Kiev will go crawling back to Russia begging for a little heating fuel.

Does any tattoo-free American adult outside the Kardashian-NFL mass hypnosis matrix feel confident about the trajectory of US policy regarding the so-called Islamic State (ISIS, ISIL)? First, there is the astonishing humiliation that this ragtag band of psychopaths managed to undo ten years, 4,500 US battle deaths, and $1+ trillion worth of nation-building effort in Iraq in a matter of a few weeks this summer. The US public does not seem to have groked the damage to our honor, self-confidence, and international standing in this debacle.

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Who cares?

Billionaires Are Hoarding Piles Of Cash (CNBC)

Billionaires are holding mountains of cash, offering the latest sign that the ultra-wealthy are nervous about putting more money into today’s markets. According to the new Billionaire Census from Wealth-X and UBS, the world’s billionaires are holding an average of $600 million in cash each—greater than the gross domestic product of Dominica. That marks a jump of $60 million from a year ago and translates into billionaires’ holding an average of 19% of their net worth in cash. “This increased liquidity signals that many billionaires are keeping their money on the sidelines and waiting for the optimal moment to make further investments,” the study said. Indeed, billionaires’ cash holdings far exceed their investments in real estate. Their real-estate holdings average $160 million per billionaire, or about one-fifth of their cash holdings.

Simon Smiles, chief investment officer for Ultra High Net Worth at UBS Wealth Management, said that the billionaire families and family offices he talks to are focused largely on the same question: What to do with all their cash. “The apparent safety of cash, reinforced by the painful psychological experience of the 2008-09 global financial crisis and the subsequent troubles within the European Monetary Union, likely reinforces the tendency to favor this cautious allocation strategy,” Smiles said in the report. But he said creeping inflation threatens to erode cash values, so he’s advising clients to take on “considered amounts of risk” with interest rate swaps, credit default swaps, or selling rates or foreign exchange derivatives. Yet in today’s increasingly frothy market environment, and after the hangover of 2009, today’s billionaires prefer a return of their assets rather than a return on assets. And in fact, they may be happy with a small loss rather than risk a larger one.

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Yes!

Texas Independence MUST Happen (Texas Nationalist Movement/CNBC)

If ever an epitaph were to be written for failed governments, businesses and ideologies it would be this — “It’ll never happen.” There are few phrases that adequately capture the human capacity for denial like this one. But there is one inescapable truth that is unfolding before the eyes of the world right now. “It” never happens — until “it” does. With Scotland’s independence referendum now over, the world has had a wake up call. In a country where 10 years ago, most Scots believed that a vote on independence would never happen in 2014 — it did. And it’s been happening around the world in places where the general consensus was that it would not or could not happen. At the end of WWII, there were 54 recognized countries on the globe. At the end of the 20th century, there were 192. And in the 21st century, the number has grown even larger. Attention is now on the number of nations where independence movements have been steadily, and often silently, growing for years. And no place is getting attention like Texas.

In Texas, as part of our work with the Texas Nationalist Movement, we’ve heard “it’ll never happen” more times than we can count. But, just like in the rest of the world, it is happening right now. Regardless of the incessant arguments from those opposed to Texas independence that center around “can’t” and “won’t,” Texans are coming to the realization that it “can,” it “will” and it “must.” Prior to the Scottish referendum becoming major global news, there were more websites, polls, blogs, and discussions dedicated to the issue of Texas independence than about Scottish independence. Texas independence sentiment has been steadily rising over the last decade. This was highlighted in a recent Reuters poll. The question was asked, “Do you support or oppose the idea of your state peacefully withdrawing from the USA and the federal government?” In Texas, the numbers were surprising to some. In a state where the majority of the electorate is comprised of Republicans and Independents, among those groups, 51% support the independence of Texas.

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May 232014
 
 May 23, 2014  Posted by at 7:46 pm Finance Tagged with: , ,  


Arthur Rothstein Mooo, Ropesville Farms, Texas April 1936

We’re going into another weekend, and this one’s Memorial. It may also be memorable, since there are elections in both the EU and Ukraine. And fireworks may well be part of both, during and after. In the Netherlands, where they were early, just 35% of people voted, which makes you want to look up the word democracy in the thesaurus, while in also-early-ran Britain UKIP won big. Nobody cares about Europe, or let’s say the only ones who care do so for strictly personal reasons, not for some grand ideal. The ideal is dead, the only thing left is “the EU gives us jobs and profits”, even as both claims are entirely unprovable for lack of things to compare them to. The Ukraine elections are a whole lot more serious. Willy Wonka is set to be the next president, but only part of the population will accept him, and the rest have plenty guns to prove they don’t.

The chance that Ukraine survives as a nation is about the same as the global economy, or the US economy, being in recovery. Slim in a late phase anorexic sense. New home sales were announced up. But are they?

New Home Sales Post Tepid April Bounce As Average, Median Home Price Drops

Last month’s dramatic miss of expectations for a modest post-weather pop in new home sales (having dropped 14.5% month-over-month) so it was inevitable that there would be a bounce. Modestly beating expectations, 433k annualized new home sales in April was only a 6.4% gain MoM thanks to the upward revision of the big miss in March. This ‘recovery’ remains well below the peak see in January – right in the middle of the worst weather impacted time in US history if one is to believe what the media is spewing. Before the ‘housing recovery is back on track’ meme gets going though, there is the fact that homes sold in the Northeast fell to the lowest since June 2012 … as the average home price fell to $320,100 – the lowest since August 2013.

A scratch below the surface shows that the April jump was all region, and driven by the Mideast where New Homes sold were up a whopping 47.4% (35.5% Y/Y) in April to 84K. Contrast that with the Northeast which was down -26.7% (-31.3% Y/Y) to 22K. And perhaps the most interesting fact: both the median and average home prices were down Y/Y, by 1.3% and 5.0% respectively. Further, the average new home price of $320,100 was the lowest since August 2013.

Some of the big boys think not:

Big Investors Are Betting Against US Housing Market (MarketWatch)

• DoubleLine Capital founder Jeffrey Gundlach took to the podium at a highly watched investment conference to suggest shorting the popular SPDR S&P Homebuilders exchange traded fund . He pointed to a concern, cited by others, that would-be young buyers are shunning mortgages . BlackRock CEO Laurence Fink said Tuesday that the housing market is “ structurally more unsound ” …

• Real-estate investor Sam Zell says he expects the Homeownership rate to drop as low as 55% as more people delay marriages.

• Charles Plosser, president of the Fed Bank of Philadelphia says housing fundamentals “remain sound” on Tuesday, while New York Fed Bank President Charles Dudley said later that day he believes there’s a “deep and protracted” housing downturn.

According to Jeff Cox at CNBC, the Fed is awfully bad in its history of predictions:

Everything The Fed Thinks It Knows May Be Wrong (CNBC)

At the core of the Federal Reserve’s credibility is its insistence that it can hold interest rates low enough for long enough to ensure a complete economic recovery. The reality may prove quite a bit different, particularly if current trends hold up. Those low yields are critical for both the public and private sector – financing upwards of a trillion dollars a year in corporate borrowing as well as helping to contain financing costs for the government’s $17.5 trillion debt. …

“It’s not that I don’t have faith in the Fed or think these are not some of the smartest economists out there. This is unprecedented territory,” said Lindsey M. Piegza, chief economist at Sterne Agee. “It’s going to be very difficult to understand those unintended consequences on the back end of these policies. …That confusion of how to unwind these unprecedented policies says to me there’s going to be a lot of volatility, a lot of missteps.”

It’s the rates, guys, they’ll make you poor(er) and save the economy at the same time, so your kids may not have to be chained down for their entire lives. See, in the end it all works out.

Anyone else have the feeling that there are at least as many Americans who don’t register as unemployed any longer as those that are? So, you know, the real number should be north of 12%? Look, if Italy can include hookers and cocaine to boost its GDP numbers, why would you think Washington would not? Cause their nice and decent folk looking out for you? Come to think of it, what part of US GDP is blow and pussy? However that may be:

Nearly Half Of US Unemployed Have Given Up Looking For A Job

Nearly half of unemployed Americans are on the verge of completely giving up on looking for a job, but they remain optimistic they will find a job they really want within the next six months, a new survey found. The poll, commissioned by staffing firm Express Employment Professionals, found that 47% of the 1,500 respondents agreed to some extent that they have completely given up on looking for a job, but only 7% said they agree completely with that statement. “

And why is this all going to get worse? Again, it’s the rates, guys:

Forget ‘Taper Tantrum’, Here Comes ‘Rate Rage’

If you thought market nervousness over central bank policy decisions was largely over, you might be in for a shock. Despite global markets seemingly taking the Federal Reserve’s “tapering” in their stride it now appears there’s a new concern on the horizon. “Rate rage”, dubbed on Friday by Dario Perkins, an economist at Lombard Street Research, is a term used to describe the future market turmoil that could arise from the raising of benchmark interest rates by the Bank of England and the Federal Reserve. … “With central banks less able to provide clear guidance about the future, we are likely to see renewed market volatility as they start to raise interest rates in 2015. Some investors will again be anxious to sell their bonds, fearing significantly higher yields.”

And those rising rates will need to lead to what Marc Faber mistakenly labels asset deflation, which exists no more than cookie inflation, consumer inflation or any of those terms. What Faber has right is that a lot of money/credit, trillions ‘worth’ of it, will go Poof and will never be seen again. And that will have a major effect on the economy and everyone who’s part of it.

Marc Faber: ‘Brace For A “General Asset Deflation’

With global debts 30% higher than they were at the 2007 crisis peaks, enabled by the money printing of central banks, Marc Faber warns that the “asset inflation” of the last years is not reflective of the broad growth seen in the 70s. “The system is still very vulnerable,” he warned as investors are exuberant over “hot new issues” just as they were in 2000 and fears “excessive speculation” means investors should brace for a “general asset deflation.”

But we can still grow our way out of all the negatives, can’t we? You know, escape velocity! Well, sorry …

a target=”new” href=”https://www.marketwatch.com/story/world-trade-flows-drop-in-first-quarter-cpb-2014-05-23?”>World Trade Flows Drop In Q1 2014

World trade flows fell in the first three months of 2014, another indication that a sustained and broad-based pickup in global economic growth remains out of reach more than five years after the start of the financial crisis. The Netherlands Bureau for Economic Policy Analysis, also known as the CPB, Friday said the volume of world exports and imports in March was 0.5% lower than in February. For the first quarter as a whole, trade flows were down 0.8% on a quarterly basis, after a rise of 1.5% in the final three months of last year.

That’s not happening. Maybe there’s a pocket somewhere, China?

PBOC’s Zhou Says China May Have Housing Bubble in ‘Some Cities’ (Bloomberg)

China may have a housing bubble only in “some cities” … While 12 of 18 economists say China has some national oversupply of housing, only seven say the market is in a bubble countrywide, according to a Bloomberg News survey [..] Half see bubbles in some cities, and a majority say they expect restrictions on home purchases and loans to be loosened at a regional level. New construction in China has fallen 22% and sales have slumped 7.8% this year,

No salvation there either. We’re going into the Memorial weekend, and the elections that may tear the EU further apart and do g-d knows what damage in Ukraine, with an economic system that keeps on exhibiting sings of starvation and exhaustion more than recovery (for good reason, when you look at debt levels).

Things are not going well. At all. Perhaps, instead of clinging on to happy happy propaganda emanating from the politicians who screwed up and the media that are umbilically linked to them, it would be better if we acknowledge the failures of our economic and political systems, in order to be able to build new ones. What we have now is only going to schlepp us down ever more. Not unlike Ukraine perhaps.

Here’s your weekend song.

Big Investors Are Betting Against US Housing Market (MarketWatch)

Some of Wall Street’s most vocal investors are betting against housing, saying the recovery has fizzled out. Earlier this month, DoubleLine Capital founder Jeffrey Gundlach took to the podium at a highly watched investment conference to suggest shorting the popular SPDR S&P Homebuilders exchange traded fund . He pointed to a concern, cited by others, that would-be young buyers are shunning mortgages . BlackRock CEO Laurence Fink said Tuesday that the housing market is “ structurally more unsound ” than prior to the financial crisis due to its reliance on Fannie Mae and Freddie Mac , according to news reports. He did sound a more optimistic note on Homeownership reviving.

Real-estate investor Sam Zell says he expects the Homeownership rate to drop as low as 55% as more people delay marriages. But there are also some long bets out there. Former Legg Mason Chief Bill Miller, a housing bull, said last week that the bearish positions of Gundlach and Zell are wrong . He expects continued strong demand for housing, and said he’s betting on mortgage insurers, home builders and subprime servicers, according to Bloomberg News. And Pershing Square Capital Management’s Bill Ackman recently trotted out a 110-slide presentation on the value of mortgage finance giants Fannie Mae and Freddie Mac, saying he’s ready to sit down with the government to work out a deal.

As investors take sides, Federal Reserve officials are doing so too . Charles Plosser, president of the Fed Bank of Philadelphia says housing fundamentals “remain sound” on Tuesday, while New York Fed Bank President Charles Dudley said later that day he believes there’s a “deep and protracted” housing downturn. For market participants, the current time period reflects uncertainty — and a touch of fear — about whether the housing market is improving fast enough to push broader U.S. economic growth toward liftoff. Investors are taking the pulse of business conditions after a cold winter to gauge when and how the Fed will normalize its monetary policies, in turn guiding the future of the five-year-old bull market in stocks and the direction of bond yields. That’s making housing a key factor that could aid or stifle growth.

Read more …

Everything The Fed Thinks It Knows May Be Wrong (CNBC)

At the core of the Federal Reserve’s credibility is its insistence that it can hold interest rates low enough for long enough to ensure a complete economic recovery. The reality may prove quite a bit different, particularly if current trends hold up. Those low yields are critical for both the public and private sector – financing upwards of a trillion dollars a year in corporate borrowing as well as helping to contain financing costs for the government’s $17.5 trillion debt. But after nearly five months of a decline in yields that caught market participants almost completely off guard, talk is increasing that inflationary pressures are building and that yields may begin to rise in a way that could put the Fed behind the curve of market forces.

That could help undermine the position of a central bank that badly needs the market’s confidence if it is to have any chance to unwind a nearly $4.4 trillion balance sheet and a historically lengthy time period of basement-level interest rates. “It’s not that I don’t have faith in the Fed or think these are not some of the smartest economists out there. This is unprecedented territory,” said Lindsey M. Piegza, chief economist at Sterne Agee. “It’s going to be very difficult to understand those unintended consequences on the back end of these policies. …That confusion of how to unwind these unprecedented policies says to me there’s going to be a lot of volatility, a lot of missteps.” Others in the market share the sentiment that while the Fed may not be driving blind, it doesn’t have a particularly clear road map, either. One worry is that a combined heat-up in the economy will combine with inflation to force the Fed to raise rates before it would like.

Read more …

Forget ‘Taper Tantrum’, Here Comes ‘Rate Rage’ (CNBC)

If you thought market nervousness over central bank policy decisions was largely over, you might be in for a shock. Despite global markets seemingly taking the Federal Reserve’s “tapering” in their stride it now appears there’s a new concern on the horizon. “Rate rage”, dubbed on Friday by Dario Perkins, an economist at independent U.K.-based research firm Lombard Street Research, is a term used to describe the future market turmoil that could arise from the raising of benchmark interest rates by the Bank of England and the Federal Reserve.

“Just as markets suffered a ‘taper tantrum in 2013’, a ‘rate rage’ is possible,” he said in the research note. “With central banks less able to provide clear guidance about the future, we are likely to see renewed market volatility as they start to raise interest rates in 2015. Some investors will again be anxious to sell their bonds, fearing significantly higher yields.” On May 22, 2013, the Federal Reserve’s policy minutes sparked fears the central bank could start tapering off its $85 billion-a-month bond purchasing program. This came to be known as the “taper tantrum”, with emerging market (EM) currencies tumbling as investors started to bring their dollars back to the U.S. in anticipation of higher interest rates.

Read more …

Marc Faber: ‘Brace For A “General Asset Deflation’ (Zero Hedge)

With global debts 30% higher than they were at the 2007 crisis peaks, enabled by the money printing of central banks, Marc Faber warns that the “asset inflation” of the last years is not reflective of the broad growth seen in the 70s. “The system is still very vulnerable,” he warned as investors are exuberant over “hot new issues” just as they were in 2000 and fears “excessive speculation” means investors should brace for a “general asset deflation.”

Emerging markets are relatively cheap to the US and Europe, he notes, but it is too early; there is nothing to like about low treasury yields but they are good to offset risk. As the market soared recently, fewer and fewer stocks are making new highs and this internal weakness (lack of breadth) and the breakdown in so many ‘loved’ stocks says the drop is coming sooner rather than later…


Read more …

World Trade Flows Drop In Q1 2014 (WSJ)

World trade flows fell in the first three months of 2014, another indication that a sustained and broad-based pickup in global economic growth remains out of reach more than five years after the start of the financial crisis. The Netherlands Bureau for Economic Policy Analysis, also known as the CPB, Friday said the volume of world exports and imports in March was 0.5% lower than in February. For the first quarter as a whole, trade flows were down 0.8% on a quarterly basis, after a rise of 1.5% in the final three months of last year. Each month, the CPB aggregates measures of imports and exports for 96 countries around the world, plus sub-Saharan Africa. It provides the most up-to-date measure of trade flows available, which has a close correlation with global economic growth.

During the first quarter, exports from developing economies in Asia recorded the largest decline, a drop of 4.5%. Central and Eastern Europe was the only region to record a rise in exports. Asian developing economies also recorded the largest drop in imports, while Japan recorded what the CPB termed “a remarkable increase,” or a jump of 4.5%. That was likely linked to high levels of consumer spending ahead of an April increase in the country’s sales tax, which also boosted economic growth during the period. According to the CPB, exports from and imports to the U.S. also fell during the quarter, while trade flows to and from the euro zone were little changed. The decline in trade flows is consistent with other evidence that suggests the global economy got off to a weak start this year.

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PBOC’s Zhou Says China May Have Housing Bubble in ‘Some Cities’ (Bloomberg)

China may have a housing bubble only in “some cities,” a issue that’s difficult to resolve with a single nationwide policy, the nation’s central bank Governor Zhou Xiaochuan said. China is a big country with multiple housing markets, many of which are still drawing new inhabitants from the countryside, Zhou said yesterday in an interview in Kigali, Rwanda, where he was attending the African Development Bank’s annual meeting. “China is still in the process of urbanization, so there may be some kind of volatility in the supply-demand relationship,” Zhou said. “But if you look at the medium-term of urbanization, I think we still have a very good market for home sectors.”

While 12 of 18 economists say China has some national oversupply of housing, only seven say the market is in a bubble countrywide, according to a Bloomberg News survey conducted from May 15 to May 20. Half see bubbles in some cities, and a majority say they expect restrictions on home purchases and loans to be loosened at a regional level. New construction in China has fallen 22% and sales have slumped 7.8% this year, testing the government’s four-year commitment to curbs that aim to make homes more affordable, and its reluctance to enact broader economic stimulus. The slowdown’s depth will have implications for everything from demand for Australian iron ore to land sales that help local governments repay their $3 trillion of debt.

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A Look Inside The Real Fed Balance Sheet (Zero Hedge)

Sometimes one just needs a little translation to see the big picture for the trees…

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Toxic Reputations Are A Time Bomb For Banks (CNBC)

More than five years after the 2008 economic crisis, banks still have an awful reputation. And the hits keeps coming with this this week’s announcement from Credit Suisse that it’s pleading guilty to helping Americans evade taxes. In fact, Attorney General Eric Holder recently said that no bank is “too big to jail,” as his Justice Department pursues criminal charges against a number of financial institutions. Does it really matter? You could be forgiven for thinking it doesn’t. After all, a historically bad reputation hasn’t stopped banks from delivering historically good returns. Bank profits reached an all-time high in 2013 and large U.S. bank stocks have outperformed the S&P 500 for two years running for the first time since 2003.

If a half-decade of public outrage and Occupy Wall Street isn’t enough of a reputational blow to knock banks off their stride, it’s fair to wonder what is. But the toxic reputation of banks is still a huge problem — a time bomb that could soon extract a significant toll on their bottom lines. It may seem an odd argument to make at a time when banks are so profitable and influential. But though banks have won a few short-term battles in Washington, they’re losing the long-term war for public opinion. Public confidence in banks has marginally improved but is still well below pre-recession levels, and the consequences are showing up in the broader political and regulatory debate. Last year, a bipartisan group of senators introduced a bill that would have effectively reinstated the Glass-Steagall regulations that separated commercial and investment-banking activities.

And as jockeying for the 2016 presidential race starts, commentators have noted a rising populism on both the left and right, with Republican contender Rand Paul recently saying that the GOP “cannot be the party of fat cats, rich people and Wall Street.” This may all amount to nothing. But it’s instructive to remember that Congress passed two major batches of financial regulation in response to the Great Depression, one in 1933-1934 and another in 1940. There’s no reason Congress couldn’t revisit or expand upon the Dodd-Frank legislation in the coming years. If they do, the prevailing public opinion of banks will help determine if any legislation is constructive or punitive for the industry. Even without new legislation, public opinion will undoubtedly influence the aggressiveness of regulatory bodies like the Consumer Financial Protection Bureau.

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Nearly Half Of US Unemployed Have Given Up Looking For A Job (RT)

Nearly half of unemployed Americans are on the verge of completely giving up on looking for a job, but they remain optimistic they will find a job they really want within the next six months, a new survey found. The poll, commissioned by staffing firm Express Employment Professionals, found that 47% of the 1,500 respondents agreed to some extent that they have completely given up on looking for a job, but only 7% said they agree completely with that statement. “The study offers several surprising and sometimes troubling insights into how unemployed Americans are faring and what they’re doing, and not doing, to get jobs,” Bob Funk, CEO of Express and a former Chairman of the Federal Reserve Bank of Kansas City, said in a statement. “It also demonstrates why the labor force participation rate is so low – many people have given up looking for a job.”

Over the past 12 months, the number of long-term unemployed (those unemployed for 27 weeks or more) has decreased by 908,000, according to the Bureau of Labor Statistics. The civilian labor force dropped by 806,000 in April, following an increase of 503,000 in March. The labor force participation rate fell by 0.4 percentage point to 62.8% in April. The jobless rate nationwide dropped to 6.3% last month — the lowest level since 2008 — as the nation added 288,000 jobs, according to the government. “Though the unemployment rate fell in March and April, both drops reflected fewer people looking for work, not more employment,” Nigel Gault, chief U.S. economist for the forecasting firm IHS Global Insight, said in a written assessment of the job market, according to NPR. “After searching for four years and being unsuccessful, I am tired of trying,” said one Express survey respondent.

But many jobless Americans are reluctant to make significant changes to boost their chances of landing a job. Only 13% of the survey’s respondents have actively pursued more education. And they are unwilling to relocate: 44% of respondents said they are unwilling to relocate to a new town, while 60% said are unwilling to move to a new state. These numbers include 57% and 72%, respectively, of those unemployed two years or longer.

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Bad Worse Worstest.

New Jersey Economic Comeback? Fuhgeddaboudit! (Reuters)

When New Jersey Governor Chris Christie on Tuesday unveiled a massive budget shortfall, he pointed the finger at a steep and unexpected drop in income taxes. But Christie’s lowered revenue projections – $2.75 billion through the end of fiscal 2015 – highlight a deeper problem: While its neighbors and the rest of the nation have slowly but steadily recovered from the Great Recession, New Jersey has flatlined. The data paint a bleak picture. Through March, New Jersey had recovered less than 40% of the jobs it lost during the recession, while the United States overall has recovered 99% of the jobs lost, according to data from the U.S. Labor Department.

In the high-paying manufacturing sector, for instance, nearly 650,000 new jobs have been created nationally since Christie took office in early 2010. Over that same time, New Jersey’s manufacturing employment has declined by nearly 18,000 jobs. In housing, too, New Jersey is weakening while other areas improve. In the first quarter of 2014, it was the only state to see an increase in foreclosure rates. At 8%, its foreclosure rate is now the highest in the country, according to the Mortgage Bankers Association. And while most states have begun rebuilding their reserve funds, New Jersey’s has continued to shrink and is now at its lowest level in a decade, according to Moody’s Investors Service. New Jersey’s economy grew by 2% over the 12 months through the end of April. But neighbors Pennsylvania and Delaware grew by 4.2% and 3.9%, respectively, according to a Federal Reserve Bank of Philadelphia index that combines four economic factors. The U.S. economy expanded by 3% using the same measure.

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Greenwald said the revelation would lead to deaths. Really? More than there already are since we invaded?

WikiLeaks: NSA Records ‘Nearly All’ Phone Calls In Afghanistan (RT)

The NSA records almost all domestic and international phone calls in Afghanistan, similar to what it does in the Bahamas, WikiLeaks’ Julian Assange said. Reports in the Washington Post and the Intercept had previously reported that domestic and international phone calls from two or more target states had been recorded and stored in mass as of 2013. Both publications censored the name of one victim country at the request of the US government, which the Intercept referred to as ‘Country X’. Assange says he cannot disclose how WikiLeaks confirmed the identity of the victim state for the sake of source protection, though the claim can be “independently verified” via means of “forensic scrutiny of imperfectly applied censorship on related documents released to date and correlations with other NSA programs.”

The Intercept, which Glenn Greenwald, who first broke the Edward Snowden revelations helped to found, had earlier named the Bahamas as having their mobile calls recorded and stored by a powerful National Security Agency (NSA) program called SOMALGET. WikiLeaks initially opted not to reveal the name of ‘Country X’ as they were led to believe it could “lead to deaths” by Greenwald. WikiLeaks later accused The Intercept and its parent company First Look Media of censorship, saying they would go ahead and publish the name of the NSA-targeted country. “We do not believe it is the place of media to ‘aid and abet’ a state in escaping detection and prosecution for a serious crime against a population,” Assange said in the statement. “By denying an entire population the knowledge of its own victimization, this act of censorship denies each individual in that country the opportunity to seek an effective remedy, whether in international courts, or elsewhere,” he said.

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Well, that is, there is no proof.

Pentagon: Scope Of Intelligence Compromised By Snowden ‘Staggering’ (Guardian)

The classified damage assessment was first cited in a news report published by Foreign Policy on January 9. The Foreign Policy report attributed details of the DIA assessment to House intelligence committee chairman Mike Rogers and its ranking Democrat Dutch Ruppersberger. The lawmakers said the White House had authorized them to discuss the document in order to undercut the narrative of Snowden being portrayed as a heroic whistleblower. The DIA report has been cited numerous times by Rogers and Rusppersberger and other lawmakers who claimed Snowden’s leaks have put US personnel at risk. In January, Rogers asserted that the report concluded that most of the documents Snowden took “concern vital operations of the US Army, Navy, Marine Corps and Air Force”.

“This report confirms my greatest fears — Snowden’s real acts of betrayal place America’s military men and women at greater risk. Snowden’s actions are likely to have lethal consequences for our troops in the field,” Rogers said in a statement at the time. But details to back up Rogers’ claims are not included in the declassified material released to the Guardian. Neither he nor any other lawmaker has disclosed specific details from the DIA report but they have continued to push the “damage” narrative in interviews with journalists and during appearances on Sunday talk shows.

The declassified portion of the report obtained by the Guardian says only that DIA “assesses with high confidence that the information compromise by a former NSA contractor [redacted] and will have a GRAVE impact on US national defense”. The declassified material does not state the number of documents Snowden is alleged to have taken, which Rogers and Ruppersberger have claimed, again citing the DIA’s assessment, was 1.7m. Nor does the declassified portion of the report identify Snowden by name. “[Redacted] a former NSA contractor compromised [redacted] from NSA Net and the Joint Worldwide Intelligence Communications System (JWICS),” the report says. “On 6 June 2013, media groups published the first stories based on this material, and on 9 June 2013 they identified the source as an NSA contractor who had worked in Hawaii.”

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Putin: Sanctions Will Have ‘Boomerang Effect’ (CNBC)

Russian President Vladimir Putin has criticized Western powers and the Ukrainian interim government, as he announced plans for a new Eurasian union. He argued that the current stand-off with Ukraine is “not due to Russia but to the situation in the Ukraine, which abuses its position” in a speech at the St Petersburg Economic Forum, Russia’s answer to Davos. “We have gathered here for economic discussions, but we cannot erase political discussions,” Putin said, as he slammed the use of sanctions against Russian businesses and individuals as having a “boomerang effect” on the West. “Economic sanctions as a tool of political pressure are eventually going to attack the economy of the countries who have initiated the sanctions,” he said.

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West’s Eastward Expansion Ruins Historic Chance At Unification – Lavrov (RT)

The Ukrainian crisis is a natural result of the West’s expansion of its influence eastwards at the expense of Russian interests, Foreign Minister Sergey Lavrov said. This stance ruins a historic chance for a unified continent. The turbulence in Ukraine is reminiscent of the violence and bloodshed that Europe experienced in the 20th century, Lavrov told a security conference in Moscow. “The European continent, which brought two global military catastrophes in the last century, is not demonstrating an example to the world of peaceful development and broad cooperation,” he said, adding that the situation wasn’t accidental, but rather “a natural result of the developments over the past quarter of a century.” “Our Western partners rejected a truly historic chance to build a greater Europe in favor of border lines and the habitual logic of expanding the geopolitical space under their control to the East,” Lavrov stressed.

“This is de facto a continuation of a policy of containing Russia in a softer wrapping.” The West ignored Russia’s calls for cooperation and would not pursuit a challenge of bringing together different integration projects in Eurasia. Instead it was forcing nations historically close to Russia to choose between the East and the West.“With Ukraine’s fragile political situation, this pressure was enough to trigger a massive crisis of statehood,” Lavrov pointed out. But Ukraine is just one example of the destructive results that Western foreign policies bring, Lavrov said. “The operations to change regimes in sovereign states and the foreign-orchestrated ‘color revolutions’ of different brands produce obvious damage to the international stability. The attempts to impose one’s own designs for internal reforms on other peoples, which don’t take into account national characteristics, to ‘export democracy’, impact destructively international relations and multiplies the number of flashpoints on the world map,” he continued.

“Schemes based on advocating one’s exceptionalism, the use of double standards, pursuit of unilateral geopolitical outcomes in crisis situation, are widely used not only in Europe, but also in other regions,” the minister said. “This undermines crisis mediation efforts.” The problems in Ukraine, Syria, Afghanistan and many other countries can only be solved through collective effort, and Russia stands for joining forces in tackling issues. A collective effort resulted in resent advances on the Iranian nuclear program and launched the dismantling of the Syrian chemical arsenal, Lavrov said. Meanwhile unilateral attempts to resolve the Arab-Palestinian conflict proved to be deficient.

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Anything goes.

Cocaine Sales, Hookers to Boost Italian GDP in Boon for Budget (Bloomberg)

Italy will include prostitution and illegal drug sales in the gross domestic product calculation this year, a boost for its chronically stagnant economy and Prime Minister Matteo Renzi’s effort to meet deficit targets. Drugs, prostitution and smuggling will be part of GDP as of 2014 and prior-year figures will be adjusted to reflect the change in methodology, the Istat national statistics office said today. The revision was made to comply with European Union rules, it said.

Renzi, 39, is committed to narrowing Italy’s deficit to 2.6% of GDP this year, a task that’s easier if output is boosted by portions of the underground economy that previously went uncounted. Four recessions in the last 13 years left Italy’s GDP at 1.56 trillion euros ($2.13 trillion) last year, 2% lower than in 2001 after adjusting for inflation. “Even if the impact is hard to quantify, it’s obvious it will have a positive impact on GDP,” said Giuseppe Di Taranto, economist and professor of financial history at Rome’s Luiss University. “Therefore Renzi will have a greater margin this year to spend” without breaching the deficit limit, he said.

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If God would want to stop us from destroying his creation, he would, right? Since he made us (or is that just me?) in his own image, whatever we do, he does, and he wants that too.

Climate Science Is A Hoax: Big Oil, The GOP And God Say So (Paul B. Farrell)

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Let’s all get dancing and look around us while we do! That should help.

Dancing Honeybees Assess The Health Of The Environment (New Scientist)

Eavesdropping may be rude, but snooping on honeybee conversations could reveal a lot about the environment. Their unique mode of communication, the waggle dance, contains clues about the health of the landscape they live in. In effect, the bees are giving a thumbs-up or thumbs-down to different methods of conservation. A worker honeybee performs the waggle dance to tell her hive mates where the best food is located. That suggests the dance can indicate areas of the landscape that are healthy, at least in terms of food for pollinators.

To test this, Margaret Couvillon and her colleagues from the University of Sussex in Brighton, UK, videoed and decoded 5484 waggle dances from three laboratory-maintained honeybee colonies living in 94 square kilometres of rural and urban landscapes. They divided the area into various conservation schemes, regulated by the UK government, and mapped which areas were most frequented by the bees over two years. “Using honeybee colonies as biomonitors for environmental health is an idea that researchers have been interested in,” says James Nieh from the University of California, San Diego. “However, this study uses a far larger sample size and examines the data in a more sophisticated way.”

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Darn!

US House: Pentagon Can’t Treat Climate Change As Security Threat (RT)

The US House has voted to deny the Pentagon funding to combat impacts of climate change and its own heavy dependence on fossil fuels. The Department has long acknowledged the realities of global warming amid political wrangling over its effects. The House voted, mostly along party lines, to pass an amendment to the National Defense Authorization Act (NDAA) that aims to prevent the Pentagon from using appropriated funding to address the myriad national security concerns the Department of Defense (DOD) has said climate change poses to American interests.

The amendment to the NDAA, which sets the terms of the DOD budget, was sponsored by Rep. David McKinley (R), whose home state of West Virginia is deeply invested in coal development. The full text of the amendment reads: “None of the funds authorized to be appropriated or otherwise made available by this Act may be used to implement the U.S. Global Change Research Program National Climate Assessment, the Intergovernmental Panel on Climate Change’s Fifth Assessment Report, the United Nation’s Agenda 21 sustainable development plan, or the May 2013 Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order.”

In response, Democratic Reps. Henry Waxman and Bobby Rush said the “McKinley amendment would require the Defense Department to assume that the cost of carbon pollution is zero,” in a letter to House colleagues before Thursday’s vote. “That’s science denial at its worst and it fails our moral obligation to our children and grandchildren.” The amendment specifically targets the findings and recommendations of the recent National Climate Assessment (NCA) and the latest yearly climate report from the United Nations-sponsored Intergovernmental Panel on Climate Change (IPCC).

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