Around the Globe 09.11.2013

Mortgage apps plunge, refinancing hits 4 year low as rates soar.

Mortgage applications slide as rates match 2013 high – MBA | Reuters.

New-Home Sales Not So August – Developments – WSJ.

Mortgage Applications vs. Sales  6 Month Lag 09.2013

From Zerohedge

The recovery narrative counted on a new housing boom to propel the U.S. into strong sustainable growth, but it looks like the boom, actually Housing Bubble 2.0, is running out of steam.  Our chart illustrates the relationship between housing sales and the mortgage rate with a six month lead for the rate.

A recent survey confirms that the housing market is slowing down.  From “New Home Sales Not So August:”

  • There was a 4% decline in new home sales from July.
  • 5% of sellers were forced the lower prices, the highest level in 18 months
  • Realtors’ expectations of buyer traffic missed for the first time since December of 2011.

Rising rates and stagnant incomes will continue to weigh on housing demand for the immediate future despite what people wish to believe.

Richest 1% earn biggest share since Roaring ’20s.

Income Growth 99 vs 1

Two of the recurrent themes of this blog are that cheap money benefits the rich to the detriment of the rest of us and that there are diminishing marginal returns with each successive iteration of monetary easing .  The table above succinctly supports each case.

Observe how the 1% grabs an increasing share of income as monetary easing becomes more drastic.  During the Clinton boom, the Fed maintained a tight policy until 1998 when it loosened in response to the Long Term Capital Management crisis and trouble with the Asian Tigers.  The Bush Boom was created by a very low interest rates in the wake of the bursting stock market bubble and 9/11, while the current “recovery” is a child of not just low interest rates, but zero bound rates plus trillions in money printing to purchase Federal debt and mortgage bonds from TBTF banks, hedge funds and rich investors.

The mostly organic Clinton boom logged the best numbers for both the 99% and 1% racking up an overall 31.6% income increase with 45% of the gains accruing to the rich.  During the Bush boom fed by cheaper money, the overall income increase is a mere 16.1% with the rich capturing 65% of the gains.  The current economic “recovery” is being fueled by the cheapest money: not only has the Fed reduced the operating costs of the TBTF banks with ZIRP but it is also bailing them out of their poor investments by purchasing mortgage bonds driving up the price markedly since 2009.  Income has only recovered about 6% with the rich taking home 95% of that gain.

Note the pattern: each successive expansion is about half as strong as its predecessor, income growth of 31.6% declining to 16.1% and then to 6.0%.  Moreover, each wave of monetary easing results in a higher percentage of income gains benefiting the 1%, increasing about 50% from expansion to expansion, 45% to 65% to 95%.

Intriguingly, even though the rich are receiving most of the gains today, everyone is worse off due to excessive liquidity with income gains decreasing across-the-board.  Perhaps, this is the real reason that the Fed is preparing to taper.

Recession risk gone in all US states but 1: Moody’s Analytics.

Citigroup Economic Surprise Index August 2013

Today, we have already covered two reasons why the American recovery will continue to be tepid, the end of Housing Bubble 2.0 and the diminishing marginal returns of more debt.  Add another to the list—Moody’s Analytics just declared that recession risk has disappeared in all 50 states.  These are the same people that declared a bottom to the housing market 2008 and completely missed both the GFC and Great Recession and continue to slap on AAA on just about any paper presented to them by the TBTF banks.

Even though MA is a separate unit from the rating agency, this is a conflict of interest.  The same company that rates municipal debt is touting the economic health of the issuers, so take their guidance with a grain or two of salt and check out the Citibank Economic Surprise Index crossing into negative territory illustrated above.  Housing headwinds, ineffective monetary policy, flat incomes and now less surprises indicate a bumpy road lies ahead.

China Shadow Banking Returns as Growth Rebound Adds Risks – Bloomberg.

China Overnight and Seven Day Repurchase Rates

In May, China’s new leaders decided to crack down on the various methods that the Chinese were circumventing the various methods that the PBOC and government use to the control the financial markets.  The crackdown quickly metastasized into a full-blown liquidity crisis, which the authorities managed to get under control in early July.

At first, the government seemed willing to tolerate high rates and plunging liquidity in a bid to move to a more sustainable growth model.  Once they realized, that they were heading into a full-blown financial crisis, the appetite for reform quickly dissipated.  Now, it seems that China will allow additional leverage in order to maintain a 7.5% growth rate.  Eventually, additional credit will fail to budge growth rates.  How high will it go before then?

Outstanding Chinese Credit

Greece May Need Two More Aid Packages Says ECB’s Coene – WSJ.com.

Greece does not need two more aid packages. The country is now a ward of the Eurozone and will require periodic cash payments to remain afloat until it is freed from its giant debt pile.  Greece currently maintains a debt-to-GDP ration of 156% and rising.

In order for it to knock debt levels down to reasonable levels within a decade, it would have to accomplish two impossible goals.  It would have to grow its economy by 7% a year for the next 10 years while delivering a balanced budget every year to reduce the ratio to just under 80%, about German levels.

Based on what we have witnessed since 2009, what are the chances that Greece attains a Chinese 7% real growth rate while balancing a budget that has a deficit of 10% of GDP? Well, those are your chances of the Eurozone being able to cease aid.  As long as Greece can’t pay its bills, the Eurozone must pick up the tab.  Remember this when commentators begin breathlessly discussing primary surpluses.

 

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2 thoughts on “Around the Globe 09.11.2013

  1. Thanks I needed a good laugh today, I was busy all day and just loved this

    ” Recession risk gone in all US states but 1: Moody’s Analytics. ”

    debtroit is bankrupt

    but it ain’t a recession !

    There are no jobs for anyone, but it ain’t a recession !

    Trillions of debt but no recession !

    And why not borrow today and let the next generation figure it out.

    – My personal favorite has always been the California CABS

    This from 2012 LATimes article – learn more about the CA CABS !

    Overall, 200 school systems, roughly a fifth of the districts statewide, have borrowed more than $2.8 billion since 2007 using CABs with maturities longer than 25 years. They will have to pay back about $16.3 billion in principal and interest, or an average of 5.8 times the amount they borrowed.

    Nearly 70% of the money borrowed involves extended 30- to 40-year notes, which will cost district taxpayers $13.1 billion, or about 6.6 times the amount borrowed on average.

    State and county treasurers say debt payments of no more than four times principal are considered reasonable, though some recommend a more conservative limit of three times.

    “This is part of the ‘new’ Wall Street,” Lockyer said. “It has done this kind of thing on the private investor side for years, then the housing market and now its public entities.”

    The Poway Unified School District, which serves middle-class communities in north San Diego County, is one of the school systems faced with massive CAB debt payments. In 2011, it issued $105 million in capital appreciation bonds to complete a school rebuilding program.

    Because the recession had depressed property values and tax revenue, Poway district officials realized that using conventional bonds might jeopardize a promise to district voters to limit the tax rate.

    So on the advice of an Irvine-based financial consulting firm, they turned to the long-term notes. Under the deal, the school board could keep construction moving, avoid reneging on its pledge to voters and stay within the legal limits. And it would not have to repay the bonds for decades.

    By the maturity date of 2051, however, the $105 million in Poway notes will cost district taxpayers almost $1 billion in principal and interest — more than $9 for every $1 borrowed.

  2. I am sorry to repeat myself

    But you have to admit – it just does Not get any better than this

    ” The Poway Unified School District, which serves middle-class communities in north San Diego County, is one of the school systems faced with massive CAB debt payments. In 2011, it issued $105 million in capital appreciation bonds to complete a school rebuilding program.

    Because the recession had depressed property values and tax revenue, Poway district officials realized that using conventional bonds might jeopardize a promise to district voters to limit the tax rate.

    So on the advice of an Irvine-based financial consulting firm, they turned to the long-term notes. Under the deal, the school board could keep construction moving, avoid reneging on its pledge to voters and stay within the legal limits. And it would not have to repay the bonds for decades.

    By the maturity date of 2051, however, the $105 million in Poway notes will cost district taxpayers almost $1 billion in principal and interest — more than $9 for every $1 borrowed. ”

    . Saddled the suckers with a billion in P & I
    But they kept their promise to limit the tax rate !

    .

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