The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

UPS lobbyists have buried a short 230-word legislative bailout deep inside the FAA Reauthorization Act of 2009 currently before Congress. It’s worth billions to “Big Brown” at the expense of today’s American economy that thrives on next-day commerce, competitive shipping options and ready access to markets around the world.

I believe the site Brown Bailout is Fedex related.

>

I saw Jack Johnson last night at the Garden — good show, bad venue, great set list:

Set List

1. You and Your Heart
2. If I Had Eyes
3. Taylor
4. Sitting, Waiting, Wishing / Just What I Needed (The Cars cover)
5. Go On
6. To The Sea
7. Bubble Toes
8. Wasting Time
9. My Little Girl
10. Breakdown
11. Flake
12. The Joker (Steve Miller Band cover)
13. Country Road (with Paula Fuga)
14. Turn Your Love
15. Banana Pancakes
16. Same Girl
17. Good People
18. Red Wine, Mistakes, Mythology
19. Staple It Together
20. Rodeo Clowns (with G. Love)
21. At Or With Me

Solo Encore:
22. Do You Remember
23. Angel
24. Times Like These

Group Encore
25. Constellations
26. Home
27. Better Together

>

UPDATE: August 3, 2010

My crappy photos below generated some good photos from MSG

Left my camera home — bad blackberry photos to follow:

The July Philly Fed manufacturing survey confirmed the moderation seen in the NY manufacturing figure with a 5.1 reading vs expectations of 10, down from 8 in June and the lowest since Aug ’09. New Orders went negative at -4.3, down from +9 and Shipments, which followed previous orders, fell to 4 from 14.2. Backlogs fell 9 pts to -9.6. The Employment index was a lone positive as it rose back above zero to 4.0 from -1.5. Inventories were little changed. Prices Paid rose 3 pts but Prices Received fell by 2 pts. Of particular disappointment, the 6 month Business Activity outlook fell to 25 from 40.2 to the lowest since March ’09. Bottom line, activity in the Philly region has expanded for 11 straight months but over the past two has shown some clear deceleration. Manufacturing has been the bright spot in this recovery but now it needs more clarity on end demand growth which is just not there. The 2 yr note yield is at a fresh record low in response.

June IP rose .1%, better than expectations of a decline of .1%. The upside surprise was led by the utility component, which rose by 2.7%, where the very warm weather boosted output. Motor vehicle, parts production fell 1.9%, while the production of machinery, computer/electronics and mining rose. IP is now positive for 12 straight months but now faces the threat of a reduced contribution from rebuilding inventories. Following the weak July NY manufacturing survey, Philly’s manufacturing report is out at 10am.

Initial Jobless Claims totaled 429k, below the consensus of 445k and the lowest since Aug ’08 but the influence of seasonal auto shutdowns is having an impact as GM did not close down while others did. Positively, a Labor Dept economist said the decline was not just a GM thing as there were declines in a “number of different states.” Continuing Claims rose by 247k after a 203k drop in the prior week. Extended Benefits, past 26 weeks fell by another 254k after sharp drops in the previous few weeks as most likely people are falling off the rolls because of the lack of extension in the payment of unemployment insurance. Bottom line, due to the seasonal issues around the adjustments with GM doing the opposite of what they’ve historically done has made initial claims more difficult to analyze for a few weeks. One thing though is for sure, up to 3mm workers will be falling off the extended claims rolls as benefits run out.

The July NY manufacturing survey fell to 5.1 from 19.6 and was well below expectations of 18. It’s at the lowest since Dec ’09 and is the 1st July industrial report out. New Orders fell 7 pts to 10.1 and Backlogs fell 17 pts to -15.9. Shipments, which follow orders, fell 13 pts to the lowest since June ’09. The Employment component fell 4 pts to 7.9, the lowest since Feb as the average workweek fell below zero for the 1st time in ’10. Prices Paid fell 1.5 pts to 25.4 while Prices Received fell 6.5 pts to -1.6, the 1st negative report since Dec ’09. The Business Condition outlook over the next 6 months rose .5 pt to 41.3 from the June level that was the lowest since July ’09. Bottom line, the data was disappointing and if followed by other regional surveys, points to a clear moderation in manufacturing as the inventory influence wears off. One bright spot, “respondents indicated that exports accounted for a growing share of their revenues.”

I have been covering the US Real Estate market for decades. I grew up with RE (mom was a RE broker and an investor). I have been a housing bear for about 5 years. I recognized the credit bubble and inevitable bust long before most other analysts/strategists/economists did.

I mention this just to inform readers that it is very rare that I come across any housing analysis that surprises me or adds to my understanding of the real estate landscape in a major way.

Which is why I am so pleased to introduce you to Dhaval Joshi, Chief Strategist at London based hedge fund RAB Capital (and former Societe Generale and J P Morgan Strategist).

Dhaval’s analysis looks a variety of housing data relative to household formation, housing stock, vacancy rates, and inventory is not the typical housing review. It is quite illuminating.

Enjoy:

~~~

Can the US economy really return to “business as usual” when it has 4 million houses surplus to requirement, when 1 out of 4 mortgages are in negative equity, and when by our calculation, it is burdened with $4 trillion of excess mortgage debt, equivalent to 30% of GDP?

For many years, total mortgage debt consistently and reliably equalled 0.4 times the value of the US housing stock. Intuitively, this average of 0.4 makes perfect sense as every property usually has a mortgage ranging from 0 to 0.9 times its value. So in 1990, $6 trillion of housing collateral could support $2.5 trillion of mortgages, and by 2006, $23 trillion of housing collateral could support $10 trillion of mortgages. But since then, the US housing stock’s value has slumped to $16 trillion which means the amount of mortgage lending supportable by the collateral has plunged to $6 trillion. However, actual mortgage debt has remained at $10 trillion – $4 trillion too high.

The fact that mortgage debt has barely declined suggests that relatively few homeowners have defaulted on their mortgages or paid off debt yet. Instead, a quarter of all borrowers are sitting on negative equity. That’s just as well – because were mortgage debt to shrink by even half of $4 trillion, the US economy would slump.

Perhaps homeowners are patiently expecting house prices to rise again. But if so, they may be in for a long wait. Prices are likely to be weighed down by a massive oversupply of homes relative to underlying demographic demand. Whether you look at the houses to population ratio, the houses to household ratio or vacant houses ratio, the conclusion is the same – there is a 3% surplus of properties, equivalent to 4 million homes. And with household formation running at just 0.9 million while the US is still building 0.6 million new homes annually, only 0.3 million of the oversupply will be absorbed per year (see page 5).

Ultra low rates to stay

A recent study by the Federal Reserve (The Depth of Negative Equity and Mortgage Default Decisions by Bhutta, Dokko and Shan) investigated the question: at what point do underwater homeowners “strategically default” on their mortgages? Surprisingly, it found that the average borrower doesn’t walk away from his home until negative equity reaches a very high level, -62%. But the fascinating thing was that there was something that could trigger underwater borrowers to default much, much earlier – and that something was an interest rate rise.

With a quarter of US mortgages underwater, and likely to stay that way for some time, the Fed must follow its own research if it wants to prevent a cascade of defaults. Hence, expect US interest rates to stay ultra low for an ultra long time.

>

>

For many years, total mortgage debt consistently and reliably equalled 0.4 times the value of the US housing stock. Intuitively, this average of 0.4 makes perfect sense as every property usually has a mortgage ranging from 0 to 0.9 times its value. So in 1990, $6 trillion of housing collateral could support $2.5 trillion of mortgages, and by 2006, $23 trillion of housing collateral could support $10 trillion of mortgages. But since then, the US housing stock’s value has slumped to $16 trillion which means the amount of mortgage lending supportable by the collateral has plunged to $6 trillion. However, actual mortgage debt has remained at $10 trillion – $4 trillion too high.

>

Loan to value ratio is 1.5 times too high

>

To put it another way, the loan to value ratio of total mortgages outstanding to housing stock value is currently 1.5 times too high.

>

24% of US mortgages are underwater

>

The fact that mortgage debt has barely declined suggests that relatively few homeowners have defaulted on their mortgages or paid off debt yet. Instead, a quarter of all borrowers are sitting on negative equity.

>

Higher interest rates may trigger cascade of defaults

>

A recent study by the Federal Reserve investigated the central question: at what point do underwater homeowners “strategically default” on their mortgages? Surprisingly, it found that when the decision is based on negative equity alone, the average borrower doesn’t walk away from his home until it is very underwater (negative equity of 62%). But the fascinating thing was that there was something that could trigger underwater borrowers to default much, much earlier – and that something was an interest rate rise. In fact, higher interest rates were even more significant in triggering defaults than higher unemployment.

With a quarter of US mortgages underwater, the Fed must heed the advice of its own research if it wants to prevent a cascade of defaults and the consequent repercussions on the financial system and the economy. Hence, expect US interest rates to stay ultra low until millions of mortgages escape out of negative equity.

>

The US has built far too many houses

>

Perhaps homeowners suffering negative equity are patiently expecting house prices to rise again. But they may be in for a long wait. Prices are likely to be weighed down by a massive oversupply of homes relative to underlying demographic demand.

Between 2002 and 2006, US homebuilders went on a construction binge, building 12 million new homes while the number of households went up by just 7 million. The painful legacy is a massive oversupply of houses relative to the number of households.

>

The oversupply will take years to clear

>

With household formation running at just 0.9 million while the US is still building 0.6 million new homes annually, only 0.3 million of the oversupply will be absorbed per year. As there are currently 4 million too many homes, it may take years to mop up the huge oversupply of houses.

The Euro is rallying to a 2 mo high vs the US$ after Spain sold 15 yr paper at a solid b/c of 2.57 with a yield of 5.12% vs a b/c of 1.79 and yield of 4.43% in May. Yields across their curve are lower with the 2 yr in particular falling to the lowest since May. The 10 yr spread to the German Bund is at a 3 week low and the IBEX is rallying to a 2 mo high. Greek stocks are also at 2 mo highs after Greek bank Piraeus (one of the 91 banks being tested) offered to buy government stakes in 2 Greek banks as the consolidation of their banking system has hopefully begun. Greek 5 yr CDS are quoted below 800 vs 1000 2 1/2 weeks ago. ECB’s Mersch said “we should not get addicted” to bond purchases and implied they may be ending soon as they only bought 1b euro worth last week. The Shanghai index closed at a 1 week low after Q2 GDP rose 10.3%, still solid but .2% below estimates and Retail Sales and IP were below forecasts. FDI though was up a big 39.6% y/o/y and CPI and PPI were lower than expected.

Back on June 11, 2010, I noted that the Brits thought we were being rather hypocritical in our outrage over the BP Oil spill. If we were really all that concerned, argued the Brits, we would be more moderate in our consumption, have no love affair with the SUV and enact Pigou taxes on fuel consumption:

“[BP was] trying to fulfill our own reckless and irresponsible demands for cheap and plentiful energy. Anyone who is an energy consumer cannot ignore their contribution to what happened.

We can be a bit hypocritical in the US of A. We have $50k earners who bought $750k houses, then complained about Goldman Sachs; Walmart shoppers who buy 12 packs of tighty whiteys for $2.99 — then complains about job losses. Or the non voters (the majority of us) who complain about Congress. We energy consumers ought to realize that it is our demand that led to drilling in the GoM.

Its sure is much easier to blame BP, than to accept resposibility for our own role in the spill…”

-Oil Consumption Around the World

The pushback on this was fierce. The mere suggestion that Americans adopt European-style conservation was an outrage to some people. I suspect it is because most people (myself included) like a lifestyle supported by cheap oil. Significant lifestyle change is undesirable.

Where this sort issue becomes extremely fascinating to me is when we begin to rationalize the results of our behavior, and come up with explanations that are wanting. The results of  a recent Bloomberg poll show exactly those sorts of rationalizations:

Indeed, it turns out that the vast majority of Americans have those thoughts. They do not believe this was an inevitable result of pushing the energy exploration envelope to find cheap oil; Rather, to them, it was a freak accident:

“Most Americans oppose President Barack Obama’s ban on deepwater oil drilling in response to BP Plc’s Gulf of Mexico spill, even as they hold the company primarily responsible for the incident.

Almost three-fourths, or 73 percent, say a ban is unnecessary, calling the worst oil spill in U.S. history a “freak accident,” according to a Bloomberg National Poll. Barely more than a third say they support drilling less than they did a few months ago. The BP rig sank in April. The administration issued a new moratorium this week after a court rejected a six-month one imposed in May . . .

Asked who was most to blame for the spill, 44 percent say BP, and 19 percent say lax federal regulations and oversight. One in five say no one is to blame.”

Think about that: 20% of those polled think this is nobody’s fault. And “8 in 10 of those questioned say BP shouldn’t be assessed penalties beyond payment for damages.” Of course, its no one’s fault when a freak accident occurs.

So much for the era of personal responsibility . . .

>

Previously:
Oil Consumption Around the World (June 11, 2010)

Source:
Americans in 73% Majority Oppose Ban on Deepwater Oil Drilling
Kim Chipman
Bloomberg, July 15 2010
http://noir.bloomberg.com/apps/news?pid=20601109&sid=aRBd_7EpC5kA&

Visit msnbc.com for breaking news, world news, and news about the economy

The good news in America today is that many of lies from our leaders and media no longer seem to be working.  Four out of five people view the current proposed financial reform as ineffectual.  Many in Congress who voted for socialism for the rich now look like they will be voted out for continuing those giveaways.

Now the only way those Banksters can survive is to pretend that their corporate communism is working even in the face of overwhelming evidence to the contrary.  Most recently, they decided that instead of taxing complicit financial institutions the cost of their “Financial Reform-In-Name-Only“, they will instead use what I call the Big Tarp Lie to pander for the vote of Senator Scott Brown and others.

The mainstream media rarely fights back against this lie, either by an inability to understand, a desire to protect their access to these same Politicians and Bankers or an unwillingness to go up against the very same financial institutions that are often the only thing between them and the unemployment line.

However, we the people have to fight back against these lies – and thankfully we own the truth.

This lie must be beaten back by all of us like whack-a-mole every time it rears its ugly head.  Please help me by sending this information to any Politician, Media Figure, Banker, Neighbor or Robot that you find repeating it – they can take our money, but they don’t own the truth.

Let’s break it down:

1.  TARP itself hasn’t even made money.  AIG alone still owes us $75.6 billion.  However, they always add the caveat “Other than AIG…” when they say that the bailouts were “profitable“.  But the AIG money was DIRECTLY PAID to many of these same banks that “paid back their TARP” at an outrageous 100 cents on the dollar!  Mind you, this was done by government officials that were the former employees and current shareholders of the very banks they were helping.  Let’s make the banks like Goldman Sachs, Bank of America and Societe Generale pay back the $105 billion of stolen taxpayer money before we let anyone say “TARP was paid back.”

2.   TARP is a tiny little part of a massive amount of taxpayer support.  TARP is actually less than 10% of your tax dollars that have been handed to the banks.  And now the banks “paid back” the tiny slice that is TARP with OUR money and you are supposed cheer them for savvy.  At this very moment, the taxpayer is still owed $2.02 Trillion dollars for the bailout by our Politicians and Banksters, and that number is growing every day.

Never mind the money that these same banks make getting endless 0% interest loans from the Federal Reserve (aka You) while either they lend it back to you at 14% or just lend it right to back the government and pocket the yield.  Never mind the multitude of benefits they get from being Too Big Too Fail.  But you’re not supposed to pay attention to that; you’re only supposed to notice how fast they paid back TARP!
So instead of these Politicians looking for the only obvious place to find the money – clawbacks from the people who continue to steal it – we are now being subjected to outright lies as they once again pick the banksters over the people who voted them in.  But don’t let them, or anyone in the media, get away with it without hearing from you.

In line with this morning’s early post (Four out of Five Americans See Financial Reforms as Ineffectual), I discovered, quite by accident, a horrifying little article in the July 12 Time magazine (seen at my hair cutter’s and local barber shops everywhere).

The online version is pretty skimpy, which is probably why I didn’t see it until now. But the details are quite horrific.

The article’s subhed tells you all you need to know: “Why Lobbying Is Washington’s Best Bargain; Lobbyists say for just a few million, they can make clients billions:”

“Lobbyists [are] the best bargain in Washington. Capitol Tax Partners, for example, is one of 1,900 firms that house more than 11,000 lobbyists registered to operate in Washington. Last year, according to the Center for Responsive Politics (CRP), firms like Capitol Tax were paid a total of $3.49 billion for unraveling the mysteries of the tax code for a variety of businesses. According to Capitol Tax co-founder Lindsay Hooper, his firm provided “input and technical advice on various tax matters” to such clients as Morgan Stanley, 3M, Goldman Sachs, Chanel, Ford and the Private Equity Council, which is a trade group trying to head off a plan to increase taxes on what’s called carried interest, a form of income enjoyed by the heavy hitters who run venture-capital and other types of private-equity funds.”

The print edition specifically cites Derivative trading banks and Auto Dealers as examples of ROI. Derivatives trading banks spent $28 million, and got to avoid allocating $5 billion to $7 billion to back their trades. The gain in annual profits is about $3 billion — with the risk remaining on the taxpayers.  A pretty nifty return on lobbying investment (minus the lobbyists soul burning in Hell for eternity — but that’s a small price to pay.

Auto Dealers made out even better: They dropped less than $10 million dollars ($6.3 million on lobbying, and an additional $3.4 million in campaign contributions). For their troubles, the dealers get to keep $20 billion each year in undisclosed added interest and fee kickbacks to over-priced loans.

The consumer? Well, apparently, Congress is sending each voter a matching velcro glove and sock set . . .

>

Source:
Government for Sale: How Lobbyists Shaped the Financial Reform Bill
By Steven Brill
Time, Jul. 01, 2010 
http://www.time.com/time/politics/article/0,8599,2000880,00.html