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

Global Macro Monitor produces informed opinion about markets and the global economy. This was originally published on June 28, 2011.

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Looks like traders, including yours truly, were caught catawampus in a pair of Nike shorts (ouch!),  either not long enough or short, both equities and the Euro, coming into the week, even as some of the short-term signals were turning positive: 1) the commodity sell-off as a positive for margins and consumer purchasing power; 2) the French proposal to rollover some Greek debt, though we believe is weak and full of holes, the policymakers are at least moving in the right direction and Sarkozy is one of the few global politicos showing leadership; 3) the Asian markets, most notably, the Shanghai, have stabilized; 4) the S&P500 was able to make a higher high and higher low last week.

This is what I will be reading on the way home tonight:

• Kass: Debt Is Suffocating Recovery (The Street)
• The 14 Biggest Ideas of the Year (The Atlantic)
• Why Wall Street went for gay marriage (Market Watch)
• Firms Loosen Grip on Cash (WSJ)
• Can Greece Survive? (EconoMonitor)
• Google Introduces Facebook Competitor, Emphasizing Privacy (NYT)
• Stephen Breyer on Intellectual Influences (The Browser)
• Truthy: A System to Analyze and Visualize the Diffusion of Information on Twitter. (Truthy)
• SHELL GAMES: A little house of secrets on the Great Plains (Reuters)
• When The Mob Ruled Hollywood (Playboy)

What are you reading?

David Rosenberg:

Indeed, this 2009-2011 recovery and cyclical bull market has been as artificial as the 2003-07 expansion. That last one was fuelled by financial engineering in the financial sector. This one is being underpinned by unprecedented government intrusion in the credit markets. As of this quarter, your government has replaced the private sector as the largest source of outstanding mortgage market and consumer-related credit (see front page of the Investor’s Business Daily). So not only is the U.S.A. turning Japanese in many respects, it is also now resembling China where the government also redirects the flow of private sector credit.

When we said capitalism went on a sabbatical three years ago, we didn’t expect this to be a permanent vacation. In the past five years, private sector loans have deflated by $1.9 trillion, while public sector assisted credit has surged a similar amount. Roughly nine in 10 dollars of mortgage flow is being dominated by the Federal government — Fannie Mae, Ginnie Mae, Freddie Mac, and the FHA. That is amazing, and these entities have actually been tightening their scorecards to avoid political taxpayer backlash.

Be that as it may, in this new era of socialized credit, the private sector now accounts for 42% of outstanding residential mortgages, down from nearly 60% at the bubble peak in 2006. The only reason why consumer credit has not shown a complete implosion is because in the past three years, federally- assisted student loans have soared by $250 billion.

But not even the government can prevent credit from retrenching — the best it can do is cushion the blow. The front page of the weekend WSJ runs with an article on the aftershocks of the credit collapse — Tighter Lending Crimps Housing. Credit applications are still being rejected at a rapid rate.

About 20% of new home loan applications have been refused this year, up from 18% in 2010; 27% of refinancing requests have been turned down, up from 24%. And if you need any proof as to how this is playing out in the consumer space, have a look at Property Investors Face Losing Their Shirts with Strip Malls on page C14 of the WSJ. The low-income consumer that tends to shop at strip centers has been completely hobbled by weak job market conditions and punishingly high food and gas prices this cycle. Somehow the benefits from QE1 and QE2 bypassed the $50,000 and lower income club, and this group represents half of the U.S. consumer spending pie, for all the talk of Coach, Tiffany’s, and Saks for much of the past 24 months.

The WSJ emphasizes the implications of the on-going deleveraging cycle on the front page of today’s paper — Debit Hamstrings Recovery. It is so obvious that as much as the government tries to slow the process, it cannot prevent the private sector from healing itself after decades of tremendous credit excess. U.S. consumers have 30% more credit card and other revolving debt on their balance sheet than they did just a decade ago. While outstandings are down 6% from the peak, there is still considerable contractions to go before household debt levels revert to the mean relative to both income and assets. At the same time, an estimated 23% of mortgages are “underwater” and it is against this backdrop that home-equity and credit lines have almost completely dried up. The necessity of climbing out from under this unprecedented amount of debt-related stress means that interest rates are very likely going to remain near the floor for a very long time. Ben Bernanke may publicly state that “extended period” means over the next few FOMC meetings, but anyone with a sense of history knows that they will stay close to zero for years to come.

And whoever thought we’d be seeing headlines like this, four years after the initial detonation in the U.S. housing market — Lennar Profit Slides 65% on page B8 of the weekend WSJ. Incredible. Revenues are down 6.1% YoY, margins are still compressing and order books are flat.

From Russell Investments, What’s the state of the economy?

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Click for interactive graphic

PART 1

PART 2

Case Shiller Home Price Indices showed a monthly increase in prices for the first time in eight months. This was for the month of April, which is usually the beginning of the best six months of the year for home sales. (See this chart of Non Seasonally adjusted Existing Home Sales)

Davied Blitzer of S&P Indices noted “However, the seasonally adjusted numbers show that much of the improvement reflects the beginning of the Spring-Summer home buying season. It is much too early to tell if this is a turning point or simply due to some warmer weather”

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Malcolm Gladwell, one of the best storytellers of our generation, is the author of four books, including “The Tipping Point: How Little Things Make a Big Difference,” (2000) , “Blink: The Power of Thinking Without Thinking” (2005), and “Outliers: The Story of Success” (2008) all of which were number one New York Times bestsellers. His latest book, “What the Dog Saw” (2009) is a compilation of stories published in The New Yorker.

Chinese real-estate prices are declining, which has investors asking whether the country’s economy is over-leveraged. Could China’s real-estate bubble burst in coming years-and, if it does, how might that affect other countries? WSJ’s Bob Davis reports.

6/28/2011 2:26:49 AM

Our top 10 interesting reads to get your morning going:

• Gold Bull Still Has Legs  (Barron’s)
• Greek Yields: “Certain Default, But Not Yet”  (Hussman Funds)
• U.S. Money Funds Risk Losses if Europe Crisis Spreads (Bloomberg)
• The Human Face of Economics (International Monetary Fund)
• Should Public companies have to compare CEO and worker pay? (Washington Post) see also Steven Pearlstein on why CEO’s are re winning on pay (WaPo)
• Was Obama Right About The SPR Release? (Forbes)
• Indiana’s bumpy road to privatization (LA Times)
• Who Amongst the Rich Doesn’t Pay Federal Income Taxes (Legally) (Economix)
• Very Cool! BBC Radio 4 unveils 60 years of Reith Lectures archive (BBC)
• $1 Billion That Nobody Wants (NPR)

What are you reading?

June Consumer Confidence was 2.5 pts below estimates at 58.5 and down from an upwardly revised 61.7 in May. It’s a 7 month low as both the Present Situation and Expectations components fell. A main factor in the weakness was the answers to the labor market questions. Those that said jobs were Plentiful fell .5 pt and those that said jobs were Hard To Get rose .3 pt. Also of note, those expecting more jobs over the next 6 months fell to the lowest since July ’10 with most expecting the jobs outlook to remain flat. Those planning to buy a home within 6 months fell sharply to the lowest since Dec and those that want to buy a car also saw a steep drop of 3 pts to also the lowest since Dec. Coincident with the drop in gasoline prices, one year inflation expectations fell to 6% from 6.5% but still remains above the 20 yr avg of 4.70%. Bottom line, a difficult labor market continues to be the main drag on confidence, notwithstanding the recent drop in gasoline prices. But, as we know, gasoline prices are still high and a drop from $4 a gallon to $3.55 isn’t going to dramatically alter the mood especially when the jobs picture is still uncertain for many. With respect to the market response, it rarely moves off a confidence # and all eyes remain on Greece.