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European monetary policy/monetary conditions are too tight and, Citi's FX Technical group explains, the EURO is too strong thereby exacerbating the effects of the internal devaluation in Europe (as we noted here). Looser monetary policy and a weaker currency are becoming increasingly necessary conditions for the Eurozone to recover/survive. The present period in the Eurozone, Citi adds, where the financial architecture is coming apart at the seams is not remotely unprecedented and in fact offers a very compelling historical perspective for significant devaluation of the EUR in the years ahead.

Via Citi FX Technicals,

Given the lack of economic growth and employment growth combined with the precipitous fall in the inflation rate since July last year the ECB should be embracing looser policy and a lower EURO.

The present period in the Eurozone where the financial architecture is coming apart at the seams is not remotely unprecedented

Quick history recap:

1989-1991: We had the savings and loan crisis in the US; a sharp down turn in housing activity and a deep economic recession

 

1992-1994: The “travails” in the World’s largest economy found their way into the “flawed” financial architecture of Europe (The Exchange rate mechanism) which collapsed under the stress

 

1997-1998: Saw the “third leg” of this dynamic feed into Emerging markets as the aggressive easing in the World’s major economic zones created a “bubble” in EM and in particular Asia. Between 1989 and 1992 the Fed lowered the Fed funds rate from 9.75% to 3%.(The USD-Index fell about 27% in this period) From 1992 to 1996 the Bundesbank lowered rates from 8.75% to 2.5%.(The cycle low was put in for the USD-index in 1992 in a similar fashion to 2008 when we also reached the cycle low in the Fed funds rate) Three years later we saw the USD-index begin a 5 year plus rally-something we believe started again in 2011.

USD-index and the Fed easing cycles (Fed funds) of 1989-1992 and 2007-2009 on the back of a housing downturn, banking stress and economic downturn

We continue to believe that we are close to the next rally in the USD-index which we expect to continue for the next 2-3 years.

When we look back to that period in the early 1990’s we see a number of stimulus dynamics that eventually helped Europe “regain its footing”

Firstly the peripheral states got two distinct elements of stimulus. Most of the ERM currencies continued to weaken against the DEM into March of 1995 as the excessively tight monetary regime (Short term rates) put in place to defend the currencies was abandoned. This was further assisted by the easing of official rates by the Bundesbank from 8.75% in 1992 to a low of 2.5% by 1996.

European currencies continued to weaken into early 1995 against the Deutsche Mark.

The Italian Lira, Spanish Peseta and French Franc (Amongst many others) weakened substantially against the DEM into the spring of 1995.(Internal FX devaluation in “Euro bloc”)

As they strengthened again from 1995 onwards the Bundesbank was still lowering rates

Long term rates then started to fall sharply from 1995 and spreads converged with Germany providing further stimulus.

This move lower generated a rapid convergence of Bond yields.

Take Italy for example: Between 1995 and 1998 the 10 year Italy-Germany spread narrowed from about 650 basis points to ZERO on the back of the convergence trade.

That provided a huge monetary stimulus at the long end of the curve (And did not even need QE to do it) the magnitude of this move was much greater than what we have seen since this spread peaked just under 2 years ago.

Between 1995 and 1999 not only did we see spreads converge but long term rates in Italy (10 year) fell from 13.8% to 3.9% (Almost 1000 basis points). Compare that to today where we have seen a high to low fall of about 380 basis points between 2011 and 2013

Further as mentioned above we then saw the EURO (As its components) drop from 1.3770 in March 1995 to .8200 by October 2000 (40%) and from a peak of 1.4900 seen in 1992 (45%). Between 1995 and 1997 the convergence trade saw European currencies strengthen against the DEM (internal devaluation) but lower long term yields, short term yields and a much weaker “EURO bloc” against the USD all provided strong offsetting monetary stimulus.

Huge external devaluation for the EURO “bloc”

Sharp fall in the EURO bloc against the USD from 1995 to 2000 and in particular the 2 years from 1998-2000 (Fall of 32%)

That 2 year fall is important for a few reasons

– It happened after we had seen pretty much the “lion’s share” of the stimulative benefit of the “convergence trade” and drop in long term yields into 1998.

 

– The cycle low in Bundesbank rates (2.5%) in 1996 and subsequently ECB rates (2.5% in 1999) had been met at this point

Therefore the currency became the last “vestige” of monetary easing in the post ERM crisis cycle.

So reviewing the Crisis and post crisis dynamics of the ERM collapse and comparing to today

European peripheral currencies got a massive “Euro bloc” devaluation from 1992-1995. For example the Italian Lira depreciated from around 750 against the Deutsche in 1992 to about 1,240 by 1995 (About 65%). Between 1995 and 1997 some of that was unwound (internal EURO bloc) as it retraced to around 990 which became the rate at which the EURO conversion took place. That was still a devaluation of 32% from the 1992 level. Today the internal exchange rate is fixed so Italy in this crisis has had no internal devaluation.

 

From 1995 to 1998/1999 Italian long term yields fell precipitously (1,000 basis points) and the spread with Germany went to ZERO providing huge stimulus. During today’s crisis Italian 10 year yields have fallen from a peak of around 7.5% in 2011 to a low of around 3.7% in 2013 and now sit over 4% while German 10 year yields are around 1.75%. By definition this is much less stimulus as well as less convergence.

 

The EURO came into existence in January 1999 and the ECB refinancing rate hit a cycle low at 2.5% by April 1999, a move lower from the “heady peak” Bundesbank discount rate of 8.75% in 1992 and by definition large short term monetary stimulus.(fall of 625 basis points). Today we have seen a less stimulative fall from 4.25% to 0.5% over about 5 years (375 basis points with minimal future potential to fall from here)

 

Between 1995 and 2000 the “EURO bloc” devalued against the USD by 40% (45% since 1992). Today, if we use October 2009 as the start of this EURO crisis (The point at which peripheral yields led by Greece began to surge) EURUSD has gone from around 1.46 at that time to around 1.35 today (A net depreciation of only about 7.5%)

The bottom line here is that in all respects the stimulative post crisis dynamics this time have been much lower than those seen after a “lesser” crisis in 1992-1995.This is before we even talk about the excessive Government debt that now exists, the stresses in the European banking system, the default by Greece, the bailout of Ireland and Cyprus and the fiscal austerity measures being employed.

In addition there is minimal new stimulative potential from traditional monetary policy with ECB rates now at 0.5%.

This leaves really two major tools for further stimulative activity following this week's rate cut…

Renewed ECB bond buying (They can no longer rely on an LTRO transmission mechanism inducing financial institutions to buy European sovereign bonds especially as they have shown the propensity for haircuts when things go wrong)…this would likely then transmit into…

 

A sharp external devaluation of the EURO. Given the poor economic dynamics in Europe, the collapsing inflation, global feedback loop concerns regarding tapering, some concerns about the ability of China (A major export market for Europe and Germany in particular) to maintain the prior pace of economic growth etc. there should be no concern in Europe about this. The authorities have to stop viewing a weaker EURO as part of the problem (financial crisis) and more as part of the solution (External devaluation is stimulative to the MCI (monetary conditions index) and supports export led growth). Even Germany should embrace this given the sluggishness of the EURO area economies and sharply lower and falling inflation. When we look at the longer term EURUSD chart it is very supportive of this outcome in a fashion very similar to the 1995-2000 period.

URUSD monthly chart: A very compelling historical perspective

We continue to expect a significant fall in EURUSD over the next 2+ years as we saw in 1998.We believe Europe needs and should embrace this dynamic given the ongoing danger of a deep recessionary/depressionary/deflationary environment as a consequence of fiscal austerity and the sharp internal devaluation dynamics already seen.

Within this we believe Europe should (and ultimately will) embrace the stimulative effects of such a move in conjunction with further traditional (refinancing rate) easing (Albeit at these levels the move is more psychological than anything) and non-traditional (bond buying)

On top of this the position of both the relative economic and monetary policy dynamics leaves the US further down the road and closer to a potential turn than Europe (Despite those dynamics still being weak by historical recovery standards)

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/uP0g2kNd47Y/story01.htm Tyler Durden

European monetary policy/monetary conditions are too tight and, Citi's FX Technical group explains, the EURO is too strong thereby exacerbating the effects of the internal devaluation in Europe (as we noted here). Looser monetary policy and a weaker currency are becoming increasingly necessary conditions for the Eurozone to recover/survive. The present period in the Eurozone, Citi adds, where the financial architecture is coming apart at the seams is not remotely unprecedented and in fact offers a very compelling historical perspective for significant devaluation of the EUR in the years ahead.

Via Citi FX Technicals,

Given the lack of economic growth and employment growth combined with the precipitous fall in the inflation rate since July last year the ECB should be embracing looser policy and a lower EURO.

The present period in the Eurozone where the financial architecture is coming apart at the seams is not remotely unprecedented

Quick history recap:

1989-1991: We had the savings and loan crisis in the US; a sharp down turn in housing activity and a deep economic recession

 

1992-1994: The “travails” in the World’s largest economy found their way into the “flawed” financial architecture of Europe (The Exchange rate mechanism) which collapsed under the stress

 

1997-1998: Saw the “third leg” of this dynamic feed into Emerging markets as the aggressive easing in the World’s major economic zones created a “bubble” in EM and in particular Asia. Between 1989 and 1992 the Fed lowered the Fed funds rate from 9.75% to 3%.(The USD-Index fell about 27% in this period) From 1992 to 1996 the Bundesbank lowered rates from 8.75% to 2.5%.(The cycle low was put in for the USD-index in 1992 in a similar fashion to 2008 when we also reached the cycle low in the Fed funds rate) Three years later we saw the USD-index begin a 5 year plus rally-something we believe started again in 2011.

USD-index and the Fed easing cycles (Fed funds) of 1989-1992 and 2007-2009 on the back of a housing downturn, banking stress and economic downturn

We continue to believe that we are close to the next rally in the USD-index which we expect to continue for the next 2-3 years.

When we look back to that period in the early 1990’s we see a number of stimulus dynamics that eventually helped Europe “regain its footing”

Firstly the peripheral states got two distinct elements of stimulus. Most of the ERM currencies continued to weaken against the DEM into March of 1995 as the excessively tight monetary regime (Short term rates) put in place to defend the currencies was abandoned. This was further assisted by the easing of official rates by the Bundesbank from 8.75% in 1992 to a low of 2.5% by 1996.

European currencies continued to weaken into early 1995 against the Deutsche Mark.

The Italian Lira, Spanish Peseta and French Franc (Amongst many others) weakened substantially against the DEM into the spring of 1995.(Internal FX devaluation in “Euro bloc”)

As they strengthened again from 1995 onwards the Bundesbank was still lowering rates

Long term rates then started to fall sharply from 1995 and spreads converged with Germany providing further stimulus.

This move lower generated a rapid convergence of Bond yields.

Take Italy for example: Between 1995 and 1998 the 10 year Italy-Germany spread narrowed from about 650 basis points to ZERO on the back of the convergence trade.

That provided a huge monetary stimulus at the long end of the curve (And did not even need QE to do it) the magnitude of this move was much greater than what we have seen since this spread peaked just under 2 years ago.

Between 1995 and 1999 not only did we see spreads converge but long term rates in Italy (10 year) fell from 13.8% to 3.9% (Almost 1000 basis points). Compare that to today where we have seen a high to low fall of about 380 basis points between 2011 and 2013

Further as mentioned above we then saw the EURO (As its components) drop from 1.3770 in March 1995 to .8200 by October 2000 (40%) and from a peak of 1.4900 seen in 1992 (45%). Between 1995 and 1997 the convergence trade saw European currencies strengthen against the DEM (internal devaluation) but lower long term yields, short term yields and a much weaker “EURO bloc” against the USD all provided strong offsetting monetary stimulus.

Huge external devaluation for the EURO “bloc”

Sharp fall in the EURO bloc against the USD from 1995 to 2000 and in particular the 2 years from 1998-2000 (Fall of 32%)

That 2 year fall is important for a few reasons

– It happened after we had seen pretty much the “lion’s share” of the stimulative benefit of the “convergence trade” and drop in long term yields into 1998.

 

– The cycle low in Bundesbank rates (2.5%) in 1996 and subsequently ECB rates (2.5% in 1999) had been met at this point

Therefore the currency became the last “vestige” of monetary easing in the post ERM crisis cycle.

So reviewing the Crisis and post crisis dynamics of the ERM collapse and comparing to today

European peripheral currencies got a massive “Euro bloc” devaluation from 1992-1995. For example the Italian Lira depreciated from around 750 against the Deutsche in 1992 to about 1,240 by 1995 (About 65%). Between 1995 and 1997 some of that was unwound (internal EURO bloc) as it retraced to around 990 which became the rate at which the EURO conversion took place. That was still a devaluation of 32% from the 1992 level. Today the internal exchange rate is fixed so Italy in this crisis has had no internal devaluation.

 

From 1995 to 1998/1999 Italian long term yields fell precipitously (1,000 basis points) and the spread with Germany went to ZERO providing huge stimulus. During today’s crisis Italian 10 year yields have fallen from a peak of around 7.5% in 2011 to a low of around 3.7% in 2013 and now sit over 4% while German 10 year yields are around 1.75%. By definition this is much less stimulus as well as less convergence.

 

The EURO came into existence in January 1999 and the ECB refinancing rate hit a cycle low at 2.5% by April 1999, a move lower from the “heady peak” Bundesbank discount rate of 8.75% in 1992 and by definition large short term monetary stimulus.(fall of 625 basis points). Today we have seen a
less stimulative fall from 4.25% to 0.5% over about 5 years (375 basis points with minimal future potential to fall from here)

 

Between 1995 and 2000 the “EURO bloc” devalued against the USD by 40% (45% since 1992). Today, if we use October 2009 as the start of this EURO crisis (The point at which peripheral yields led by Greece began to surge) EURUSD has gone from around 1.46 at that time to around 1.35 today (A net depreciation of only about 7.5%)

The bottom line here is that in all respects the stimulative post crisis dynamics this time have been much lower than those seen after a “lesser” crisis in 1992-1995.This is before we even talk about the excessive Government debt that now exists, the stresses in the European banking system, the default by Greece, the bailout of Ireland and Cyprus and the fiscal austerity measures being employed.

In addition there is minimal new stimulative potential from traditional monetary policy with ECB rates now at 0.5%.

This leaves really two major tools for further stimulative activity following this week's rate cut…

Renewed ECB bond buying (They can no longer rely on an LTRO transmission mechanism inducing financial institutions to buy European sovereign bonds especially as they have shown the propensity for haircuts when things go wrong)…this would likely then transmit into…

 

A sharp external devaluation of the EURO. Given the poor economic dynamics in Europe, the collapsing inflation, global feedback loop concerns regarding tapering, some concerns about the ability of China (A major export market for Europe and Germany in particular) to maintain the prior pace of economic growth etc. there should be no concern in Europe about this. The authorities have to stop viewing a weaker EURO as part of the problem (financial crisis) and more as part of the solution (External devaluation is stimulative to the MCI (monetary conditions index) and supports export led growth). Even Germany should embrace this given the sluggishness of the EURO area economies and sharply lower and falling inflation. When we look at the longer term EURUSD chart it is very supportive of this outcome in a fashion very similar to the 1995-2000 period.

URUSD monthly chart: A very compelling historical perspective

We continue to expect a significant fall in EURUSD over the next 2+ years as we saw in 1998.We believe Europe needs and should embrace this dynamic given the ongoing danger of a deep recessionary/depressionary/deflationary environment as a consequence of fiscal austerity and the sharp internal devaluation dynamics already seen.

Within this we believe Europe should (and ultimately will) embrace the stimulative effects of such a move in conjunction with further traditional (refinancing rate) easing (Albeit at these levels the move is more psychological than anything) and non-traditional (bond buying)

On top of this the position of both the relative economic and monetary policy dynamics leaves the US further down the road and closer to a potential turn than Europe (Despite those dynamics still being weak by historical recovery standards)

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/uP0g2kNd47Y/story01.htm Tyler Durden

One of the most trumpeted stories justifying the US economic “recovery” is the resurgence in car sales, which have now returned to an annual sales clip almost on par with that from before the great depression. What is conveniently left out of all such stories is what is the funding for these purchases (funnelling through to the top and bottom line of such administration darling companies as GM) comes from. The answer: the same NINJA loans, with non-existent zero credit rating requirements that allowed anything with a pulse to buy a McMansion during the peak day of the last credit bubble.

Bloomberg reports on an issue we have been reporting for over a year, namely the ‘stringent’ credit-check requirements for new car purchasers by recounting the story of Alan Helfman, a car dealer in Houston, who served a woman in his showroom last month with a credit score lower than 500 and a desire for a new Dodge Dart for her daily commute. She drove away with a new car.

So there you have it: No Car, no FICO score, no problem. The NINJAs have once again taken over the subprime asylum.

This time, it seems, is different: because anyone can get a loan. A year ago, with a credit ranking in the bottom eighth percentile, “I would’ve told her don’t even bother coming in,” said Helfman, who owns River Oaks Chrysler Dodge Jeep Ram, where sales rose about 20 percent this year. “But she had a good job, so I told her to bring a phone bill, a light bill, your last couple of paycheck stubs and bring me some down payment.”

Nevermind that a FICO < 500 means that not only will her job be gone in a few weeks, and that she will likely repay a single-digit percentage fraction of the total loan. What matters is she showed, well, signs of life – which makes her immediately eligible for all the loans that the government is fit to hand out. And frankly why not: with the US essentially insolvent, and now holding on to every day that the USD is still a reserve currency like dear life, who can blame her or the countless others like her, who have given the impression the economy is recovering when it is merely going through all the final strokes before it all, once again, comes crashing down?

Is it possible that barely five years later, everyone has forgotten what happened the last time anyone who wanted credit got it? And what will happen when those who don’t even have a phone bill or a light bill, nevermind a job, come asking for a Dodge Dart? Why yes: the Pied Piper of Marriner Eccles is playing the music ever louder, and so all must dance.

Luckily, even the mainstream media is finally catching on to the fact that all the “gains” in the best economic sector have been on the back of subprime.

While surging light-vehicle sales have been one of the bright spots in the U.S. economy, it’s increasingly being fueled by borrowers with imperfect credit. Such car buyers account for more than 27 percent of loans for new vehicles, the highest proportion since Experian Automotive started tracking the data in 2007. That compares with 25 percent last year and 18 percent in 2009, as lenders pulled back during the recession.

 

Issuance of bonds linked to subprime auto loans soared to $17.2 billion this year, more than double the amount sold during the same period in 2010, according to Harris Trifon, a debt analyst at Deutsche Bank AG. The market for such debt, which peaked at about $20 billion in 2005, was dwarfed by the record $1.2 trillion in mortgage bonds sold that year.

Of course, the enablers of this destructive behavior see nothing wrong, and live under the delusion that sub-500 FICO borrowers will actually pay them back.

“It’s a good investment” for lenders, Helfman said. “A person that has to get from point A to point B, they’re not going to jeopardize their job. They have to pay the car payment before they pay anything else.”

 

His Dodge Dart customer with the bad credit had to pay a higher than average interest rate.

 

“It wasn’t pretty, but it wasn’t crazy,” he said. She was “so happy she couldn’t see straight.”

Of course she did: Greece too was happy when it found Germany – an idiot lender who fund the Greek drunken spending for a decade (mostly on made in Germany military equipment). And like the lender, Germany too was happy: it found a willing idiot to buy everything it had to sell funded by “vendor financing.” Well all know how that relationship ended.

And end again it will, because subprime borrowers are the ones who can least afford the highest interest rates, which by definition flow through to the riskiest borrowers.

Fifty-eight percent of loans taken out to purchase Chrysler Group LLC’s Dodge brand vehicles in October were with loans above the industry average of 4.2 percent annual percentage rate, according to Edmunds, a researcher that tracks vehicle sales.

 

The average loan for a Dodge charged an APR of 7.4 percent, and 23 percent of the loans had APRs of more than 10 percent, making it the brand with the highest percentage of loans for more than 10 percent, followed closely by Chrysler and Mitsubishi. Rates on subprime auto loans can climb to 19 percent, according to S&P.

 

Dodge U.S. sales rose 17 percent this year through October compared with a year earlier, propelling Chrysler Group to 43 straight months of rising sales.

 

“Right now, you have to have fairly bad credit to be paying above 3 percent,” Jessica Caldwell, an analyst with Edmunds, said in a telephone interview.

But since nobody has blown up to date as a result of this latest micro credit bubble, it must mean everyone is welcome to dance. Sure enough:

An influx of new competitors into subprime auto-lending since 2010 is sparking concern of eroding underwriting standards, according to S&P. About 13 issuers have accessed the asset-backed market to fund subprime auto loan originations this year, according to Citigroup Inc.

 

Among the issuers accessing the asset-backed market this year are GM Financial, the lender founded in 1992 and known as AmeriCredit before it was acquired by General Motors Co. in 2010, and new entrants such as Blackstone Group LP’s Exeter Financial Corp.

 

“We are still skeptical that all of today’s subprime auto players will thrive,” Citigroup analysts led by Mary Kane said in an Oct. 10 report. The successful companies will be those that can underwrite and collect on loans while holding costs and defaults to a minimum, the Citigroup report said.

We are skeptical that Citi will thrive when the bubble pops, but that’s irrelevant. For now, let the good LTV times roll. LTVs of a whopping 114.5%.

Consider Exeter Finance Corp., which was acquired by Blackstone Group LP in 2011. Moody’s Investors Service won’t grant high-investment-grade rankings to asset-backed deals sold by the Irving, Texas-based company, citing its limited experience and performance history.

 

It has
had higher loss rates compared with other lenders, S&P said in a Sept. 17 report. Julie Weems, a spokeswoman for Exeter, declined to comment on the company’s losses.

 

Exeter has issued $900 million of the bonds this year, including $589 million of securities rated AAA by Toronto-based DBRS LTD and AA by S&P, data compiled by Bloomberg show.

 

In Exeter’s most recent deal in September, a $500 million issue backed by 26,591 loans, the average loan was 112.4 percent of the value of the car, up from 111.9 percent in a previous offering sold in May, according to a presale report from S&P. The average loan-to-value ratio, or LTV, on vehicle sales to consumers with spotty credit is 114.5 percent this year, compared with a peak of 121 percent in 2008.

It is so bad that even Morgan Stanley now gets it:

“Perhaps more than any other factor, easing credit has been the key to the U.S. auto recovery,” Adam Jonas, a New York-based analyst with Morgan Stanley, wrote in a note to investors last month. The rise of subprime lending back to record levels, the lengthening of loan terms and increasing credit losses are some of factors that lead Jonas to say there are “serious warning signs” for automaker’s ability to maintain pricing discipline.

And who gets to eat the losses? Well, as we showed yesterday, the bulk of consumer credit issuance in the past year, a massive 99%, has been sourced by the government to go straight into auto and student loans.

Which means you, dear US taxpayer, will once again be on the hook when the music ends.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/O45vlMWgeRM/story01.htm Tyler Durden

Submitted by Lance Roberts of STA Wealth Management,

This past week saw the initial public offering of the single most anticipated IPO of 2013 – Twitter.   If you tweeted about it then you are not alone as the news dominated the media headlines and the market.  With Twitter already sporting a 11x price-to-sales ratio, and no earnings, what could possibly go wrong?  However, it is that growing complacency among investors that should be the most concerning as the general sentiment has become that nothing can stop the markets as long as the Fed is in the game.  This week's issue of things to ponder over the weekend provides some thoughts in this regard.

1) Are We Heading Towards A Cliff?  

Andy Xie – Caixin Online

"The odds are that the world is experiencing a bigger bubble than the one that unleashed the 2008 Global Financial Crisis. The United States' household net wealth is much higher than at the peak in the last bubble. China's property rental yields are similar to what Japan experienced at the peak of its property bubble.

 

The biggest part of today's bubble is in government bonds valued at about 100 percent of global GDP. Such a vast amount of assets is priced at a negative real yield. Its low yield also benefits other borrowers. My guesstimate is that this bubble subsidizes debtors to the tune of 10 percent of GDP or US$ 7 trillion dollars per annum. The transfer of income from savers to debtors has never happened on such a vast scale, not even close. This is the reason that so many bubbles are forming around the world, because speculation is viewed as an escape route for savers.

 

The property market in emerging economies is the second-largest bubble. It is probably 100 percent overvalued. My guesstimate is that it is US$ 50 trillion overvalued.

 

Stocks, especially in the United States, are significantly overvalued too. The overvaluation could be one-third or about US$ 20 trillion.

 

There are other bubbles too. Credit risk, for example, is underpriced. The art market is bubbly again. These bubbles are not significant compared to the big three above.

 

When the Fed does normalize its policy, i.e., the real interest rate becomes positive again, this vast bubble will burst. Given its size, its bursting will likely bring another global recession worse than the one after the 2008 crisis."

2) Three Potential Headwinds For US Housing

A while back I wrote an article about the real underpinnings of the housing market which pointed out that, despite media headlines to the contrary, home ownership was at the lowest levels since the 1980's and was showing no real signs of recovery.  I stated then:

"As I stated previously the optimism over the housing recovery has gotten well ahead of the underlying fundamentals.  While the belief was that the Government, and Fed's, interventions would ignite the housing market creating a self-perpetuating recovery in the economy – it did not turn out that way.  Instead, it led to a speculative rush into buying rental properties creating a temporary, and artificial, inventory suppression.  The risks to the housing story remain high due to the impact of higher taxes, stagnant wage growth, re-defaults of the 6-million modifications and workouts and a slowdown of speculative investment due to reduced profit margins.  While there are many hopes pinned on the housing recovery as a 'driver' of economic growth in 2013 and beyond – the data suggests that it might be quite a bit of wishful thinking."

That statement of "wishful thinking" was confirmed this past week by Trulia chief economist Jed Kolko: (via ZeroHedge)

• Census 3Q homeownership, vacancy survey shows household formation “alarmingly slow,” vacancies “remain stubbornly high,” 
• "Slow household formation number is one of the most alarming housing indicators to come out this year"
• Share of millennials living with their parents rose to 31.6% vs 31.4% y/y
• Household formation 380k in yr leading up to 3Q vs L-T “normal” increase of 1.1m
• No increase over past yr in young adults moving out of parents homes or getting jobs is “most worrying”
• Vacant homes still pose “problem” for recovery
• 53% of vacant homes were held off mkt in 3Q, highest share since before bubble
• 10.2% of all housing units are vacant, unchanged y/y, higher than pre-bubble level of 8.9% in 3Q 2001

 Furthermore, Sober Look also noted:

"While the US housing market remains relatively robust, it is likely to face a couple of headwinds going forward. One is the lower affordability index, which is declining due to higher prices and higher mortgage rates (see discussion). On a year-over-year basis the declines have been quite steep."

The Federal Reserve has consistently been noting the strength of the housing recovery as evidence of a recovering economy.  Those hopes are likely to fade in the months ahead as household formation lags, millennials remain on parent's couches and affordability declines.

3) Seeds Are Sown For The Next Financial Crisis

Represent Us Blog

After the crash in 2008, Congress leapt into action to pass legislation, which has yet to be fully written, to make sure the financial shenanigans of Wall Street were never repeated.  Unfortunately, that was then, and this is now. 

"A new law written by Citigroup lobbyists (we couldn’t make this stuff up if we tried) exempts derivatives trading from regulation, and was passed this week by the House of Representatives with broad bipartisan support.

 

It sounds bad… but don’t worry, it gets much, much worse:

 

The New York Times reports that 70 of the 85 lines in the new House bill were literally written by Citigroup lobbyists (Citigroup was one of the mega-banks that brought our economy to its knees in 2008 and received billions in taxpayer money.)

 

The same report also revealed “two crucial paragraphs…were copied nearly word for word.” You can even view the original documents and see how Citigroup’s lobbyists redrafted the House Bill, striking out ideas they didn’t like and replacing them with ones they did.

 

The bills are sponsored by Randy Hultgren (R – IL), and co-sponsored by Rep. Jim Himes (D-CT) and others. Himes is a former Goldman Sachs executive, and chief fundraiser for the Democratic Congressional Campaign Committee.

 

Maplight reports that the financial industry is the top source of campaign funding for 6 of the bills’ 8 cosponsors.

 

Maplight’s data shows that members of the House received $22,425,740 million from interest groups that support the bill — that’s 5.8 times more than it received from interest groups opposed.

 

“House aides, when asked why Democrats would vote for this proposal even though the Obama administration opposes it, offered a political explanation. Republicans have enough votes to pass it themselves, so vulnerable House Democrats might as well join them, and collect industry money for their campaigns.” — New York Times

4) Valuations And Future Returns

by Mebane Faber

I have discussed the importance of valuations on future returns many times in the past, however, Mebane Faber did an excellent job recently noting that if you are still heavy U.S. equities it may be a good time to reevaluate.

5) Budget Deficit Reduction Only Temporary

In my post on Q3-2013 GDP, I pointed out that the reduction in the budget deficit was due to a temporary anomaly in tax receipts.  I stated:

"The reality is that the surge in tax revenues was a direct result of the "fiscal cliff" at the end of 2012 as companies rushed to pay out special dividends and bonuses ahead of what was perceived to a fiscal disaster.  The large surge in incomes was primarily generated at the upper end of the income brackets where individuals were impacted by higher tax rates.  Those taxes were then paid in April and October of 2013 and accounted for the bulk of the surge in tax revenue to date.  Also, it is important to remember that payroll taxes also increased due to the expiration of the payroll tax cut from 2010."

However, the Rockefeller Institute recently wrote a research report entitled "Temporary 'Bubble' in Income Tax Receipts" which points out a secondary anomaly created by just one state:

"Personal income tax collections had the strongest growth among the major taxes, at 20.3 percent.

 

However, the strong growth is attributable not only to the acceleration of income into calendar year 2012 and the 2012 stock market, but also to strong growth in a single state, California, where income tax collections grew by nearly $7.1 billion, or 40.7 percent, in the second quarter of 2013. The large growth in income tax collections in California reflects the acceleration, as well as recent increases in income tax rates that were only partially reflected in withholding. On November 6, 2012, California voters adopted Proposition 30, which increased the personal income tax rate on taxpayers making over $500,000 for a seven-year period that is retroactive to January 1, 2012, through December 31, 2018. If we exclude California, income tax collections in the remainder of the nation grew 14.9 percent in the second quarter of 2013…"

Plus 1)  The Boy Who Cried "Wolf"

Lakshman Achuthan, from the Economic Cycle Research Institute, has been chastised in the press over the last couple of years for calling for an economic recession that didn't occur.  However, he remains adamant that the U.S. has actually been in a recession for the last year and remains so accordingly to the underlying economic data.  Once again, he has been summarily dismissed by the media for his statements because with the stock market near all-time highs that surely means the economy is recovering, right?  Well, as he states, if that was indeed the case then "you wouldn't have four years of zero-interest rate policy and quantitative easing."

He also has a take on something that I have be
en questioning myself with regards to the ISM and PMI data which has come completely detached from the underlying fundamental data.

There is one important point to remember about the "boy who cried wolf;" eventually the wolf did come.

 

Have a great weekend.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/YS73nR-mtgQ/story01.htm Tyler Durden

The “commodity king” author of the “world renowned” Gartman momentum chasing and perpetual contrarian fade newsletter, if not so much of an ETF under the same name anymore, does it again. From this morning.

Now with the S&P forging a massive reversal to the downside, we not only must abandon being bullish we must become bearish… and very so…. Our bearish friends, having been wrong for so long, are now right; it is time to be bearish of stocks, while the time for having been bullish is now past… We trust we are clear. The game’s changed and when the game changes, we change…. We had heretofore consistently erred bullishly of simple things… of coal; of steel; of railroads; of ships and shipping… but we are not now.

…

 

The Game Changed Utterly In The Capital Markets Yesterday

And… wrong again. Or said otherwise, short of subscribers in breaking even terms.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Csv3urXPhx4/story01.htm Tyler Durden

The “commodity king” author of the “world renowned” Gartman momentum chasing and perpetual contrarian fade newsletter, if not so much of an ETF under the same name anymore, does it again. From this morning.

Now with the S&P forging a massive reversal to the downside, we not only must abandon being bullish we must become bearish… and very so…. Our bearish friends, having been wrong for so long, are now right; it is time to be bearish of stocks, while the time for having been bullish is now past… We trust we are clear. The game’s changed and when the game changes, we change…. We had heretofore consistently erred bullishly of simple things… of coal; of steel; of railroads; of ships and shipping… but we are not now.

…

 

The Game Changed Utterly In The Capital Markets Yesterday

And… wrong again. Or said otherwise, short of subscribers in breaking even terms.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Csv3urXPhx4/story01.htm Tyler Durden