iftttwall

The predictions of Blackstone’s octogenarian Byron Wien (born in 1933) have been all over the place in the past 10 years, some correct, most wrong (with a recent hit rate of about 25%) – his 2013 year end S&P forecast was for 1300 – yet always entertaining. Which is the only value in the latest release of his 10 forecasts for 2014. Naturally, take all of these with a salt mine.

Byron’s Ten Surprises of 2014 are as follows:

1. We experience a Dickensian market with the best of times and the worst of times. The worst comes first as geopolitical problems coupled with euphoric extremes lead to a sharp correction of more than 10%. The best then follows with a move to new highs as the Standard & Poor’s 500 approaches a 20% total return by year end (ZH: or, said otherwise, S&P 500 at 2200).
2. The U.S. economy finally breaks out of its doldrums. Growth exceeds 3% and the unemployment rate moves toward 6%. Fed tapering proves to be a non-event.
3. The strength of the U.S. economy relative to Europe and Japan allows the dollar to strengthen. It trades below $1.25 against the euro and buys 120 yen.
4. Shinzo Abe is the only world leader who understands that Dick Cheney was right when he said that deficits don’t matter. He continues his aggressive fiscal and monetary expansion and the Nikkei 225 rises to 18,000 early in the year, but the increase in the sales tax, the aging population and declining work force finally begin to take their toll and the market suffers a sharp (20%) correction in the second half.
5. China’s Third Plenum policies to rebalance the economy toward the consumer and away from a dependence on investment spending slow the growth rate to 6% in 2014. Chinese mainland traded equities have another disappointing year. The new leaders emphasize that their program is best for the country in the long run.
6. Emerging market investing continues to prove treacherous. Strong leadership and growth policies in Mexico and South Korea result in significant appreciation in their equities, but other emerging markets fail to follow their performance.
7. In spite of increased U.S. production the price of West Texas Intermediate crude exceeds $110. Demand from developing economies continues to outweigh conservation and reduced consumption in the developed world.
8. The rising standard of living and the shift to more consumer-oriented economies in the emerging markets result in a reversal of the decline in agricultural commodity prices. Corn goes to $5.25 a bushel, wheat to $7.50 and soybeans to $16.00.
9. The strength in the U.S. economy coupled with somewhat higher inflation causes the yield on the 10-year U.S. Treasury to rise to 4%. Short-term rates stay near zero, but the increase in intermediate-term yields has a negative impact on housing and a positive effect on the dollar.
10. The Affordable Care Act has a remarkable turnaround. The computer access problems are significantly diminished and younger people begin signing up. Obama’s approval rating rises and in the November elections the Democrats not only retain control of the Senate but even gain seats in the House.

Every year there are always a few Surprises that do not make the Ten either because I do not think they are as relevant as those on the basic list or I am not comfortable with the idea that they are “probable.”

Also rans:

1. Through a combination of intelligence, extremism, celebrity and cunning Ted Cruz emerges as the clear front runner for the 2016 Republican presidential nomination. Chris Christie and the moderates fade in popularity as momentum builds for fiscal and social conservative policies.
2. In 2½ years the price of a Bitcoin has increased from $25 to $975. The supply of Bitcoins is fixed at 21 million with 11.5 million in circulation. Bitcoins lack gold’s position as a store of value over time. During the year Bitcoin’s acceptance collapses as investors realize that it cannot be used as collateral in financial transactions and its principal utility is for illegal business dealings where anonymity is important.
3. Overcoming objections from the Cuban exile community, President Obama opens discussions on initiating trade and diplomatic relations with Cuba. A reduction in sanctions is proposed, as well as limited financial support in the form of bonds, quickly dubbed as “Castro convertibles.”
4. Hillary Clinton decides not to run for President in 2016. She says her work with various Clinton non-for-profit initiatives is important and unfinished. Specifically, she explains that her health was not an issue in her decision. The Democratic race for the top seat becomes chaotic.

* * *

Good luck Byron

And as a reminder, from a year ago here are Byron’s Ten Surprises for 2013.

1. Iran announces it has adequate enriched uranium to produce a nuclear-armed missile and the International Atomic Energy Agency confirms the claim. Sanctions, the devaluation of the currency, weak economic conditions and diplomacy did not stop the weapons program. The world must deal with Iran as a nuclear threat rather than talk endlessly about how to prevent the nuclear capability from happening. Both the United States and Israel shift to a policy of containment rather than prevention.
2. A profit margin squeeze and limited revenue growth cause 2013 earnings for the Standard & Poor’s 500 to decline below $100, disappointing investors. The S&P 500 trades below 1300. Companies complain of limited pricing power in a slow, highly competitive world economic environment.
3. Financial stocks have a rough time, reversing the gains of 2012. Intense competition in commercial and investment banking, together with low trading volumes, puts pressure on profits. Layoffs continue and compensation erodes further. Regulation increases and lawsuits persist as an industry burden.
4. In a surprise reversal the Democrats sponsor a vigorous program to make the United States independent of Middle East oil imports before 2020. The price of West Texas Intermediate crude falls to $70 a barrel. The Administration proposes easing restrictions on hydraulic fracking for oil and gas in less populated areas and allowing more drilling on Federal land. They see energy production, infrastructure and housing as the key job creators in the 2013 economy.
5. In a surprise reversal the Republicans make a major effort to become leaders in immigration policy. They sponsor a bill that paves the way for illegal immigrants to apply for citizenship if they have lived in the United States for a decade, have no criminal record, have a high school education or have served in the military, and can pass an English proficiency test. Their goal for 2016 is to win the Hispanic vote, which they believe has a naturally conservative orientation and which put the Democrats over the top in 2012.
6. The new leaders in China seem determined to implement reforms to root out corruption, to keep the economy growing at 7% or better and to begin to develop improved health care and retirement programs. The Shanghai Composite finally comes alive and the “A” shares are up more than 20% in 2013, in contrast with the previous year when Chinese stocks were down and some developing markets, notably India, rose.
7. Climate change contribut
   es to another year of crop failures, resulting in grain and livestock prices rising significantly. Demand for grains in developing economies continues to increase as the standard of living rises. More investors focus on commodities as an investment opportunity and increase their allocation to this asset class. Corn rises to $8.00 a bushel, wheat to $9.00 a bushel and cattle to $1.50 a pound.
8. Although inflation remains tame, the price of gold reaches $1,900 an ounce as central bankers everywhere continue to debase their currencies and the financial markets prove treacherous.
9. The Japanese economy remains lackluster and the yen declines to 100 against the dollar. The Nikkei 225 continues the strong advance that began in November and trades above 12,000 as exports improve and investors return to the stocks of the world’s third largest economy.
10. The structural problems of Europe remain largely unresolved and the mild recession that began there in 2012 continues. Civil unrest subsides as the weaker countries adjust to austerity. Greece proves successful in implementing policies that reduce wasteful government expenditures and raise revenues from citizens who had been evading taxes. European equities, however, decline 10% in sympathy with the U.S. market.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/4q5e5hjQU5o/story01.htm Tyler Durden

The predictions of Blackstone’s octogenarian Byron Wien (born in 1933) have been all over the place in the past 10 years, some correct, most wrong (with a recent hit rate of about 25%) – his 2013 year end S&P forecast was for 1300 – yet always entertaining. Which is the only value in the latest release of his 10 forecasts for 2014. Naturally, take all of these with a salt mine.

Byron’s Ten Surprises of 2014 are as follows:

1. We experience a Dickensian market with the best of times and the worst of times. The worst comes first as geopolitical problems coupled with euphoric extremes lead to a sharp correction of more than 10%. The best then follows with a move to new highs as the Standard & Poor’s 500 approaches a 20% total return by year end (ZH: or, said otherwise, S&P 500 at 2200).
2. The U.S. economy finally breaks out of its doldrums. Growth exceeds 3% and the unemployment rate moves toward 6%. Fed tapering proves to be a non-event.
3. The strength of the U.S. economy relative to Europe and Japan allows the dollar to strengthen. It trades below $1.25 against the euro and buys 120 yen.
4. Shinzo Abe is the only world leader who understands that Dick Cheney was right when he said that deficits don’t matter. He continues his aggressive fiscal and monetary expansion and the Nikkei 225 rises to 18,000 early in the year, but the increase in the sales tax, the aging population and declining work force finally begin to take their toll and the market suffers a sharp (20%) correction in the second half.
5. China’s Third Plenum policies to rebalance the economy toward the consumer and away from a dependence on investment spending slow the growth rate to 6% in 2014. Chinese mainland traded equities have another disappointing year. The new leaders emphasize that their program is best for the country in the long run.
6. Emerging market investing continues to prove treacherous. Strong leadership and growth policies in Mexico and South Korea result in significant appreciation in their equities, but other emerging markets fail to follow their performance.
7. In spite of increased U.S. production the price of West Texas Intermediate crude exceeds $110. Demand from developing economies continues to outweigh conservation and reduced consumption in the developed world.
8. The rising standard of living and the shift to more consumer-oriented economies in the emerging markets result in a reversal of the decline in agricultural commodity prices. Corn goes to $5.25 a bushel, wheat to $7.50 and soybeans to $16.00.
9. The strength in the U.S. economy coupled with somewhat higher inflation causes the yield on the 10-year U.S. Treasury to rise to 4%. Short-term rates stay near zero, but the increase in intermediate-term yields has a negative impact on housing and a positive effect on the dollar.
10. The Affordable Care Act has a remarkable turnaround. The computer access problems are significantly diminished and younger people begin signing up. Obama’s approval rating rises and in the November elections the Democrats not only retain control of the Senate but even gain seats in the House.

Every year there are always a few Surprises that do not make the Ten either because I do not think they are as relevant as those on the basic list or I am not comfortable with the idea that they are “probable.”

Also rans:

1. Through a combination of intelligence, extremism, celebrity and cunning Ted Cruz emerges as the clear front runner for the 2016 Republican presidential nomination. Chris Christie and the moderates fade in popularity as momentum builds for fiscal and social conservative policies.
2. In 2½ years the price of a Bitcoin has increased from $25 to $975. The supply of Bitcoins is fixed at 21 million with 11.5 million in circulation. Bitcoins lack gold’s position as a store of value over time. During the year Bitcoin’s acceptance collapses as investors realize that it cannot be used as collateral in financial transactions and its principal utility is for illegal business dealings where anonymity is important.
3. Overcoming objections from the Cuban exile community, President Obama opens discussions on initiating trade and diplomatic relations with Cuba. A reduction in sanctions is proposed, as well as limited financial support in the form of bonds, quickly dubbed as “Castro convertibles.”
4. Hillary Clinton decides not to run for President in 2016. She says her work with various Clinton non-for-profit initiatives is important and unfinished. Specifically, she explains that her health was not an issue in her decision. The Democratic race for the top seat becomes chaotic.

* * *

Good luck Byron

And as a reminder, from a year ago here are Byron’s Ten Surprises for 2013.

1. Iran announces it has adequate enriched uranium to produce a nuclear-armed missile and the International Atomic Energy Agency confirms the claim. Sanctions, the devaluation of the currency, weak economic conditions and diplomacy did not stop the weapons program. The world must deal with Iran as a nuclear threat rather than talk endlessly about how to prevent the nuclear capability from happening. Both the United States and Israel shift to a policy of containment rather than prevention.
2. A profit margin squeeze and limited revenue growth cause 2013 earnings for the Standard & Poor’s 500 to decline below $100, disappointing investors. The S&P 500 trades below 1300. Companies complain of limited pricing power in a slow, highly competitive world economic environment.
3. Financial stocks have a rough time, reversing the gains of 2012. Intense competition in commercial and investment banking, together with low trading volumes, puts pressure on profits. Layoffs continue and compensation erodes further. Regulation increases and lawsuits persist as an industry burden.
4. In a surprise reversal the Democrats sponsor a vigorous program to make the United States independent of Middle East oil imports before 2020. The price of West Texas Intermediate crude falls to $70 a barrel. The Administration proposes easing restrictions on hydraulic fracking for oil and gas in less populated areas and allowing more drilling on Federal land. They see energy production, infrastructure and housing as the key job creators in the 2013 economy.
5. In a surprise reversal the Republicans make a major effort to become leaders in immigration policy. They sponsor a bill that paves the way for illegal immigrants to apply for citizenship if they have lived in the United States for a decade, have no criminal record, have a high school education or have served in the military, and can pass an English proficiency test. Their goal for 2016 is to win the Hispanic vote, which they believe has a naturally conservative orientation and which put the Democrats over the top in 2012.
6. The new leaders in China seem determined to implement reforms to root out corruption, to keep the economy growing at 7% or better and to begin to develop improved health care and retirement programs. The Shanghai Composite finally comes alive and the “A” shares are up more than 20% in 2013, in contrast with the previous year when Chinese stocks were down and some developing markets, notably India, rose.
7. Climate change contributes to another year of crop failures, resulting in grain and livestock prices rising significantly. Demand for grains in developing economies continues to increase as the standard of living rises. More investors focus on commodities as an investment opportunity and increase their allocation to this asset class. Corn rises to $8.00 a bushel, wheat to $9.00 a bushel and cattle to $1.50 a pound.
8. Although inflation remains tame, the price of gold reaches $1,900 an ounce as central bankers everywhere continue to debase their currencies and the financial markets prove treacherous.
9. The Japanese economy remains lackluster and the yen declines to 100 against the dollar. The Nikkei 225 continues the strong advance that began in November and trades above 12,000 as exports improve and investors return to the stocks of the world’s third largest economy.
10. The structural problems of Europe remain largely unresolved and the mild recession that began there in 2012 continues. Civil unrest subsides as the weaker countries adjust to austerity. Greece proves successful in implementing policies that reduce wasteful government expenditures and raise revenues from citizens who had been evading taxes. European equities, however, decline 10% in sympathy with the U.S. market.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/4q5e5hjQU5o/story01.htm Tyler Durden

The possibility of a French recession is not exactly new: even the venerable Economist penned an an extensive article – with a humorous cover – over a year ago describing just such a possibility (the French were unamused). Yet to this date, not only has France managed to avoid the dreaded “Triple Dip” but its bonds continue to be well-bid, with the yield on the 10 Year well inside the US, at only 2.53%, nearly 1% below the wides seen in 2011. However, and especially now that Hollande’s 75% millionaire tax has finally been enacted, the fuse on the baguette time bomb is getting shorter.

As GaveKal’s Francois Chauchat rhetorically asks, “Is every country in Europe recovering, but France? This is the question raised by a third consecutive month of disappointing French manufacturing Purchasing Managers Indices (PMIs), which plunged to 47 in December even as the eurozone-wide PMI expanded to 52.7, a 31-month high. Such a large divergence is peculiar, since France and eurozone PMIs have historically been aligned. It could be that

France’s recovery is just a bit more painful and taking that much longer—but what if the real story is that the country is slipping back into recession?

 

Judged by the PMI surveys alone, and the economy indeed looks to be contracting, a pretty worrying development since the rest of the advanced economies are firmly in growth territory. Another recession would suggest that socialist President Francois Hollande’s targeted high tax agenda has hit a wall, and that a messy revision in economic policy, possibly preceded by financial market pressure, could be in store.

The divergence between France and the rest of Europe can be seen vividly on the European PMI chart below:

So a French recession would be a bad thing, right? Well, yes – for the French population, and certainly whatever is left of its middle class. However, as has been made clear repeatedly, in the New Normal in which only the trickle down effects from the wealth effect of the 1% matters, what the broader population wants and needs is hardly high on the list of priorities of the central planners. What does matter are stocks. And it is the wealthiest 1% and the stock market which, in keeping up with the old bad news is good news maxim, that may be the biggest beneficiary of a French triple dip.

The reason, at least according to GaveKal and increasingly others, is that a French re-re-recession would be precisely the catalyst that forces the ECB out of its inaction slumber and pushes it to engage in what every other “self-respecting” bank has been doing for the past five years – unsterilized quantitative easing: an event which the soaring European stocks have largely been expecting in recent weeks and months.

Quote GaveKal:

But even if the country is slipping back into recession, it is not clear that the “French tail risk” would reignite a broader euro financial crisis — a fear that has been raised repeatedly in the past few years. Would not a shockingly weak French GDP number rather increase pressure on the European Central Bank to act, weaken the euro and push Hollande to deliver more quickly and efficiently on his new pledge to regain business confidence? If this is what a still very hypothetical new French recession produces, not much lasting damage would be done to eurozone financial markets. Rather the opposite.

And there you have it: spinning bad economic news as more hopium for market bulls, and in fact setting the stage when the latest surge in risk assets just happens to coincide with that negative French GDP print, an outcome predicted by BNP two months ago, and an outcome which Draghi and the other ECB doves and which the Hawks on the ECB will theatrically complain about, but in the end, do nothing as usual. And with Merkel incapacitated, well: vive la recession!

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

The possibility of a French recession is not exactly new: even the venerable Economist penned an an extensive article – with a humorous cover – over a year ago describing just such a possibility (the French were unamused). Yet to this date, not only has France managed to avoid the dreaded “Triple Dip” but its bonds continue to be well-bid, with the yield on the 10 Year well inside the US, at only 2.53%, nearly 1% below the wides seen in 2011. However, and especially now that Hollande’s 75% millionaire tax has finally been enacted, the fuse on the baguette time bomb is getting shorter.

As GaveKal’s Francois Chauchat rhetorically asks, “Is every country in Europe recovering, but France? This is the question raised by a third consecutive month of disappointing French manufacturing Purchasing Managers Indices (PMIs), which plunged to 47 in December even as the eurozone-wide PMI expanded to 52.7, a 31-month high. Such a large divergence is peculiar, since France and eurozone PMIs have historically been aligned. It could be that

France’s recovery is just a bit more painful and taking that much longer—but what if the real story is that the country is slipping back into recession?

 

Judged by the PMI surveys alone, and the economy indeed looks to be contracting, a pretty worrying development since the rest of the advanced economies are firmly in growth territory. Another recession would suggest that socialist President Francois Hollande’s targeted high tax agenda has hit a wall, and that a messy revision in economic policy, possibly preceded by financial market pressure, could be in store.

The divergence between France and the rest of Europe can be seen vividly on the European PMI chart below:

So a French recession would be a bad thing, right? Well, yes – for the French population, and certainly whatever is left of its middle class. However, as has been made clear repeatedly, in the New Normal in which only the trickle down effects from the wealth effect of the 1% matters, what the broader population wants and needs is hardly high on the list of priorities of the central planners. What does matter are stocks. And it is the wealthiest 1% and the stock market which, in keeping up with the old bad news is good news maxim, that may be the biggest beneficiary of a French triple dip.

The reason, at least according to GaveKal and increasingly others, is that a French re-re-recession would be precisely the catalyst that forces the ECB out of its inaction slumber and pushes it to engage in what every other “self-respecting” bank has been doing for the past five years – unsterilized quantitative easing: an event which the soaring European stocks have largely been expecting in recent weeks and months.

Quote GaveKal:

But even if the country is slipping back into recession, it is not clear that the “French tail risk” would reignite a broader euro financial crisis — a fear that has been raised repeatedly in the past few years. Would not a shockingly weak French GDP number rather increase pressure on the European Central Bank to act, weaken the euro and push Hollande to deliver more quickly and efficiently on his new pledge to regain business confidence? If this is what a still very hypothetical new French recession produces, not much lasting damage would be done to eurozone financial markets. Rather the opposite.

And there you have it: spinning bad economic news as more hopium for market bulls, and in fact setting the stage when the latest surge in risk assets just happens to coincide with that negative French GDP print, an outcome predicted by BNP two months ago, and an outcome which Draghi and the other ECB doves and which the Hawks on the ECB will theatrically complain about, but in the end, do nothing as usual. And with Merkel incapacitated, well: vive la recession!

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

Submitted by Ramsey Su via Acting Man blog,

I remember Ben Bernanke saying that lenders are overly stringent on underwriting, unnecessarily so. I assume Ms. Yellen is parroting the same message, and so are all those in the business, hoping for a return of no-qualification-needed financing.

Are current underwriting practices overly stringent? Yes and no. With the exception of the sub-prime era, underwriting has never been easier (read on before you start calling me names). At the same time, it has never been more difficult for many qualified borrowers to get a loan. This strange phenomenon is among the unintended consequences of ill-guided public policies.

Round peg/round hole, that is the best description current underwriting guidelines. It started with the conservatorship of Freddie Mac and Fannie Mae. Combined with VA and FHA, these agencies have taken over the mortgage finance business with a 90% market share. In the meantime, Bernanke has purchased $788 billion of securities backed by agency loans in 2013.  The Treasury/Fed monopoly has been born. This combination of the Treasury guaranteeing and the Fed buying at manipulated rates made it impossible for any private label mortgage backed securities to compete against the GSEs. The private sector is left with a sliver of the business, mainly in the jumbo and oddball products.

With the dominance of the agencies,  agency guidelines became the law of the land. These guidelines are even more restrictive with the introduction of the CFPB's QM (qualified mortgage) guidelines.

 

Once upon a time there was an occupation known as loan officers. They evaluated a borrower's credit history, ability to pay, collateral and other factors in order to make lending decisions. Today, the title of loan officer may still exist but they are nothing more than children playing with a toy, the one that inserts pegs of different shapes into holes of the same shape. The mortgage version of this toy has only round holes. Round pegs will fit into this hole with ease. Good luck if your pegs are not round. A round peg borrower is a W-2 household, or one with a few years of steady tax returns. A so-so credit score in the low 700s is more than adequate. Even a 580 score is enough to get you an FHA loan. Do you have any idea how irresponsible you have to be in order to have a credit score that low? Speaking of the FHA, borrowers now may become eligible for an FHA loan just one year after a short sale, foreclosure or bankruptcy as long as they can show they experienced financial hardship due to extenuating circumstances, such as unemployment. You have to read this HUD instruction to believe it. FHA also allows co-signers, including blending the family members' income credit to arrive at an acceptable ratio and to cover the down payment as a gift. How much easier can it get?

Do not confuse cumbersome documentation with easy underwriting. Do not confuse easy qualifying with deteriorating qualification of borrowers. Just imagine how many borrowers have been knocked out of the market during 2013 with mortgage rates rising about 1% and double digit house price appreciation.

The mortgage industry is flawed. Underwriting guidelines are flawed. The secondary market is flawed. Policies are heading in the wrong direction. Any system, even sub-prime loans and sub-prime MBS, will work as long as property values appreciate enough to offset the flaws. It is when less than optimal economic conditions occur that the weaknesses surface. I could write a book on this subject but I will only use one simple illustration.

Here are two loan applications, from Joe Sr. and Joe Jr., both plumbers. They have an identical credit score, income, the minimal required down payment and are perfect round pegs at just under the 43% overall debt ratio. The Consumer Finance Protection Bureau has determined that these are Qualified Mortgages. The borrowers are well protected and have the ability to repay.

As it turns out, Joe Sr. is 60 with not many years left that he can bend under the sink. Joe Jr. is only 30 with a full career ahead. Both have no retirement savings (not required). Joe Sr. is going to be living off social security as soon as his back gives out. It is obvious that while these loans are both round pegs, one of them has a high probability of default. In reality, both loans are not likely to survive an economic downturn if the income of both borrowers declines. Both are hand to mouth borrowers with no ability to survive a few missed paychecks. Would you call these underwriting guidelines too stringent?

Anyway, I digressed. My point is underwriting today is not about sound lending practices. It is about how policy makers want to manipulate the market.

A truly healthy mortgage system requires the breakup of the Treasury/Fed monopoly and the return of portfolio lending by community banks. Neither are possible at this time. Therefore, it is useless to analyze the logic behind sound underwriting. It is far more important to anticipate what policy makers are going to do. We know the FHA is already the sub-prime lender of today. We know that with Mel Watt, the probability of more accommodation from Freddie and Fannie is likely. The easiest route is to quietly pass the cost of default insurance to the government, which would only be discovered when we have another down cycle. The Treasury would have to pick up the guarantees but let's not worry about that until we have to. Right?

Mortgage applications have been declining. The mini housing bubble is deflating. Borrower qualifications are not keeping pace with rising rates. What will Ms. Yellen do? Whether it is $40 billion or the tapered $35 billion per month, the Fed is already buying all agency purchase mortgage originations.

In conclusion, I eagerly await some clarification of policies from the new people at the helm of the Treasury/Fed mortgage monopoly, the Watt/Yellen combo. We shall see in the next few weeks.

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