mortgage vs treasury debt

Interesting graphic regarding the change in mortgage and treasury debt in our economy….As the article infers – will this trend continue and provide us with low rates for quite some time?

The Housing Bust Gave Birth To A Trillion Dollar Buyer Of US Treasuries

 

 

UBS's Maury Harris, who is frequently recognized as the most accurate economist on Wall Street, shared an important chart with Business Insider when we had lunch with him last week.

It compares the year-over-year change in U.S. Federal government debt and home mortgage debt for each year since the heyday of the housing bubble.

"Over the past 6 years, an around $1 1/8 trillion downsizing in per annum net home mortgage financing has accompanied an around $7/8 trillion upswing in federal borrowing per annum," said Harris. In other words, the size of the mortgage bond market has shrunk by much more than the Treasury bond market has grown.

Back when the U.S. housing market was booming, the mortgage bonds it generated was an enormous source of fixed-income securities for investors. Today, with home prices way down and home purchases only beginning to recover, the size of the mortgage bond market is only a fraction of what it used to be.

Meanwhile, data suggests that demand for bonds is only growing.

"Federal borrowing is 'filling in' instead of 'crowding out,'" said Harris.

You could actually argue that there isn't enough debt out there going around.

Harris believes that the tight supply in the bond market will keep investors buying Treasuries for years.

This dynamic should quell some fears that demand for Treasuries will just disappear and send borrowing costs/interest rates surging in the near-term.

Read more: http://www.businessinsider.com/maury-harris-on-treasury-bond-demand-2012-12#ixzz2GMActeIa

 

Commercial Real Estate Vacancy Rates Improving

Will improving vacancy rates generate improving valuation trends as well as lower cap rates as we move forward into 2013?

CRE vacancy rates remained high through June of 2012 but improved for all types of commercial property(see figure 4). Private sector forecasts call for continued improvement but at a slow pace given expectations for weak economic growth. Low interest rates have helped CRE borrowers, but many borrowers may find it difficult to refinance in the near term because of elevated loan-to-value ratios. Small banks in general have higher CRE concentrations and are therefore more vulnerable to declines in this asset class.

Figure 4: CRE Vacancy Rates

 

OCC’s Semiannual Risk Perspective, Fall 2012

Vital Signs Chart: Fed’s Balance Sheet Expands

How big will it grow? Word is over $4 trillion before they are done with all of the QE's....not sure that is where we should be headed!

 

The Federal Reserve’s balance sheet continues to expand as the central bank prepares to tweak its bond-buying program at a two-day meeting starting today.

The Fed’s asset holdings reached$2.86 trillion in the week ended Dec. 5, up from $2.85 trillion a week earlier.

Among the holdings are $1.65 trillion in U.S. Treasury’s and $884 billion in mortgage-backed securities.

 

 

http://blogs.wsj.com/economics/2012/12/11/vital-signs-chart-feds-balance-sheet-expands/?mod=WSJ_latestheadlines

Fed spending to GDP

some interesting information regarding Federal spending and revenue as a percentage of GDP

The Federal Reserve's Zombie Economy (quotes)

Where are we headed?

“The Fed continues to operate an open bar for the fiscal drunks in Washington,” says economist Ed Yardeni.

“Central banks cannot solve structural problems in the economy,” Stephen Cecchetti, head of the monetary department at the Bank for International Settlements

Stephen Roach of Morgan Stanley has said: “Washington policymakers are doing everything they can to forestall rational economic adjustments.”

The Federal Reserve's Zombie Economy

By Elizabeth MacDonald

Published December 13, 2012

Read more: http://www.foxbusiness.com/economy/2012/12/13/federal-reserve-zombie-economy/#ixzz2Ex4phXLA

If We Don’t Measure Leverage...

Finally someone deals with the leverage issue....I compare leverage to a rubber band....at some point, if you stretch it far enough, it will break!

If We Don’t Measure Leverage, We Risk More Crises

By Mark Buchanan -Dec 9, 2012

You can’t control what you don’t measure.

In engineering, control theory is all about using information gained by measuring a system to plan and carry out intelligent actions that will control it. Ideally, it leads to desirable outcomes, such as a nuclear reactor that doesn’t melt down, or a robotic arm that does precisely what it is supposed to do.

In the case of the economy, we might not be measuring everything we need to achieve control.

For at least half a century, policy makers seeking to control inflation and unemployment have typically focused on managing interest rates. The U.S. Federal Reserve lowers its target rate if the economy stalls, and raises it if inflation appears on the horizon. The recent financial crisis, however, had more to do with the amount of borrowing people did and the way such leverage fueled a bubble in the housing market.

Where does leverage currently fit in the equation of macroeconomic stability? Surprisingly, the answer seems to be that it doesn’t.

For 15 years, Yale economist John Geanakoplos has argued that policy makers should pay more attention to leverage. Prevailing interest rates determine the cost of borrowing, if a borrower ultimately repays the loan.

Independent Quantity

Leverage -- reflected by how much collateral people or firms need to put down to borrow and might lose if they fail to pay the loan back -- determines how much someone can buy with a given amount of starting capital. It’s an independent quantity that also influences what happens in the economy, whether borrowing is easy and attractive or not.

Importantly, leverage isn’t a fixed quantity. It changes over time as people get more or less optimistic and lenders more or less confident of being repaid. Geanakoplos makes a convincing case that such changes in leverage can and routinely do drive major economic booms and busts, and that managing leverage should be as much a part of the Fed’s activities as managing interest rates.

The core of his argument rests on a common-sense insight: An increase in leverage generally leads directly to an increase in prices. Consider the housing market. At any moment, you’ll find that some people are more optimistic than others, more convinced that prices will go up in the future and hence eager to invest on that belief. If banks change their practice to require only a 5 percent down payment, rather than 20 percent, these optimists have more to spend. They can purchase up to 20 times the value of their own funds, rather than just 5 times, hoping to profit when things go well. As more money chases the available houses, prices go up, which makes the optimists even more bullish.

In a series of papers and presentations, Geanakoplos has documented how the leverage effect operates in the real world (see further discussion on my blog). From 2000 to 2005, for example, down payments on home mortgages fell from about 15 percent to 3 percent. Leverage increased similarly for banks and hedge funds borrowing to buy mortgage-backed securities. Housing prices rocketed up, spurring home-building and all kinds of other economic activity.

The boom also set the stage for collapse. As markets grew more volatile, and everyone more uncertain, lenders of all kinds naturally wanted to preserve their money, so they increased collateral demands accordingly. By 2008, investors could buy only $1.20 in mortgage securities for each dollar of their own money, compared with $15 in 2006. The down payments required on new mortgage loans rose to as much as 30 percent.

Leverage Cycle

Geanakoplos argues that this dynamic is not a one-off peculiarity of the latest financial crisis, of modern banking, deregulation and derivatives. He sees it as a natural cycle -- the leverage cycle -- that is fully able on its own to drive an economy up and down even if interest rates stay the same. He suggests we’ve had three crises linked to the leverage cycle in the past 20 years: in 1994, in 1998 and in 2008.

If you take his view seriously, it looks as if economic theory, and the Fed policy based upon it, hasn’t been paying attention to the right variables. Some economists are working to include leverage in the basic models that central banks use, and we can hope they will succeed. The Fed is beginning to collect data of the kind that would be useful for identifying leverage changes and their effect on economic activity, but how far leverage control will enter practical policy and regulation on banking and investment firms remains unclear.

Crises incur real damage, in the form of lost jobs, credit- starved companies and people who can’t borrow to buy a car or fix their house. Banks wouldn’t be in such precarious condition, and so many homeowners wouldn’t be underwater, if leverage had not reached such extreme proportions before falling back again. To avoid such outcomes in the future, we need to find ways to manage leverage as well as interest rates.

Since the crisis, there have been myriad proposals for new measures to detect systemic risk. The mathematics and data used are getting ever more complex. Yet one of the most important measures may be one of the simplest. We’ve understood the benefits and potential dangers of leverage for a long time. Now we need to start measuring it.

(Mark Buchanan, a theoretical physicist and the author of “The Social Atom: Why the Rich Get Richer, Cheaters Get Caught and Your Neighbor Usually Looks Like You,” is a Bloomberg View columnist. The opinions expressed are his own.)

To contact the writer of this article: Mark Buchanan at buchanan.mark@gmail.com.

To contact the editor responsible for this article: Mark Whitehouse at mwhitehouse1@bloomberg.net.

http://www.bloomberg.com/news/2012-12-09/if-we-don-t-measure-leverage-we-risk-more-crises.html

Some amazing Greenspan quotes

Some amazing Greenspan quotes:

"Reducing U.S. long-term deficits will inevitably cause economic pain."

“The presumption that we’re going to have a painless solution to this, I think, is fantasy. There are a lot of risks out there but the one thing I can be reasonably certain of is we won’t get through this whole issue without some pain.”

“A credible framework to set federal fiscal policy on a stable path -- for example, one on which the ratio of federal debt to GDP eventually stabilizes or declines -- is thus urgently needed to ensure longer-term economic growth and stability”

…the “key part” of the deficit is“government social benefits to persons.”

“Two percent is going to be our normal for now. “What is going to be the key factors in the long-term productivity outlook is innovation. I think there are types of things out there we can have no insight into.”

(during his tenure as Fed chairman one of his main tenants of 'why' we could continue with the growth levels that were being experienced was due to the 'new paradigm' of productivity gains - that did not quite pan out!....so here he is right back pushing productivity as the key yet having no idea where that might come from!)

December 2012

http://www.bloomberg.com/news/2012-12-06/greenspan-says-painless-solution-to-u-s-debt-is-fantasy.html

Greek debt skyrockets...

This looks like a problem with no end...an amazing trajectory, circular issues (controling costs while attemtping to generate improved levels of GDP) - does this have a foreseeable ending that works out for anyone's good?

 

debt, debt and more debt...

As you take a look at the following graphic representations of the debt of our country the first question that comes to my mind is - where is this headed?  And at what warp speed? 

I thought that we learned during the last two economic meltdowns that too much debt is ALWAYS a bad thing for everyone involved. Yet, our fearless leaders continue to take us down the path of more debt (or maybe it's just the course of least resistance - it's very hard to draw the line and say NO!) a band aid here and an increase in the debt ceiling there but never, ever cut spending. But at some point the party ends and not very many people go home with party favors worth having…

 

US Total Federal Debt - talk about a fiscal cliff in reverse this trend looks better than an F 15's takeoff trajectory….

 

 

US Federal Debt as a % of GDP - at least we are not at Greece's level of 180% but we try harder!

revised 3rd qtr GDP

 

U.S. GDP growth accelerated to 2.7% in the third quarter, supported by a rise in government spending.

GDP for 3Q was revised from 2.0% to 2.7%, a much more palatable rate of growth. However, the details of the report were not as exciting. The revision included:

            - a drop in personal consumption from 2.0% to 1.4%,

            - a drop in the savings rate from 3.7% to 3.6%,

            - and weaker personal income.

Inventories were the real story behind the upward revision, initially subtracting 0.1% from GDP and now adding 0.8%. This is not necessarily a good thing for 4Q because that build-up will have to be given back.

Federal government spending was up 9.5% and total government spending (including state and local) was up 3.5%, also boosting the headline growth rate. That jump in government spending is also unlikely to be replicated. 

Some interesting trends reflected in changes to consumer debt components. And mortgage debt continues its decline with refinancing generating a significant part of recent mortgage activity volume.

Will these trends be the ‘new normal’ for an extended period of time?

On the other hand, government debt continues to climb at record speed with no end in sight!

 

In the Fed report on household debt released yesterday, mortgage debt fell $120b, equity lines of credit shrank $16b, student loan debt rose $42b, auto loans rose $18b, and credit card balances rose $2b. As mortgage debt drops (through a combination of pay downs and defaults), student loans and auto debt is taking some of its place which will likely be an issue down the road. The Market Today ONLINE

Falling Mortgage Balances Offset Rising Student, Auto, Credit-Card Debt

By Josh Mitchell

Americans cut their debt further in the summer, with falling mortgage balances more than offsetting increases in other types of borrowing, new data show.

 

Household debt — the money Americans owe on home, auto and student loans, credit cards and other types of consumer debt — fell by $74 billion in the third quarter to $11.31 trillion as of Sept. 30, the Federal Reserve Bank of New York said Tuesday.The drop reflected a continued decline in mortgage debt, as some households paid down balances while others lost their homes in foreclosure.

Americans have reduced their debts by more than $2 trillion since household debt peaked in summer 2008, a process called deleveraging. Economists saythe process will put households on a sounder financial footing in the long term, though it has sapped consumer spending and slowed growth in the short term.

Some additional information regarding delinquency trends for credit cards and student loans: the fastest growing consumer loan component now has the highest level of delinquency.

 

 

 

retail sales and personal consumption

So, where is GDP headed? Where is the trend line leading us...

jobs roller coaster

Looks like a roller coaster to me! When does the ride end?

Or maybe the better question is - how long do we have to deal with the ‘new normal’!

 



Frightful news on this Halloween....

Scary Cliff:The National Association of Manufacturers has released a report showing thatif all the scheduled spending cuts and tax increases took effect when the Fiscal Cliff hits, it would cost 6mm jobs and push unemployment to 11% by 2014.

 

Muni Retirement Risk:A Pew study finds the gap between state assets and obligations nationwide is now $1.4T, up about 9% from the prior year.

 

Euro Stress:The latest data shows unemployment in the Euro Zone hit another record in Sept., reaching 11.6%. This compares to 7.8% in the U.S. and 7.9% in the U.K. Overall, Spain was in the worst shape at 25.8%, followed by Greece at 25.1%. The data shows problems in the EU are far from resolved and more is needed to get things moving again. This is particularly important to the U.S. because the EU accounts for about 21% of overall U.S. exports.

 

Debt Owed: The latest data from the Treasury shows every household in the U.S. owes about $47,495 to foreign countries, a 72% increase since 2008 (the largest amount, about $10,000, is owed to China).

 

(source: PCBB Newsletter)

GDP Grows 2.0% in 3Q

GDP grew 2.0% in the third quarter, beating expectations of 1.8%. This is slightly better than the 1.3% growth rate seen in Q2.

Looking at the various components of GDP -

- Personal consumption grew at a 2.0% rate, up from 1.5% in Q2.

- Government spending grew 3.7%, following eight consecutive quarters of contraction.

- Business investment, what has been a strong area of growth during the recovery, dropped 1.3%.

- However, housing was up 14% for the quarter. Unfortunately, housing is such a small part of the economy now that even a 14% rate of growth did not make a meaningful impact to the total numbers.

All in all, this GDP report illustrates moderate growth in the economy once again. The consumer continues to muddle along, business spending has slowed, and housing is recovering. There is no new news in that.

The Market Today ONLINE

The real U.S.GDP growth rate was lifted by government for the first time since 2010.

CPI YOY

Looks like we are headed back into the 2.00% + range – is this a blip (comparable to the first part of this year) or will we see more pricing pressure (movement in commodity prices working their way through the system) begin to move the meter upward and create additional stress for the Fed!

 

Interesting note for this data set: the high was on 10/31/06 and the low was on 10/31/10!

CPI Year-Over-Year

 

 

trend lines

Looks like volatility to me!

Should we begin calling this trend the “Tigger” bounce?

And with everything that we have coming up as we head toward the end of this year, I would ponder to say we shall see more of this bouncing…

Continued domestic economic stress, election season unknowns, fiscal cliff coming, European stress continues, China’s continued economic slow down…a lot of stuff happening to continue volatility’s active presence.

 

 

perspective on housing starts

The beginning of some positive signs of improvement in the housing sector are very welcome after such a long period of entrenchment. But when we look at the numbers from the perspective of past performance one can see that we have a way to go to get out of the valley. The ‘amazing-ness’ of this graph’s depiction of the precipitous drop in housing starts is truly mind numbing. The question to ask is - how do we return to the consistent growth trend line levels of earlier times? While understanding that the steep growth trend that took place from 2002 – 2006 was not built upon a viable financial model.

 

• September Housing Starts Surge Was Marginally Significant
But Not Credible

Shadow Government Statistics, American Business Analytics & Research LLC

http://www.shadowstats.com/

housing update

Some positive news on the housing front. Interesting component is the continued strong trend in multi-family growth.

 

We received two strong housing reports this morning. Housing starts jumped 15% in September to an annualized rate of 872k, the best pace of growth since July 2008.

Single family starts grew 11% while multi-family starts jumped 25%. Building permits, a future indicator for starts, also rose by double digits, increasing 11.6%.

 

The Market Today ONLINE

 

 

mbs spread

QE3 working its magic….quite a drop!

Where will we end…nobody knows!

But it appears that the refi window will remain open for business….

 

One interesting thing to note is the continued drop in MBS security yields. The spread between a 30-year mortgage and the 7-year Treasury has dropped almost 100 basis points in the past two months. This is dropping mortgages rates. The 30-year mortgage rate, as quoted by Freddie Mac, is back to the record-low rate of 3.49%. Fifteen-year mortgage rates are now at 2.69%. This drop will likely spur on more refinance activity which we are already seeing in the MBA refi index.

 

The Market Today ONLINE

 

 

job data detail

Probably more than you wanted to know but here is the detail on the two different data sets and how their survey information is derived.

For September, the politically important unemployment rate fell to 7.8% in September from 8.1% the prior month, according to the Labor Department. That was the lowest level since January 2009 and well below the 8.1% forecast of economists surveyed by Dow Jones Newswires. The unemployment rate estimate is derived from a survey of households, which came up with an estimate that 863,000 jobs were added for the month.

But the separate establishment survey from which the official payrolls number is derived reported a more modest seasonally adjusted gain of 114,000 jobs in September. That was below the consensus forecast of 118,000, though the previous two months were revised higher.

Mr. Hall said the inconsistent reports reflect the different samples used in the two surveys, one focused on households the other on businesses. The establishment survey has a huge sample size of 141,000 business and agencies covering 486,000 worksites, whereas the household survey covers just 60,000 homes.

“The household survey is much smaller. When you look at something like labor force and employment levels, the uncertainty of those numbers is much larger,” said Mr. Hall. “Within two months, the household survey could show the unemployment rate eking back up.”

http://blogs.wsj.com/economics/2012/10/05/impossible-to-manipulate-labor-survey-data-former-bls-head/

currency debasements

A very interesting analysis of the end run effects of inflationary policy (ie: over abundant money creation) and the road that follows for an infected economy.

 

“History is replete with Great Disorders in which social cohesion has been undermined by currency debasements. The multi-decade credit inflation can now be seen to have had similarly corrosive effects. Yet central banks continue down the same route. The writing is on the wall. Further debasement of money will cause further debasement of society. I fear a great disorder,” Grice wrote in a note outlining why he is so worried about central bank policy and its cheerleaders.

Likening the printing of money to a stealth tax that erodes people’s spending power without anyone being able to place the blame for their loss of purchasing power, Grice said people need to blame someone.

“No one knows upon whom the burden falls. People notice only that they can’t afford the things they used to be able to afford, or they can’t afford the things which everyone else can afford.”

“They know that something is wrong, but they just don’t know what, why, or who is to blame. So inevitably they look for someone to blame”

Grice believes that the cost of currency debasement falls on those who do not benefit from the debasement when it occurs and believes people are finally waking up to this fact.

“Central banks provided cheap money to banks, the cheap money artificially inflated asset prices, artificially inflated asset prices made anyone connected to those assets rich as we became anation of speculators, those riches were achieved at everyone else’s expense, and everyone else has now realized what has happened and is understandable enraged,” said Grice who believes we are now locked in a blame game.

“The 99 percent blame the 1 percent, the 1 percent blame the 47 percent, the private sector blames the public sector, the public sector returns the sentiment, the young blame the old, everyone blame the richyet few question the ideas behind government or central banks.”

“I’d feel a whole lot better if central banks stopped playing games with money. But I can’t see that happening anytime soon. The ECB has thrown the towel in, following the [Swiss National Bank] last year in committing effectively to print unlimited amounts of money for the greater good. The [Bank of England] and the Fed have long since made a virtue of what was once considered a necessity, with what was once the unconventional conventional.”

 

As Iran’s Currency Plunges, Investors Warned on Debasement

http://www.cnbc.com/id/49283238

September 2012 Manufacturing ISM Report

More mixed signals from the manufacturing sector. Prices were up again – indicative of underlying growing inflationary pressure buildup???

September 2012 Manufacturing ISM Report On Business^®

PMI at 51.5%

- New Orders, Employment and Inventories Growing

- Production Contracting

- Supplier Deliveries Slower

(Tempe, Arizona) — Economic activity in the manufacturing sector expanded in September following three consecutive months of slight contraction, and the overall economy grew for the 40th consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business^®.

The report was issued today by Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. "The PMI™ registered 51.5 percent, an increase of 1.9 percentage points from August's reading of 49.6 percent, indicating a return to expansion after contracting for three consecutive months. The New Orders Index registered 52.3 percent, an increase of 5.2 percentage points from August, indicating growth in new orders after three consecutive months of contraction. The Production Index registered 49.5 percent, an increase of 2.3 percentage points and indicating contraction in production for the second time since May 2009. The Employment Index increased by 3.1 percentage points, registering 54.7 percent. The Prices Index increased 4 percentage points from its August reading to 58 percent. Comments from the panel reflect a mix of optimism over new orders beginning to pick up, and continued concern over soft global business conditions and an unsettled political environment."

PERFORMANCE BY INDUSTRY

Of the 18 manufacturing industries,11 are reporting growth in September in the following order: Textile Mills; Food, Beverage & Tobacco Products; Printing & Related Support Activities; Wood Products; Apparel, Leather & Allied Products; Paper Products; Petroleum & Coal Products; Primary Metals; Fabricated Metal Products; Furniture & Related Products; and Miscellaneous Manufacturing.The six industries reporting contraction in September — listed in order — are: Nonmetallic Mineral Products; Electrical Equipment, Appliances & Components; Transportation Equipment; Machinery; Chemical Products; and Computer & Electronic Products.

WHAT RESPONDENTS ARE SAYING ...

§ "Appears that our so-called 'slowdown' was a summer thing. September brings with it increasing requirements and business." (Paper Products)

§ "Business improved through Q3, but is beginning to show signs of slowing down in Q4; this has been a typical trend over the last few years." (Wood Products)

§ "Business has picked up going into the last quarter." (Plastics & Rubber Products)

§ "We are sticking to our manufacturing plan, but have slowed production down considerably. Haven't added any new units to the 2012 plan, and still have no forecast for 2013 released." (Computer & Electronic Products)

§ "Sales have tanked over the last two months, bringing a very concerned and stressed management team. Not very optimistic for the near-term future." (Apparel, Leather & Allied Products)

§ "Uncertainty in the healthcare legislation (reform) continues to be the underlying force keeping our sales revenue below its full potential." (Miscellaneous Manufacturing)

§ "Steel and aluminum prices still dropping, and auto production orders are up." (Transportation Equipment)

§ "Domestic business is up; international is down." (Electrical Equipment, Appliances & Components)

§ "Demand seems to have stabilized from August. New orders are appearing this month without advanced notice from our customers." (Chemical Products)

MANUFACTURING AT A GLANCE SEPTEMBER 2012
Index	Series Index Sep	Series Index Aug	Percentage Point Change	Direction	Rate of Change	Trend* (Months)
PMI™	51.5	49.6	+1.9	Growing	From Contracting	1
New Orders	52.3	47.1	+5.2	Growing	From Contracting	1
Production	49.5	47.2	+2.3	Contracting	Slower	2
Employment	54.7	51.6	+3.1	Growing	Faster	36
Supplier Deliveries	50.3	49.3	+1.0	Slowing	From Faster	1
Inventories	50.5	53.0	-2.5	Growing	Slower	2
Customers' Inventories	49.5	49.0	+0.5	Too Low	Slower	10
Prices	58.0	54.0	+4.0	Increasing	Faster	2
Backlog of Orders	44.0	42.5	+1.5	Contracting	Slower	6
Exports	48.5	47.0	+1.5	Contracting	Slower	4
Imports	49.5	49.0	+0.5	Contracting	Slower	2
OVERALL ECONOMY				Growing	Faster	40
Manufacturing Sector				Growing	From Contracting	1

COMMODITIES REPORTED UP/DOWN IN PRICE and IN SHORT SUPPLY

Commodities Up in Price

Caustic Soda (2); Corn (3); Corn Products (2); Corrugated Boxes (2); Flour; Fuel (2); Gasoline; HDPE; Soy Bean Oil; Steel*; and Structural Steel.

Commodities Down in Price

Aluminum (2); Nickel (2); Stainless Steel (3); Steel* (7); and Steel Products.

Commodities in Short Supply

Plastic Components is the only commodity reported in short supply.