final revision Q1

The continuation of our economy's 'variable bouncing data' performance reflects upon the uncharted workings of the new normal...so many possibilities, so much data to parse, so many 'unexpected' data results...are we moving toward firmer economic ground; skating on thin ice or is there a titanic financial iceberg ahead just waiting for the black swan to appear?

Final Q1 GDP Revision

Initial Q1 GDP: 2.5%
Final Q1 GDP revision: 1.77%.
Personal Consumption Expenditures tumbled to just 1.83% of GDP. In absolute terms, PCE plunged from 3.4% to 2.6% on expectations of 3.4%. There goes the buying power of the over-levered, under-saved US consumer.
Fixed Investment, i.e. CapEx, cratered to only 0.39% of the GDP, down from 0.53% in the first revision. This as the lowest Fixed Investment number since Q3 of 2012. What is worse, is that non-residential fixed investment crashed from 2.2% to 0.4%. 

velocity...

Here we find a key piece of our economic puzzle that provides some light on why we seem to be stuck on an economic treadmill that's trans-versing a rocky and jagged road....

You might think that The Federal Reserve's policy of making credit cheap and abundant would goose people to consume and invest more money. Alas, the velocity of money is hitting historic lows: the Fed may be creating credit but people and enterprises aren't putting that money into circulation.
 

It's called diminishing returns: every dollar of debt creates interest payments, but it's no longer doing households or enterprises any good.

by Charles Hugh-Smith of OfTwoMinds blog

Definition of 'Velocity Of Money' The rate at which money is exchanged from one transaction to another, and how much a unit of currency is used in a given period of time. Velocity of money is usually measured as a ratio of GNP to a country's total supply of money.

Investopedia explains 'Velocity Of Money' Velocity is important for measuring the rate at which money in circulation is used for purchasing goods and services. This helps investors gauge how robust the economy is, and is a key input in the determination of an economy's inflation calculation. Economies that exhibit a higher velocity of money relative to others tend to be further along in the business cycle and should have a higher rate of inflation, all things held constant.

housing starts May....

How will the multifamily growth scenario play out as we move forward? With home ownership levels dropping during the great recession and first time home owners struggling to raise down payment monies, will the growth in multifamily inventory levels fill a market void/need or is another bubble within a bubble being formed?

U.S. housing starts rose 6.8% in May, but single-family building was nearly flat.

FOMC today

As we prepare for Ben's FOMC highlights this afternoon it shall be interesting to see how they (he) plan to maneuver (wordsmith) the exit strategy (unwind without market chaos) for the amazing QE box that they have created for themselves. Let's see what happens as we watch the greatest economic show on Earth reveal itself (cue stage right - send in the clowns).....

Stuff to ponder: 

The Federal Advisory Council, a group of 12 bankers from each Fed district who meet four times per year to advise the Fed, warned in their May 17 meeting of the risks to ending QE. The Minutes from the FAC meetings are not normally distributed but were after the May meeting in response to a FOIA request from Bloomberg. 

The Minutes state, “Uncertainty exists about how markets will reestablish normal valuations when the Fed withdraws from the market. It will likely be difficult to unwind policy accommodation, and the end of monetary easing may be painful for consumers and businesses.” Conversely, the FAC said that QE may not be effective, and “Uncertainty about fiscal and monetary policy is deterring business investment that would spur growth…” They went on to warn that, “The Fed's aggressive purchases of 15-year and 30-year MBS have depressed yields for the 'bread and butter' investment in most bank portfolios; banks seeking additional yield have had to turn to investment options with longer durations, lower liquidity, and/or higher credit risk. … [the results of the asset purchases] may encourage unsophisticated investors to take on undue risk to achieve better returns.”

Chart Of The Day

Nonfarm payroll growth has improved marginally, from 185k per month in the 12 months leading up to QE3 to 190k per month since. The unemployment rate was at 8.1% when the Fed announced QE3 but dropped to 7.8% in the subsequent report. Even those who argue for the efficacy of asset purchases cannot credit that drop to the asset purchases given the timing. Since then, the rate has managed to only drop to 7.6%. Moreover, the unemployment rate was falling by 0.07% each month, on average, in the 12 months leading up to QE3. Since the announcement, the drop in the rate has slowed to 0.06% (including the 0.03% initial drop). There is still a deep hole in the labor market, and it’s a bit of a limb to be on to even argue that there has been marginal improvement – much less “substantial improvement”.     (The Market Today ONLINE)

how easy it is to digitally create trillions of dollars...

How much economic disruption, distortion and dislocation has been (and will be) created by the Fed's digitizing its balance sheet?

And how will the yield curve be affected when the great unwinding actually begins? We have seen the beginning of movement with the usage of the word of 'taper' being tossed out for the financial markets to nibble upon. 

These are very interesting times in the financial world and even though we throw around the term 'new normal' to describe this phase of our current economic cycle, the dial on the the risk indicator reflects pressure is building with each passing day. 

Everything Created Digitally Is Nearly Free - Including Money  - Charles Hugh-Smith

It is immeasurably easier to digitally create claims on real-world assets than it is to create real-world assets.

We all understand that the cost of everything that can be created digitally is near-zero. This is why music, videos, text-based knowledge and telephone calls (Skype) are now basically free.
Since money is now created digitally, it too is basically free. We can see how easy it is to digitally create trillions of dollars in this chart of the U.S. monetary base. Roughly $1.2 trillion was created out of thin air essentially overnight back in the good old days of global financial meltdown:



For another look at the wonders of the digital credit creation machine (a.k.a. digital printing press), here are the assets of the Federal Reserve banks: there's the $1.2+ trillion again--hum, Baby! Hit me with another trillion....



Here's a detailed look at the assets the Fed bought with its digitally created money--mostly Treasury bonds and real estate mortgages:


The key feature of digitally creating credit/money is this: it is immeasurably easier to digitally create claims on real-world assets than it is to create real-world assets.
This is why the digital creation of trillions of dollars in credit/money is distorting and disrupting the real economy of real-world assets: the claims on those assets keep expanding while the actual assets remain stubbornly tied to the real world.

a correction in asset prices underway?

Has QE lost its effectiveness? Has the artificial 'sweetener' of Fed induced low rates lost its favor or are we beginning to see the acknowledgement that the 'sweetener' may have damaging long term side effects...

Or is the 'correction' occurring due to the market's belief that the great unwinding is ready to begin and prices will adjust to where their true present market valuation lies?

Chart Of The Day

Bloomberg

Treasuries continued to take it on the chin overnight as the 10-year yield rose above 2.25% for the first time in over a year. Selling pressures came as the Bank of Japan did not take further action overnight, as some had expected they would do. Instead, the BOJ left policy unchanged for now. The Yen strengthened over 1% against the Dollar, the Nikkei fell 1.5%, European stocks are down 2.0%, and S&P futures are down 1.0%. Yields on Spanish and Italian 10-year bonds are up 20+ bps in the last two days alone. As the world’s central banks begin to disappoint the markets by not increasing asset purchase programs, there will be (is currently underway) a correction in asset prices.

The Market Today ONLINE

1st quarter community banking status

Moving forward through the new normal, community banks are improving their over-all health...balance sheet and income statements.

Risks moving forward:

- Margin pressure continuation

- Profitable earning asset growth

- Maintaining appropriate levels of ALLL

- Liability/funding structure to prepare for yield curve movement

- Product and service development (new vs realignment of existing) - areas for consideration: product penetration and pricing, appropriate levels of due diligence, potential regulatory and compliance concerns, market acceptance and reputation

- Product and service channel provision

- Human capital - staffing for the new normal (capacity and capabilities) 

Community Banks in Western States Grow Stronger, Agricultural Banks Performing Well

DENVER — Community banks and thrifts in the western part of the United States are growing stronger as housing, commercial real estate, agriculture and other key business sectors in that region continue to improve, officials from the Office of the Comptroller of the Currency (OCC) said today.

“The OCC is seeing positive changes in commercial real estate, the number of problem community banks is down and continues to fall compared with last year, and the housing market continues to improve,” said Kay Kowitt, the OCC’s Western District Deputy Comptroller.

The OCC conducts a quarterly analysis of community banks based on financial data from the Consolidated Reports of Condition and Income, also known as Call Reports. In addition, the OCC gathers information about market conditions and industry health from the 15 locally based Assistant Deputy Comptrollers in the Western District. The analysis identifies current and potential risks facing the district’s national banks and federal savings associations and assists these institutions in proactively identifying and managing potential risks.

Significant themes and risks in the current economic environment are:

• Approximately 77 percent of district banks are highly rated, 1 and 2 category, banks as of the end of the first quarter 2013, up from the low point of 64 percent in the latter half of 2010. The OCC anticipates continued improvement in the condition of the community banks under its supervision. Banks are rated on a 5-point scale that measures capital, asset quality, capability of management, earnings, liquidity and sensitivity to market risk. The OCC considers a bank with a 1 or 2 rating as highly rated, and banks with a 3, 4 or 5 rating as problem institutions.

• Most financial performance metrics stabilized or improved modestly over the past two years.Earnings have improved, largely because of reduced provision expense, and capital levels are satisfactory overall. 

• While asset quality has improved, commercial credit continues to present the highest risk to bank earnings. While credit metrics show improving trends, they are still weak relative to historical performance. 

• Most banks have ample sources of liquidity and moderate interest rate risk.

Looking Ahead

• Profitability remains under pressure due to sluggish loan growth, lack of investment alternatives, and declining non-interest income. Banks are looking to bolster income through new products and services, expansion of existing business lines, and/or cost reductions.

• Bankers are challenged to modify policies and practices to ensure compliance with regulatory changes and maintain effective compliance risk management systems.

Western District: Banks with Commercial Real Estate Concentrations

• Despite a reduction in commercial real estate (CRE) concentrations, many banks continue to deal with a high volume of problem loans in this asset class. CRE fundamentals remain weak in a number of markets.

• Construction and development (C&D) concentrations have declined sharply, but stress in these portfolios remains high. 

• Loans secured by investor-owned CRE are performing better than C&D loans, but higher vacancy rates and lease rollover risk warrant close monitoring. 

• The volume of Other Real Estate Owned (OREO), a category that includes property acquired as a result of loan defaults, in District banks has declined from peak levels, but continues to negatively impact earnings. 

• Actions to diversify CRE portfolios have led to intense competition for commercial and industrial lending opportunities. Examiners will continue to focus on the quality of underwriting and the identification and tracking of underwriting exceptions.

http://www.occ.gov/news-issuances/news-releases/2013/nr-occ-2013-91a.pdf

TEFF

yields up...has the QE wonder last its zeal!

PMI bouncing around...reflecting a continuing mixed bag of economic data - is this the new normal of economic cycles!

along with a "Quote for the week": The next major theme is stagflation — this will be the legacy of the Bernanke regime. You cannot keep real short-term rates negative for this long in the face of even modestly positive real economic growth without generating financial excesses today and inflationary pressures in the future. (D. Rosenberg)

 

·  ECON: ISM Manufacturing Lowest Since June 2009                                                                                                                                                                        

- Headline PMI 49.0 vs 50.7 forecast
- New Orders 48.8 vs 52.3 previously
- Employment 50.1 vs 50.2 previously
- Manufacturing Activity lowest since June 2009
- First Contraction Since November 2012

US Treasury Yields

Name	Yield		1 Month	1 Year
US Treasury 2 Year Yield	0.30%		+8	+5
US Treasury 5 Year Yield	1.05%		+33	+44
US Treasury 10 Year Yield	2.12%		+42	+70
US Treasury 30 Year Yield	3.31%		+36	+79

Last week’s wild ride in bonds featured volatility every day but Thursday. On Friday, the ten-year Treasury’s yield soared to over 2.20% by early afternoon before closing at 2.12%. The updraft in yields has permeated the market, pushing up yields on most securities to their highest levels in over a year and pushing up mortgage loan rates. Mortgage spreads generally stabilized last week but were wider on the month. Mortgages have given up all of their spread tightening that occurred beginning in August of 2012, just before the Fed began their latest mortgage purchase program. Mortgage rates are up to their highest rates since last summer.  (The Market Today ONLINE)

Five-year Treasury Yield