Political instability generally leads to spiking sovereign yields, as exemplified by Ukraine and Turkey. Ukraine’s 10 year sovereign rate rose 22.1 bps today while Turkey’s rose 14.0 bps.
Note that Russia saw an increase of only 6.4 bps on their 10 year sovereign debt.
In terms of credit default swap prices, Ukraine has surged to 1225, followed by Greece, Egypt and Cyprus.
But Ukraine is still below the CDS prices of South American nations of Argentina and Venezuela.
Shinzō Abe, the Prime Minister of Japan, launched “Abenomics” in 2013. Abenomics is based upon “three arrows” of fiscal stimulus, monetary easing and structural reforms. Unfortunately for Japan, growth in Q4 slowed to sub-1% after reaching 4% real GDP growth in Q1 and Q2 of 2013.
Even worse, Japan’s current account balance (exports – imports) have collapsed to the lowest since at least 1985.
And Japan’s current account balance has collapsed despite Abe’s arrow of monetary stimulus.
Meanwhile, Japan’s house prices continues to decline despite Abenomics and massive Bank of Japan balance sheet expansion (yellow line).
The Federal Reserve’s massive balance sheet expansion has helped some and done little for others. One of those it has helped is Todd Westhus, an investor in Fannie Mae and Freddie Mac preferred shares at 2 cents on the dollar.
March 10 (Bloomberg) -By Jody Shenn- Todd T. Westhus is poised to join George Soros and John Paulson with an unlikely wager.
Soros broke the Bank of England in 1992 by betting on the devaluation of the British pound, netting $1 billion. Paulson took home $15 billion, anticipating the collapse of subprime debt that contributed to the financial crisis. Now, Westhus is trying to transform the $9.4 trillion U.S. mortgage market. The 38-year-old hedge fund partner was the mastermind of Perry Capital LLC’s 2010 purchase of Fannie Mae and Freddie Mac preferred shares at 2 cents on the dollar. Back then, the mortgage giants were just about given up for dead. Today, the companies are profitable and their shares have soared 24-fold.
Taxpayers rescued Fannie Mae and Freddie Mac in 2008 with a bailout that swelled to $187.5 billion, an amount the companies will finish sending back to the government this month. The issue for investors is that the Treasury Department decided in 2012 to keep all the companies’ profits. Perry sued the U.S. in July,saying the money sweep flouts the rule of law. Senator Bob Corker, a member of the Senate Banking Committee, said the firms’ staunchest supporter should be rewarded.
The companies would “be generating not one dime of revenue if it weren’t for the federal government,” Corker, a Tennessee Republican, said in an interview.
The preferred shares of the mega-GSEs have risen with speculation that Fannie Mae and Freddie Mac might survive. Then again, their preferred shares have risen with The Fed’s 3rd round of quantitative easing (QE3). Here is a chart of the preferred share price against The Fed’s Balance Sheet (yellow line).
The Fed giveth, and Corker taketh away.
The housing market is not rebounding as many would hope. We know from the lackluster mortgage purchase application index that the traditional homebuyers are not jumping in with both feet as they did during the housing bubble of the last decade.
One reason for the housing recovery stall is the slowdown in household formation which has been in decline in recent months. In fact, household formation turned negative during Q4 of 2013, the first time that has happened since 2000 when the dot.com bubble burst. Household formation has been declining since September 2012.
Household capital formation has risen recently to 2000 levels.
And the decline in household capital formation is correlated with sagging real median household income.
The percentage of first time homebuyers has been falling as well.
And now we have a growing rental rate.
Resulting in the U.S. getting back to 1996 levels of home ownership.
Vermont Governor Peter Shumlin signed an executive order Monday creating a new council to combat poverty … the Governor’s Council on Pathways Out of Poverty (POOP) will have between 10 and 30 members and meet three times a year. This follows on the heels on President Obama’s “Income Inequality” speeches and new budget.
Am I hopeful that POOP will eliminate poverty in Vermont? Or President Obama’s “War on Income Inequality?” Not really. Here is why.
President Lyndon B. Johnson declared a “War on Poverty” in the mid 1960s. President Jimmy Carter signed the Community Reinvestment Act (CRA) into law in 1977. President Bill Clinton strengthen the CRA in 1992 by requiring Fannie Mae and Freddie Mac, the two government sponsored enterprises that purchase and securitize mortgages, to devote a percentage of their lending to support affordable housing. Clinton also “reformed” the CRA and introduced the National Homeownership Strategy in 1995. nhsdream2
Oddly, with each consecutive “war on poverty” initiative, income inequality just keeps getting worse. Here is the GINI coefficient since the mid 1960s.
Sadly, the gini coefficient wedge (with real median household income) widening.
Maybe the government meant “War on the impoverished.” If that is the case, they have been spectacularly successful!!
Earlier today, I reported on the absurdly low levels of labor force participation, employment-to-population ratio and real median household income.
Now comes some more news from the Bureau of Labor Statistics: real average weekly earnings plunged to 2010 levels in February at 1.30% YoY growth. It isn’t just the cold weather. The downward plunge started with December.
Real weekly earnings did see an increase in 2013 as The Fed’s QE3 balance sheet expansion went into effect. But alas, the bloom is off that rose.
After listening to Mark Zandi and others drone about the horrible weather and its negative impact on the economy, the Bureau of Labor Statistics reported today that February payrolls actually by 175,000 versus an expectation of 149,000. Unfortunately, the unemployment rate rose to 6.7%.
February payrolls continue the downward trend for the past 3 years. Each year, the January/February payrolls numbers have been deteriorating.
The unemployment rate rose to 6.7%. Unfortunately, real median household income has been falling.
The labor force participation rate remained at 63.0% in February.
The employment to population ration also remained constant at 58.8%. Thus, the US economy remains in “Death Valley.”
The inverse of the employment to population ratio leads the increase in average duration of unemployment. Hopefully, this isn’t the new normal for the US economy.
Now you can see a clear picture why the residential mortgage market is stalled.
Despite The Fed’s massive balance sheet expansion, the number of unemployed rose to 10,459,000 in February.
The US Treasury 10 year yield rose 6.3 basis points on the news (as on 10:21am EST).
Welcome to Death Valley Days!