S&P500 Index Continues To Climb As World GDP Forecast Plunges And Atlanta Fed Says Q1 Real GDP Grew At 1.2 Percent

Time to queue the ship’s band to play “Nearer My God To Thee” from the film “Titantic.”

The S&P 500 index has continued to climb over the past year as the World GDP Forecast YoY continues to sink (like The Titanic).

spxworldgp

And now the Atlanta Fed has joined the Titanic band and is playing a mournful tune of … Q1 2015 Real GDP growth of 1.2 percent.

gdpnow-forecast-evolutionAnd up on Constitution Avenue, The Federal Reserve swings into action!

Fortunately, Central Banks have flooded the globe with liquidity.

Maybe the Hindenburg Omen should be renamed The Titanic Omen!

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“Lookout, do you see any icebergs ahead in this tranquil sea of liquidity?” “No Captain Yellen. Ocean is as still as a mill pond.”

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Bernanke: Presidents Should Be Able To Declare Economic Emergencies (As Yellen Pleads “Don’t Audit Me, Bro!”)

Former Federal Reserve Chair Ben Bernanke recently suggested that The President should be able to declare ECONOMIC emergencies. What does that mean? Martial law? Prison camps? Probably not. But unlimited borrowing and spending by the Federal government to implement a recovery (and bypassing Congress) is the likely answer.

it might make sense to give “the president some ability to declare emergencies or take extraordinary actions and not put that all on the Fed,” Bernanke said at a conference. “The constitution gives the president significant flexibility to respond to military situations,” in part because they are chaotic, he noted.

This is a Keynesian’s dream! Imagine all the broken windows that will occur to justify the manufacturing and installation of new windows.

Yes and if The President can declare economic emergencies, then The President can spend unconstrained by Congress. No moral hazard problems here!!! [Cough, cough]

If this wasn’t bad enough, we have the current Federal Reserve Chair, Janet “The Shadow” Yellen screaming “Don’t audit me, Bro!” As in, DON’T audit The Fed.

Her argument? An audit would be overly political.

After I stopped laughing, I decided to lay out a few points.

First, The President nominates the Chair of The Federal Reserve Board and the US Senate confirms the nominee. The seven members of the Board of Governors are appointed by the President and confirmed by the Senate to serve 14-year terms of office. If this isn’t already political, I don’t know what is!

Second, losses on The Fed’s asset purchases are sent to the US Treasury for payment. As a taxpayer, I think I should be able to know what I am liable for in taxes. And since The Fed is the largest holder of US Treasury debt, I think knowing what is happening behind the curtain would be helpful.

fedholdingsThe standard comeback is “The Fed is already audited by others” and “The President would NEVER do that!” These comebacks are unconvincing.

Particularly after reading “Obama “Very Interested” In Raising Taxes Through Executive Action.”

 

The Itch Is Back! Zero Down Payment Mortgages Return! (So Much For Learning Any Lesson From The Financial Crisis)

After the financial crisis of 2008 (nicely summarized by this UK Parliament study RP09-34 (2)), the financial system vowed to return to safe underwriting standards such as 20 percent down payments on mortgages. The US financial system returned to high down payments for a while, but …. the itch is back to make zero down payments loans again.

First, of course, you have the FHA which stuck by it’s low down payment guns (3.5 percent).

Second, you have mortgage giants Fannie Mae and Freddie Mac pushing the enveloped with 3 percent down payment loans.

Third, you have this story from Housing Wire,  “BBVA Compass launches zero-percent down mortgage program.”  (Banco Bilbao Vizcaya Argentaria, a Spanish bank).

In recent months, the Obama administration has taken several steps to expand the credit box and make it easier for borrowers, especially first-time homebuyers, to buy a home. To that end, in October, Fannie Mae and Freddie Mac announced 97% loan-to-value offerings.

For some borrowers, saving up 3% for a down payment is still a hurdle they can’t quite clear. However, a new program from BBVA Compass (BBVA) will allow borrowers to put down even less for a down payment, in fact.

BBVA Compass announced the launch of a new program, called Home Ownership Made Easier or HOME for short, designed to help low- and moderate-income borrowers become homeowners by helping to overcome one of the “most significant barriers” to homeownership, the down payment.

In the HOME program, qualifying borrowers will be eligible to finance 100% of the home’s value. In addition to offering 100% LTV loans, BBVA will also contribute up to $4,500 toward “certain closing costs” associated with obtaining a home loan.

What could go wrong? 100 percent LTV lending with lenders paying $4,500 of closing costs?

Like this?

bfmB912Fourth, you have the American Enterprise Institute (AEI) repackaging the 15 year mortgage with a maximum LTV (loan-to-value ratio) of 100 percent that allows for repurposing the 5 percent in down payment funds for a 1.25 percent permanent rate buydown. The 15 year mortgage rate already available is 3.03 percent compared to a 3.85 percent 30 year fixed, so the AEI’s plan is to buy down the rate even further.

3015ratediffI am a big fan of the traditional 15 year mortgage because of it’s lower interest rate.

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But the 15 year mortgage also requires a larger monthly payment to amortize the mortgage over 15 years. This will raise the mortgage payment considerably and borrower’s may not be able to meet the debt-to-income (DTI) requirement, even at the lower interest rate AFTER the buydown.  AND it is a 100 percent LTV mortgage! How many low income households can afford 30 percent higher monthly payments?

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This is hardly a mortgage product for low income households. We already have a product for low-income households — it’s called RENTING.

So there you go, sports fans. The financial system is returning to 100 percent (or thereabouts) LTV lending.

And if the system crashes again, we can sing along with another Elton John song, “Saturday Night’s Alright For Fighting!”

yellenlaighing

Bubble Driver: This New Libor ‘Scandal’ Will Cause A Terrifying Financial Crisis(?)

Forbes Magazine has an interesting piece entitled “This New Libor ‘Scandal’ Will Cause A Terrifying Financial Crisis.”

The vastly worse Libor “scandal” that I am referring to is the fact that the Libor has stayed at record low levels for the past half-decade, which is helping to fuel a massive economic bubble around the entire world that will end in a devastating financial crisis that will be even worse than the Global Financial Crisis. Instead of causing a few tens of billions of dollars worth of losses like the Libor rate-fixing scandal, the “Libor Bubble” will gut the global economy by trillions of dollars.

Here the the 1 month LIBOR rate compared to The Fed Fund target rate.

libor1mthfedOther than brief episode in September 2008, The Fed seems to be driving 1 month LIBOR.

fedtarlibor11

To quote Robert DeNiro from Taxi Driver, “Are you looking at me?”

U.S. Federal Reserve Chair Yellen testifies before a House Financial Services Committee hearing on Capitol Hill in Washington

 

 

Fredo Mac? Freddie Mac Profit Slides on Derivative Losses (Book Of Business Declined)

Freddie Mac, one of the government mortgage giants, posted a Q4 profit (which goes to the US Treasury), but that profits is lower than a year earlier.

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Freddie Mac had an earnings surprise of -89 percent. Surprise!

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According to the Wall Street Journal, “Freddie Mac Profit Slides on Derivative Losses.”

Mortgage-finance company Freddie Mac will send the U.S. Treasury $90 million in March, after posting a fourth-quarter profit that declined steeply from a year earlier.

The company said that its fourth-quarter net income was $227 million, down from $8.6 billion in the same quarter of 2013. The profit was driven by interest income of $3.6 billion and derivatives losses of $3.4 billion.

Still, the three-month period ended Dec. 31 was the 13th consecutive quarter in which the firm showed a profit.

The derivatives losses were also not as serious an issue as they appeared. Freddie uses derivatives to hedge its portfolio’s exposure to rising interest rates. For accounting purposes, the company marks the derivatives to the market price, even as it carries many of its hedged investments at cost.

Because of that mismatch, when rates fall, as they did late last year, the derivatives can show a loss, even though the effect should even out over time.

Freddie, along with mortgage-finance firm Fannie Mae , was put into a conservatorship by the U.S. government in September 2008 after crisis-era losses.

Freddie received about $71.3 billion in support from the Treasury. After the expected March payment, Freddie will have paid back $91.8 billion.

Freddie doesn’t make loans, but buys them from lenders, wraps them into securities and guarantees to make investors whole if the loans default.

As policymakers continue to debate the future of the companies, Freddie and Fannie are slowly reaching what could be described as a normal operating environment. Although the companies’ profits had been partly driven by large post-crisis settlements with lenders on crisis-era mistakes, much of that is behind them.

“The ’Great Recession’ is passing through. We’ll have fewer giant swings in credit losses…There are a declining amount of special items,” said Freddie CEO Donald Layton . “We expect less and less of that kind of stuff to deal with.”

Likewise, as home prices have risen and borrowers’ credit quality has improved, Freddie has seen fewer defaults. Freddie said its single-family serious delinquency rate at the end of the year was 1.88%, its lowest since January 2009.

Lenders for the past few years have been loath to make loans to borrowers with anything less than pristine credit, in part because of the steep penalties that they faced from Fannie and Freddie after the financial crisis.

Late last year, the companies reached an agreement with lenders clarifying their liability for making loan mistakes in an effort to entice lenders to make loans to creditworthy borrowers with worse credit scores and lower down payments.

Mr. Layton said that on average, lenders have been moving to offer more loans to such borrowers, though some have been quicker or slower to lessen the requirements.

Richard “Dick” Bove is still recommending purchasing Freddie Mac stock, despite the downturn in earnings.

boverecAnd from Bloomberg, Freddie Mac’s total book of business decreased for the first time since August, declining 0.8% in January after rising at its fastest pace since December 2009 in the final month of 2014. Freddie’s retained portfolio diverged from December’s 19% gain, falling at a 3% rate in January as it bought fewer mortgage securities. Its guarantee business slowed 210 bps from December to a 1.2% growth rate. Single-family delinquency rates continued to be a strong point for Freddie, falling to 1.86% from 2.34% a year earlier.

Freddie Mac’s mortgage-related investment portfolio must fall to $399 billion by year-end, based on its agreement with the U.S. Treasury, though Freddie is reducing its portfolio faster than required. The decline may hurt earnings through lower net interest income and operating leverage. Freddie accelerated the sale of less liquid assets, such as mortgage loans, since 4Q12. If it continues to do so, the net interest yield may shrink because most loans have a higher yield than comparable securities.

Freddie Mac could post higher GAAP earnings if interest rates rise, raising the amount paid to the U.S. Treasury. Freddie uses derivatives to hedge against movements in interest rates. In general, changes in their fair value have been positive during periods of rising rates, and negative when rates have fallen. While such changes do not reflect economic returns because the fair value of the hedged assets and liabilities may not be adjusted, any gain in net income would boost payments to the Treasury.

So, there you have it. Freddie Mac remains profitable despite the tanking of mortgage purchase applications since 2007.

mbapsa022515As Fredo (the spiritual father of Freddie Mac) said in The Godfather,

fredomac

 

 

 

 

Pikey Nation? Personal Spending Declined -0.2 Percent In January, Second Worst Decline Since 2009 As Gasoline Prices Rise

According to the US Government (which now regulates the internet for “the greater good”), personal spending declined more than expected in January by -0.2 percent. This read is tied for the second worst personal spending read since 2009.

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Let’s see what happens in for February’s personal spending report since regular gasoline prices have been rising again.

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The PCE Deflator rose by only 0.2 percent YoY, after rising 0.8 percent in December.

pcedef I though the 50 percent decline in oil and gasoline prices were supposed to have a stimulative effect on personal spending?

On top of declining personal spending, we have an UNaffordability crisis in housing at wage growth is still slow and home price growth is 2 times wage growth.

pikeynatjoon

At this rate, middle class America will be living in Caravans like Brad Pitt and the Pikeys in the Guy Ritchie film “Snatch.”.

pikeyscaravans

On a side note, several years ago I drove from Glasgow to play golf at Southerness Golf Club near Dumfries on the British border. While playing, I noticed a community of caravans next to the golf course. Not knowing what that implied, I asked my Scottish golfing partner. He said “Bloody Pikeys.”

sness

Dream Lover: Stock Market Continues To Rise As Expected Global GDP Growth Continues To Tank

The S&P 500 stock market index keeps climbing regardless of whether economic information is good or bad. Why? Because Wall Street’s “Dream Lover” is the Chair of the Federal Reserve Board of Governors.

For example, the world GDP forecast keeps falling … and the S&P 500 stock market index keeps rising. Much like a psychotic Energizer Bunny.

gdpfprefedBut Janet is not the Dream Lover of middle class America where real median household income and mortgage purchase applications remain depressed after 2007.

househfed4The M1 Money Multiplier  reamains stalled and below 1 indicating the low interest rate loans are not circulating among the middle class.

m1mfedugh.

Somewhere beyond the sea, Yellen’s comrades in Central Banks are pushing their rates into negative territory. And it is not helping their middle classes either!

negrates

And if Janet Yellen and the Central Banks remove the monetary stimulus, splish-splash, we’ll be taking a bath!

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Once again, a tip of the hat to the brilliant Jesse’s Cafe Americain!