Where to Invest: With Macroinvestors or Macroeconomists?

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009), which was translated and republished in Chinese (2014). He is researching a book about Ben Bernanke. He writes a blog at www.AuContrarian.com.

            Stanley Druckenmiller, the justly renowned investor, spoke at the Delivering Alpha conference on Wednesday, July 16, 2014. Quoting Druckenmiller: "As a macro investor, my job for 30 years was to anticipate changes in the economic trends that were not expected by others - and therefore not yet reflected in securities prices. I certainly made my share of mistakes over the years, but I was fortunate enough to make outsized gains a number of times when we had different views from various central banks."

            Druckenmiller went on to discuss, among much else that deserves reading, how the Fed's emergency 1.0% fed funds rate in 2003-2004 defied conditions observed by him and his colleagues at Duquesne Capital. Where was the emergency? In short: "[W]e were confident the Fed was making a mistake, but we were much less confident in how it would manifest itself. However, our assessment by mid-2005 that the Fed was fueling an unsustainable housing Bubble, with dire repercussions for the greater economy, allowed our investors to profit handsomely as the financial crisis unfolded."

            Today, Federal Reserve Chairman Janet Yellen sounds more preposterous every time she opens her mouth. Last week, maybe it was two weeks ago, she offered America a sector analysis, proposing that small-cap and biotech stocks look overpriced. A few days later, ECB President Mario Draghi offered his opinion of no widespread asset bubbles, although some markets looked "frothy."

            It has been less than a decade since Fed chairman Greenspan declared there was no housing bubble, though he saw signs of "froth." His weasel act warranted derision, which is just what it received, such as in the Economist's headline: "Frenzied Froth" (May 28, 2005). Draghi is acclaimed for his well-tailored suits but they stink of old mothballs. He's a botoxed Greenspan.

            The two of them - that would be Yellen and Draghi - have decided to let markets take their course, now that the Fed and ECB have used every possible mechanism to create mispricings in all markets. They will administer regulatory measures, if necessary.

            The only such declaration of any use would be to administer the two of them, along with their supercilious staffs, out of existence. Instead, the average person who reads newspapers that include even a moderate degree of financial reporting knows multiple crashes are building.

The all-star break results are in. That is, the announcements of how first-half 2014 security issues compare to earlier years. We can congratulate ourselves. Never before has the world shown such indulgence, intemperateness, and unconscionable underwriting as in 2014.

"Megadeals... helped push the number of debt sales by highly rated companies in the U.S. to record levels in the first half of the year. These companies sold about $642 billion of debt." That "outstrips the previous record set in 2009, when $612 billion of bonds was sold..." (Wall Street Journal, July 1, 2014) Aside from the probable default rate (where are you now, TXU?), megadeals are no friend to the workers.

"As investors scour the landscape for income, the first half of the year saw record amounts of new corporate bond issuance as well as record issuance of collateralized loan obligations. CLOs are securitized vehicles that invest in bank loans made to junk-rated companies, first pooling the loans and then dividing them into tranches to be sold to investors at varying levels of income and risk.... The $58 billion of CLO issuance in the first half of this year puts 2014 on pace to top $100 billion and break the previous single-year issuance record...set in 2007." (Wall Street Journal, July 2, 2014) Pension plans and insurance companies are large buyers of such attempts to increase yield; an attempt to reinstitute the yield confiscated by the same central banks that have now declared their forbearance in monitoring default-prone issues.

Doug Noland, manager of the Prudent Bear Fund, in his Credit Bubble Bulletin, written on July 11, 2014, analyzed the seven-year itch, under the appropriate title: "2014 vs. 2007":

"From my perspective, 2014 and 2007 share troubling similarities. Both periods feature overheated securities markets, replete with the rapid issuance of securities at inflated valuations. Both are characterized by investor exuberance in the face of deteriorating fundamentals - and in both cases central bank policymaking was fundamental to heavily distorted market risk perceptions. It's no coincidence that today's overheated backdrop - record securities issuance and meager risk premiums/record high prices - readily garner statistical comparison to 2007.

"This year's booming M&A market has posted the strongest activity since 2007. Second quarter global M&A volume of $1.06 trillion was up 72% from the year ago period. Here at home, M&A more than doubled year-on-year to $473 billion, pushing record first-half volume to $749 billion. The proliferation of deals was fueled by the loosest credit conditions in years. First-half global corporate bond issuance hit an all-time high $2.29 trillion. A record $286 billion of junk bonds were issued globally, as average junk yields traded to the lowest level ever. At $642 billion, first-half U.S. investment-grade company bond sales easily posted an all-time high. The first six months of 2014 also saw record issuance of collateralized loan obligations (CLOs). A record number of global IPOs were sold in the first half, with $90.6 billion of offerings 54% above comparable 2013. Led by technology and biotechnology issues, U.S. IPO sales enjoyed the strongest first-half since the height of the technology bubble back in 2000. According to Dealogic, year-to-date total global sales of corporate stock and equity-linked securities reached an unmatched $510 billion, outpacing 2007's record pace."

It is certain such frivolities are "not yet reflected in securities prices."

 

 

The Bed-Pan Economy

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (Aucontrarian.com, 2009)

Data portrayed in the "Employment in Total Non-Farm" payroll (NFP) chart is used by central bankers and Wall Street strategists to assert economic strength. They either think the trend demonstrates morning in America, or, they know otherwise, but cannot fashion anything better.

 

The Federal Reserve chairman, probably any Fedhead for that matter, whip off cheerleading spiels supported by numbers that make no reference to historical comparison. For that matter, they use numbers that make no reference to other numbers, and numbers without reference have no meaning. Fed chair Yellen recklessly disregarded context in her March 31, 2014 speech in Chicago: "Since the unemployment rate peaked at 10 percent in October 2009, the economy has added more than 7-1/2 million jobs and the unemployment rate has fallen more than 3 percentage points to 6.7 percent. That progress has been gradual but remarkably steady - February [2014] was the 41st consecutive month of payroll growth, one of the longest stretches ever."

 

 

 

Yellen's data, in reference, offers no promise of recovery. There have been no jobs "added" since the unemployment bottom in 2009. Yellen is spoken of as a "great labor economist." She either knows her statement is misleading, or, she is demonstrating how little economists know. It was not too long ago Simple Ben was ordained "the Greatest Economist of the Greatest Depression," after which, he ushered us into The Great Recession and created The Protracted Depression.

 

In  "April 2014 - Castles in the Air," I wrote the "span from December 2007 to March 2014 is 75 months. Seventy-five months after jobs peaked in 1990 (as we entered the 1900-1991 recession), there were 10 million net new jobs. Seventy-five months after the post-2000 job peak, there were five million net new jobs. In March 2014, we are still half-a-million jobs south of the zero bound."

 

More important is whether jobs can support a family. The nearby "Breadwinner Economy" chart is designed for this purpose. The chart is from David Stockman's ContraCorner website as is the discussion of what constitutes a breadwinner job in "The Born Again Jobs Scam: The Ugly Truth Behind 'Jobs Friday,'" and "The Fed's Labor Market Delusion."   

 

  

Only one aspect of the delusion will be discussed here. This is the quality of breadwinner jobs created since NASDAQ 5000. As such, this does not directly address the problems of those who have lost an $80,000 job for $40,000 employment, the long-term unemployed, the part-time employed, and the misleading data that accompanies headline news. For instance, people who work one hour a week are counted as "part-time workers" in U.S. government data.

 

From "April 2014 - Castles in the Air":"The Greenspan NASDAQ Bubble peaked in 2000 and breadwinner jobs reached 72.7 million. After Greenspan and Bernanke artificially revved up the mortgage-finance economy through 2007, jobs topped out at 71.9 million in December 2007. By June 2009, the deflated mortgage bubble had cost five million jobs: there were 66.2 million NFP workers in June 2009. By March 2014, there were 68.3 million breadwinner jobs, 3.6 million fewer than in December 2007, a level achieved during the second Clinton Administration. The quality within the breadwinner industries has deteriorated significantly and the population has grown."

A major change in the composition of breadwinner jobs since 2000 has been the shift from production to service. More specifically, jobs from the goods-producing economy (manufacturing, construction, mining, and energy) have declined from 24,627,000 in January 2000 to 18,941,000 in March 2014. The largest relative growth of jobs has been within the Health, Education, and Social Services (HES) area. From 24,382,000 jobs in January 2000, HES jobs have sprouted to 31,505,000 in March 2014.

Goods-producing jobs pay much better than those within health, education, and human services. HES jobs are highly dependent on fiscal solvency, with the exception of hospital employment which is vulnerable when the government loses its exorbitant privilege of funding its promises for free. Less hospitals, 75% of the revenue supporting these jobs comes from local, state, and federal funding. The average pay within the HES assembly is $35,000. Yellen is not going to achieve "escape velocity" without HES employees shuffling their accounts faster than Charles Ponzi.

            Even given the deep contraction in 2009, the re-emergence of HES positions is much slower than the years leading up to the Greenspan Famine. From January 2000 to December 2007, 4.8 million, or 51,000 HES jobs, were added each month. Since the bottom of the Great Recession (stage 1 in Bernanke's Protracted Depression), 1.5 million, or, 26,000 jobs have been added each month. "Restored," not "added," which is Yellen's claim. (Breadwinner jobs also include "Core Government" employment, which excludes Post Office and Education. There were around 11 million in 2007 and in 2014. Uncle Sam's workers receive around $60,000 on average.)

  

Jobs clawed back within the HES sectors are inferior to those before. By and large, the jobs have not been among doctors, skilled nurses, or medical technicians. About 80% of them - 1.2 million - fall within the Bed-Pan Economy: home-health aids, day-care workers, and nursing-home staff.

The April employment numbers released on May 2, 2014, were greeted warmly. Front-page headlines from the Wall Street Journal ("Job Growth Gathers Steam") and Financial Times ("U.S. Jobs Growth Exceeds Expectations") were as untutored as Chairman Yellen's claims.

April 2014 - Castles in the Air

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (Aucontrarian.com, 2009)

            The word "bubble" is suffering from overuse. Still, with money for nothing inflating markets around the world, we are seeing how prices inflate to enormous proportions where the prospect of pushing those prices even higher draws a crowd. When such artificial stimulants to bond, mortgage and tea-cup enthusiasm reaches a peak, the switch from green to red is often quick.

            A reminder comes by way of "Run, Run, Run, Was the Financial Crisis Panic over Institution Runs Justified?" by Vern McKinley. Published on April 10, 2014, by the Cato Institute, McKinley writes: "Countrywide's [a premier sub-prime lender when the going was good - FJS] second-quarter 2007 financial results indicated no significant weaknesses and the major rating agencies assigned it strong ratings with a stable outlook. [Although, a MarketWatch headline on July 24, 2007: "U.S. Stocks Close Sharply Off on Credit Woes, Dow Slides 226 points; Countrywide Says Risks Extend Beyond Subprime." This is a reminder that "the market" quickly forgets what it does not want to know, as we see on May 1, 2014. - FJS]

"This calm changed dramatically on August 2, 2007, as Countrywide was unable to roll over its commercial paper or borrow in the repo market.... On August 14, Countrywide released its July operational results, reporting that foreclosures and delinquencies were up and that loan production had fallen by 14% during the preceding month.... On August 15... a Merrill Lynch analyst switched Countrywide from a "buy" to a "sell" rating.... [T]hat led to a Los Angeles Times article that [Angelo] Mozilo [CEO of Countrywide] blamed for causing the run that ensued.... One customer pulled $500,000 from a Countrywide Bank branch... 'It's because of the fear of bankruptcy.... I don't care if it's FDIC-insured - I want out.'"

            Countrywide follows a pattern seen dozens of times over the past twenty years. The quality of loans had fallen off a cliff but the economists, the brokerage houses, and - of course - the Federal Reserve - were in the dark. The stock market played the schizophrenic, "Oh, No!" and "Good thing that's Over!" game. It peaked in October 2007. The catalyst for collapse was "loan production had fallen by 14%." Even the carpe diem frat boys on TV know the deteriorating quality of loans will not cause a ruckus as long as the percentage of missed payments and defaults does not rise. But, once Countrywide & friends could no longer feed the fast, rising rate of new loan production, the façade was near its end. The combination of more defaults and lower production is soon impossible to hide. 

            The FOMC (Federal Open Market Committee, where monetary policy is set) had talked about houses at its meeting on March 27-28, 2006. Federal Reserve Chairman Ben S. Bernanke reminded the anointed: "residential housing is, of course, only about 6 percent of GDP." We can read, actually see, inside the professor's mind, since it is so simple: He is looking at a pie chart of the GDP, with slices of red, magenta, honeydew, and fern. The residential housing slice is a thin one, and, as his sort is programmed to regurgitate, isolated from the others. Any ambitious student at Princeton or the FOMC knows "6%" is the "A" response. Lights out. 

At the December 2006 meeting, reclining even deeper into his barcalounger, the most prominent cheerleader for the Great Moderation was tranquil. He tossed manufacturing sectors, including furniture and appliances into his splendid-isolation view, since "this is about 15 percent of the economy compared with 85 percent of the economy." The 85 percent was another world.

            Bernanke went on in this vein through 2007, not taking the time to bone up on inevitable cross currents that accelerate when recognition and margin calls lead the man at the bank to declare "I want out."

A sample of the commotion after Countrywide's August 15, 2007, hiccup follows; showing how quickly an accumulation of accepted beliefs vanish in a credit collapse:

Aug. 15, 2007 (Bloomberg) POOLE SAYS "REAL ECONOMY"UNHURT BY SUBPRIME COLLAPSE

Aug. 16 (Bloomberg) - "Investors are scooping up U.S. Treasury bills like few times in history as an expanding credit crunch makes it hard for companies to roll over short-term debt. The yield on the three-month Treasury bill fell 0.54 percentage point yesterday to 4.09 percent, the lowest since 2005. It was the biggest single-day decline since Oct. 13, 1989, when the Dow Jones Industrial Average tumbled 6.9 percent...."

Aug. 16 (Thomson Financial) PAULSON SEES MARKET TURMOIL STALLING U.S. GROWTH, BUT NO RECESSION - "U.S. Treasury Secretary Henry Paulson said... the financial system and economy are 'strong enough to absorb the losses....  '[L]ooking over periods of stress that I've seen, this is the strongest global economy we've had,' he said."

Aug. 17 (Boston Globe) "First Magnus Financial Corp., based in Tucson, which purchases mortgages from loan brokers and is one of the 10 largest mortgage wholesalers in New England, yesterday said it would no longer fund new loans...."

Aug. 21 (Reuters) - MARSH: MANY CLAIMS LOOM IN THE SUBPRIME CRISIS "Marsh Inc., the world's largest insurance broker and risk adviser, yesterday warned financial institutions they may face more claims as a result of the subprime mortgage crisis...."

Aug. 21 (Bloomberg) "COMERCIAL PAPER ROILS BORROWERS WITH $550 BILLION COMING DUE "Ottimo Funding LLC, whose name is Italian for 'excellent, has the highest possible credit rating and doesn't own subprime mortgage bonds. That made no difference to investors who refused to buy Ottimo's $3 billion of short-term debt this month as losses on home loans to risky borrowers infect the global credit markets. 'It's pretty much a straight contagion,' said George Marshman, chief investment officer of Stamford, Connecticut- based Aladdin Capital Management, which oversees about $20 billion, including Ottimo."

Aug. 21 (Fortune) CAPITAL ONE AND THE MORTGAGE DOMINO EFFECT "Capital One's shuttered GreenPoint Mortgage is the latest mortgage banking explosion to bump Wall Street's panic meter up a notch."

Aug 21 (Los Angeles Times) "THE NUMBER OF U.S. HOMES FACING FORECLOSURE SURGED 58 PERCENT IN THE FIRST SIX MONTHS OF THE YEAR...."

Aug. 22 - (Reuters) "TIGHTENING GLOBAL CREDIT MARKETS HAVE TAKEN A TOLL ON U.S. MORTGAGE-BACKED SECURITIES ISSUED BY FANNIE MAE AND FREDDIE Mac...."

Aug 22 - (AP) MONEY MARKET FUNDS FACE PRESSURE AMID BROADER UNEASE ABOUT CREDIT "The market turmoil of the past month spawned by growing credit market problems is spilling over to money market funds...."

Aug. 22 (Bloomberg) DEVELOPER'S BIG MANHATTAN MOVE FACES A CREDIT SQEEZE "Harry Macklowe, the New York developer, was flying high in February when he decided to buy a portfolio of prime Midtown Manhattan office towers for nearly $7 billion, using only $50 million of his own money.... Skip to next paragraphHis 2003 purchase of the General Motors Building on 59th Street and Fifth Avenue for $1.4 billion, though derided at the time as reckless, had been vindicated as the value of the building soared, enhancing Mr. Macklowe's reputation as a visionary tycoon.... But as the crisis over subprime residential mortgages spills over into other real estate sectors, causing a severe tightening of credit, there is widespread talk in the industry that Mr. Macklowe is in deep trouble, so much so that he could lose control not only of the newly acquired portfolio but also the G.M. Building and other properties that were used as collateral for short-term debt that must be repaid six months from now."

Aug. 22 (Bloomberg) - TOLL BROTHERS INC. THE LARGEST U.S. LUXURY HOMEBUILDER, SAID THIRD-QUARTER PROFITS FELL 85 PERCENT"

Aug. 22 (TheStreet.com) IS WAMU THE NEXT COUNRTRYWIDE?

Specifically stated in the travails of Harry Macklowe, but running through the other dislocations mentioned, is collateral. With Macklowe, it is collateral in the literal sense. Given the turmoil after August 15, 2007, lenders marked down the value of Macklowe's assets that stood behind his borrowings. As a hunch, his assets were additionally discounted because "he decided to buy a portfolio of prime Midtown Manhattan office towers for nearly $7 billion, using only $50 million of his own money." In other words, when the reliable but jury-rigged, "Greenspan/Bernanke put" becomes unhinged, the (downward) revaluation of collateral is not a cold, hard calculation, but, "I want out," on the lenders part.

  

Don Hogan Charles/The New York Times

Harry Macklowe - August 22, 2007

The FOMC chatted about their magenta and honeydew economy deep into 2008. Federal Reserve Chairman Ben S. Bernanke told an audience of economists on June 9, 2008: "The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so." The recently released 2008 FOMC transcripts show Ben & Co. were not putting on a brave face. They really believed this stuff.

A handful of district presidents operated with a full seabag, and could see the 6% of GDP was not separate from the professor's textbook, FOMC-Approved economy. ("Yes, Ben, 6%. Another "A".)

The lethargy is worse in 2014. Old hands on the Federal Reserve staff who dealt in markets have retired. The professors' minds are more constipated than ever. Federal Reserve Chairwoman Janet Yellen sounds like Alan Greenspan in 2005 - or 1995: The Fed is lifting the stock market, the housing market, and the consequent "channel" from those to consumer spending will fuel "escape velocity."

She could not be more wrong. Consumers are not in a position to increase credit. The Greenspan leveraging of America could only happen once. An extraordinary supplement of consumer spending and credit is needed to save the Holy GDP. Consumer credit debt rose from 105% to 117% during the first Reagan Administration (1980-1985) to 205% in 2007. Total credit (business, household, financial, and government) rose from 150% to 350% of GDP. This will not rise to 500%.

Yellen cannot think differently. Federal Reserve policy will "encourage consumers to spend and businesses to invest, to promote a recovery in the housing market, and to put more people to work." (Janet Yellen, March 31, 2014, National Interagency Community Reinvestment Conference, Chicago, Ill) In the same speech: "We are trying to help families afford things they need so that greater spending can drive job creation and even more spending, thereby strengthening the recovery." The Fed believes the "Wealth Effect" from rising asset prices is the "Channel" to GDP "Escape Velocity." (The first thing we do is kill their vocabulary.)

This channel has never worked as they claim. Michael Feroli, chief U.S. economist at J.P. Morgan, calculates the amount of acquired wealth spent by consumers was 3.8% from 1952 through 2009. That is 3.8 cents of every additional dollar in "wealth." (Another word economists have mangled.) Since 2009, Feroli calculates households have spent 1.9 cents of each incremental dollar, half the historical average. Feroli also found that withdrawal of home equity has been negative for the past five years.

Yellen toted her "wealth" channel to Congressman Frank Lucas on February 11, 2014: "I would agree that one of the channels by which monetary policy works is asset prices, and we have been trying to push down interest rates, particularly longer-term interest rates. Those rates do matter to the valuation of all assets, both [Sic] stocks, houses, and land prices. And so I think it is fair to say that our monetary policy has had an effect of boosting asset prices."

Yellen's theoretical world not only lacks a theory but is at odds with reality. Maybe the Fed can claim a partial victory: the U.S. Census median price for new homes sold in March 2014 rose 13.3% from a year earlier and reached a new record high of $290,000. As one might guess, sales have fallen.

Redfin, a real-estate brokerage firm, calculates house sales have collapsed in 2013's most effervescent Arizona and California housing markets. In Phoenix, inventories rose 42.7% from March 2013 but sales fell 17.4%. Redfin describes what eludes Yellen: "Someone who purchased a $350,000 home in Riverside [CA] in March 2013 with a twenty percent down payment and a 30-year fixed mortgage rate of 3.4% would have a monthly mortgage payment of $1,241. But with prices up 19.6%, the same home would now cost $418,600. At the current mortgage rate of 4.33%, the monthly mortgage payment on that home is now $1,663, a 34% jump from a year ago."

            California Association of Realtors Chief Economist Leslie Appleton-Young recently warned: "Housing affordability is really taking a bite out of the market. We haven't seen this issue since 2007."  This is a remarkable comparison, given that, just seven years earlier, California housing was collapsing faster than London during the Blitz. In October 2007, California Association of Realtors Chief Economist Leslie Appleton-Young announced: "The impact of the credit crunch spread throughout all tiers of the market in September." California statewide median home prices had sunk $58,140 from September 2006 and statewide home sales fell 39% from the year before. The California Association of Realtors "Unsold Inventory Index" increased to 16.6 months, double the level in March 2007. It had been 6.4 months in September 2006. San Francisco Bay Area sales fell 46% over the past year; High Desert sales were 63% lower. (In December 2003, California Association of Realtors Chief Economist Leslie Appleton-Young told her audience the chronic shortage of homes for sale coupled with attractively low mortgage rates would keep the pressure on buyers: "The message is 'Boy, this is the time,' Young said. 'It doesn't look like the situation is going to change any time soon.'")

The rate of home ownership in the United States just fell to the lowest level since 1995: 64.8%. It is not a coincidence that then-Fed Chairman Alan Greenspan started confiscating our interest rates around that time, partly to goose the housing market. He had enjoined Fannie Mae and Freddie Mac to turn their mortgage regurgitations into assembly lines, to quicken the pace of credit flows since the economy was moving to China.

            At the July 1995 FOMC meeting, Greenspan expounded on mortgage growth and the GDP: "[M]ortgage applications for purchasing new and existing homes have been moving up....The home builders data clearly indicate that things are moving. This is important not only because of the importance of the residential construction sector, but also because history suggests that motor vehicle sales and some parts of the residential building industry move together. If there is firmness in the home building area it has to exert, if history is any guide, some upward movement in the motor vehicle area, which would be very useful." Especially useful to a public servant whose annual review consists of the percentage increase to GDP.

            The ownership rate of houses peaked at 69.2% in 2004. The mad rush into home mortgages was only possible through the Fed's perpetual perversion of interest rates. When interest rates are too low, the riffraff banned from Vegas hangs a "Loans" shingle in the pool hall.

It appears Chairman Yellen came close to admitting low rates had destroyed balance in the housing market in her February 2014 meeting with the Congressmen. This is gathered from the phrasing of a question by Representative Patrick Murphy:

MURPHY: "The collapse of the housing bubble and resulting financial crisis devastated the global economy and cost Americans $17 trillion worth of wealth. Many of us assign responsibility for low interest rates and lax capital and leverage standards to the Federal Reserve and then Chairman Greenspan. While I do not believe the Fed caused the crisis, [Come on, Murph! Let it fly! - FJS] its policies certainly helped fuel the Bubble. In June 2009, you said that higher short-term interest rates might have slowed the unsustainable increase in housing prices. With the benefit of hindsight, would measures to slow the housing bubble have been appropriate?"

YELLEN: ".... [P]olicies to have addressed the factors that led to that Bubble would certainly have been desirable. I think a major failure there was in regulation and in supervision, and not just in monetary policy."

            The bureaucrat's utopia. New and more regulation.

            The housing market is not hitting a single cylinder. The Fed cut mortgage rates from 6.5% to 3.3% over five years. Around 80% of mortgage originations are refinancings, not money-purchase mortgages. And now, that has dried up, for the simple arithmetic Redfin described in the Riverside, California market.

The combination of higher payments (delinquencies rise) and lower volume is similar to when Countrywide's loan production sank in the summer of 2007. Mortgage originations from the four big banks (Wells Fargo, Bank of America, J.P.MorganChase, Citi) averaged $300 billion a quarter from 2010 through 2013 (average of $1.2 trillion each year, $300 billion a quarter). They fell to $67 billion in the first quarter of 2014. Total mortgage-backed security (MBS) issuance has fallen from $185 billion in June 2013 to $87.2 billion March 2014.

This is bad for collateral. When credit expands beyond its capacity to fund positive-return projects, asset quality deteriorates This is a dangerous moment: asset prices must not fall, and acceptable collateral must rise at a faster rate, not fall by $98 billion a month, as MBS securitization has since June 2013.  

            House sales affirm life is good at the top. The bottom is getting worse. The National Association of Realtors (NAR) existing home sales data for March 2014 calculates number of houses sold for below $100,000 fell 17% year over year. Those between $100,000 and $250,000, fell 10%. House sales for prices above $1 million rose 14.8% in February 2014 and 7.8% in March 2014. Vacation home sales rose 30% in 2013, from 553,000 in 2012 to 717,000 in 2013.  
 

            Spending at the top must not slacken. Hermès has stationed a baseball glove in its window - with a sales tag of $14,100. To the question, "Why so expensive?" MarketWatch was reminded the mitt is "absolutely top-grade." The Ritz-Carlton in Chicago offers a $100 grilled cheese sandwich, stuffed with 40-year-old aged Wisconsin cheddar that's been "infused with 24K gold flakes." New asset classes include old cars. Classic Auto Funds Limited (CAF) is "launching several investment partnerships using collectable cars as the hard asset." Fund CAF/1 is already up and running, or, at least, in storage: with a 1971 Ferrari Dino 246 GT and a 1964 Maserati Mistral 3.5. The investment partners (conjecture comes from how this ended in 2007) will turn this asset into (discounted) collateral. The investors will then use the borrowed money to buy Facebook shares (passé as that may be) or to bid against Chinese businessman Liu Yiqian, who bought a fifteenth century porcelain cup at Southeby's in Hong Kong for $36 million. Also recalling 2007: how will this collateral look to the lender in a panic? The larger point here is that collateral's velocity cannot slow down, from fatigue or concern. The imaginary value behind assets must keep rising, or all will fall. 

 

            Federal Reserve Chairman Janet Yellen came to the job touted as a "great labor economist." She betrayed an untutored knowledge of labor data during a speech in Chicago on March 31, 2014: "Since the unemployment rate peaked at 10 percent in October 2009, the economy has added more than 7-1/2 million jobs and the unemployment rate has fallen more than 3 percentage points to 6.7 percent. That progress has been gradual but remarkably steady--February was the 41st consecutive month of payroll growth, one of the longest stretches ever."

 

            What jobs have been created during those 41 months? Not the sort that can pay for a house. Before looking at the poor quality, the quantity is absent. Yellen is looking for a renaissance when there are fewer payroll (NFP: non-farm payroll) workers than in 2007.

            In "The Born Again Jobs Scam: The Ugly Truth Behind 'Jobs Friday,'" David Stockman writes on his ContraCorner website there were 138.4 million NFP jobs in December 2007. In March 2014, the total was 137.9 million. There are 500,000 fewer payroll workers today.

            The span from December 2007 to March 2014 is 75 months. Seventy-five months after jobs peaked in 1990 (as we entered the 1900-1991 recession), there were 10 million net new jobs. Seventy-five months after the post-2000 job peak, there were five million net new jobs. In March 2014, we are still half-a-million jobs south of the zero bound.  

Stockman makes the distinction of "breadwinner jobs." Breadwinner jobs produce annual pay of about $45,000. "The Born Again Jobs Scam," lists the breadwinner-job industries and income data as calculated by the Bureau of Labor Statistics.

It is assumed here that only those with breadwinner jobs can buy a house. Short of that, there are methods to finagle a house through student loan and the used-car loan markets, but that is limited.

The Greenspan NASDAQ Bubble peaked in 2000 and breadwinner jobs reached 72.7 million. After Greenspan and Bernanke artificially revved up the mortgage-finance economy through 2007, jobs topped out at 71.9 million in December 2007. By June 2009, the deflated mortgage bubble had cost five million jobs: there were 66.2 million NFP workers in June 2009. By March 2014, there were 68.3 million breadwinner jobs, 3.6 million fewer than in December 2007, a level achieved during the second Clinton Administration. The quality within the breadwinner industries has deteriorated significantly and the population has grown.

             Ben Bernanke's "six percent" also failed because his approach was wholly abstract. Construction and its financing had lost its mind. Today, again, grandiosity is the rule.

Hudson Yards, on New York's West Side, is the largest such development in Manhattan since Rockefeller Center in the 1930s. Residential towers at 15 Hudson Yards and 35 Hudson Yards will rise 910 feet, with 70 floors of "unobstructed views of the of the city and Hudson River.... 15 Hudson Yards will be the ideal place for New York's creative visionaries to live." A search for a perfect resident at 35 Hudson Yards was unavailing.

 

The 52-story South Tower will be the first to soar. That in itself is commonplace. It is when one reads "it is to become the home of the luxury handbag maker Coach," tentatively named "Coach Tower," that securitization of vintage cars looks relatively sane. The Masterplan, on Hudson Yards' promotion website, expects 17,440,000 square feet of office, residential, hotels, shops on 28 acres.

 

When Mayor Bloomberg launched the Hudson Yards initiative, he compared it to Canary Wharf's influence in London. This may not be the most encouraging comparison, at least for the builders, since Canary Wharf crushed the Reichmann Family (Olympia & York), and its creditors, with $20 billion of unpaid bills when it filed for bankruptcy.

 

As to London, the glass cube tower invasion rises as one of the most celebrated skyline additions in decades goes broke. On April 25, 2014, the Gherkin Building was placed in receivership. The following paragraph from Realty Today just about sums up the derangement of minds and finance in 2007: "VG Immobilien purchased the building in 2007 from architects Norman + Foster [Always a red flag for extravagance - FJS] for $1 billion. The Germany-based realty firm financed the deal through a loan, part of which was in Swiss Francs. The currency has gained about 63 percent on the dollar in the last seven years, which ballooned the debt price to a point that it breached levels of debt allowed to be held in the country, reports Bloomberg."

Another cautionary comparison lies partially built but wholly insolvent in Seoul, South Korea. "Dream Hub," a proposed 138-acre building project, midwifed by former Seoul Mayor Oh Se-Hoon (this was to be his ticket to the presidency), has entered bankruptcy. Sparing the details reported by the Wall Street Journal (which published "just the tip of the iceberg"), six years after groundbreaking, the anticipated 150-story, 2,181-foot-tall skyscraper is stillborn, and Oh Se-Hoon will not comment on his foregone objective to turn Seoul "into a center of global commerce."

 

Boston Properties has acquired the groundbreaking (on March 27, 2013) Salesforce Tower in San Francisco. The 1,070 foot, 61-floor tower (expected completion in 2017) will rise 200 feet above Transamerica Pyramid, currently the tallest building in San Francisco, and the west coast. It will "eventually be eclipsed in height by the 73-story Wilshire Grand in Los Angeles." Originally contracted on "spec," meaning the builder did not have a substantial tenant at the outset, Salesforce will rent 700,000 square feet in its namesake skyscraper. Mayor Lee of San Francisco commented: "It's not just about an expanding company. It's about a company that has faith in our city and is demonstrating that. And has faith in the kind of values we try to teach our kids about giving back."

 

These mayors. ("Boston Mayor Martin Walsh said [in late April] he wants to make his city the tech capital of the world.... And he's "not afraid to build a skyscraper for [high-tech] workforce housing.") What does that mean? A case might be made that Boston Properties is the model of faith and charity. Salesforce "had operating losses of $35 million, $111 million, and $286 million the past 3 years?  (Yes, the losses are increasing in size.) On top of that, CRM has net debt of over $1 billion on their balance sheet." (Thank you, Kevin Duffy at Bearing Asset Management) San Francisco as a whole is grossly overrun by social media operations at unsustainable rents that have a whiff of Webvan, the San Francisco Internet grocer that went public in 2000, broke in 2001, after placing a $1 billion order with Bechtel to build grocery warehouses.

 

            Despite mounting evidence the house and skyscraper markets are long in the tooth, they continue to rise. Harry Macklowe, undeterred after losing the GM Building (and seven others following the 2007 credit crunch), received FAA approval to build "the tallest residential tower in the western hemisphere." If all goes as planned (it is under construction), the 95-story apartment house, at 432 Park Avenue, will glower down upon Central Park, with "[p]rices at the proposed 1,396-foot tall skyscraper start[ing] at $20 million for three-bedroom units with libraries. Full-floor penthouses with 360-degree views cost up to $95 million. A one-bedroom can be had for close to $7 million." Harry "Macklowe claims he has already sold one-third of the 123 units, but [CORE broker Jarrod Guy Randolph] worried about pricing."

            Come on, Jarrod. Follow Harry. He didn't even graduate from college. Parents and students paying extortionist tuitions, take note.

 

Vision of 432 Park Avenue: Monument to 

the Bernanke/Yellen Zero-Bound

Silent Minority or Majority?

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (Aucontrarian.com, 2009)

            Understanding what the people think (popular opinion) is a difficult task. It is not the same as what the experts and media tell us to think (public opinion), but the two have much in common. The correct judgment of if, or when, popular opinion will say "enough" to public opinion's mistreatment of the people could produce a multi-trillion dollar payoff.

            Without personally having a clue if or when that time is approaching, it is as a public service that an undercurrent of American opinion is hereby forwarded.  

Federal Reserve Chairman Janet Yellen will gush with the media on March 19, 2014. MarketWatch asked its audience just what the Federal Reserve chairman should be asked:   

From MarketWatch - What's your question for Janet Yellen? March 18, 2014

 

Most recent responses at 2 PM, March 18, 2014:

ron swaim 33 minutes ago: "Why she been incompetent her entire life which matches every single person in his administration, i.e., Kerry, Clinton, holder, etc.?!?!?!?!?"

Sammy Edwards 1 hour ago: "Why don't you dye your hair?"

Lori Smith 1 hour ago: "On that I would say give her a break. At least she is trying to grow old gracefully. Look at Hitlary that hairs dyed and it still doesn't stop the ugly anyway."

PHILLIP LARREA 1 hour ago: "If 2.5% variance is defined as price stability, why does this variance only apply to inflation, and not deflation?"

Jay Lazo 2 hours ago: "When will it all end ?"

  

Rodney Olives 2 hours ago: "Hey Janet,  Sooooooo....what are you doing after the press conference? Wanna grab a latte?"

John Warren 2 hours ago: "why do old people feel a need to continue hanging on as though they are important?  oh yes, gives mw something to print about, i forgot"

Jay Lazo 2 hours ago: "Any relation to Moe Howard ?"

MISSINGMW 2 hours ago: "I would like to know when you are willing to let savers participate in the game? The economy has lost a lot of buying power in the last 5 years. Not everyone wants to take risk, some that are retired are looking for preservation of capital. If we do jump off the deep end will be considered as too big to fail and be made whole again just like the banks?"

             From the above (only one of the latest 10 questions was deleted, due to length) one might think the public is less pleased with the Federal Reserve than the media establishment would like us to believe. But, one must then ask why the hostility was similar in questions posed before Federal Reserve Chairman Ben S. Bernanke held a press conference in December 2012:

What's your question for Ben Bernanke? WASHINGTON (MarketWatch) December 12, 2012 - "Bernanke Claus is coming to town, and the bearded central banker from his helicopter sleigh is about to drop more cash on the U.S. economy specifically because it's been more naughty than nice....MarketWatch invites you to ask your question, in the Story Conversation below. MarketWatch may take or amend your question when it's our turn to query Bernanke":

Robert Drobot  When will the FED permit an independent source to perform a complete and comprehensive audit of FED books? Why don't you support an end to FED control of America's financial matters?

Nick Henderson  What I would ask is how Mr. Bernanke and his associates draw a moral distinction between what they do and what a criminal counterfeiter does?

jim davis  Bernanke, why do you continue to steal from prudent savers, retirees and widows by devaluing the dollar year after year?

Shambrook Whoppers Are you a traitor or you just hate America ?

Ms. Judy Rosner  When are you going to retire?

             These were the five most recent questions posed to Bernanke at the time. Maybe others were more congenial, but the fact is, in both the December 2012 and March 2013 samples, every question copied was hostile, except (possibly) the hair-do inquiries. (As for the latte invitation, my advice for her chairmanship is to decline.) We could spend hours attempting to attribute the difference between public opinion and the menacing fragrance wafting from the inquisitive bunch quoted above. To add one speculative comment: the type of person who responds to such a question on a website may betray a sinister disposition. Or, maybe not. 

 

Another Go

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (Aucontrarian.com, 2009)

Advocates for Federal Reserve disclosure harp on the five-year wait for FOMC transcripts. The reasoning goes that institutions in a democracy should be more democratic: let the people know what the Fed plots behind closed doors. The question arises: to what end?

            The 2008 transcripts were released in late-February. Most media operations published stories about the Fed's absent-minded professors who missed the importance of failing financial institutions during 2008. This was not news. That has been described over the past five years, among other places, in Panderer to Power. The release, however, was an opportunity to remind investors, retirees, florists, and students receiving government financing of their precarious state.

Now, the story of the 2008 transcripts has died, without much in the way of help to the bewildered. Granted, bewilderment is the general state of affairs today, whether at the FOMC, among the media, the people, and those who cannot understand how such as state-of-affairs continues. Nevertheless, the opportunity exists to elevate comprehension. This was the goal in"Those FOMC Transcripts: Watch Out Below," (February 26, 2014). The effort continues, here, to describe how the whirlwind of noise escaping the Eccles Building reflected through the self-serving interpretations of the Wall Street experts is so perilous. 

 

  From the March 3, 2014, King Report: "Due to quivering Fed officials' incessant assertions that the Fed would halt or even reverse QE tapering if economic conditions warrant, an increasing universe of investors and traders see little or no downside equity risk."

There we have the reason various U.S. stock indices alternately hit all-time highs. We should not need The Charge of the Light Brigade to worry investors. The February 21, 2014, issue of Grant's Interest Rate Observer includes a front-page reminder that pre-tax profits of U.S. corporations as a percentage of G.D.P. are the highest since records began in 1946; after 382 of the S&P 500 reported fourth quarter results, average year-on-year gain on profit has been 10.7%; of the same cohort, revenue growth has been 0.7%. Presumably, these are not adjusted for price inflation which is currently raging in the United States, all claims to the contrary deserving ridicule.

At the September 16, 2008, FOMC meeting, Chairman Ben S. Bernanke was not blind to financial woes. He declared: "Conditions clearly have worsened recently, despite the rescue of the GSEs, the latest stressor being the bankruptcy of Lehman Brothers and other factors such as AIG." He did not stop there, acknowledging "[a]lmost all financial institutions are facing significant stress, particularly difficulties in raising capital, and credit quality is problematic, particularly in residential areas."

Nevertheless, Bernanke was not troubled. He concluded this discourse by opining: "We may have to wait for some time to get clarity of the last week or so." As discussed in my first go at the 2008 transcripts, the FOMC voted to sit still, voting unanimously to keep the fed funds rate at 2.0%. The reason for such repose is the central-banking fable that finance can be ignored; its Dynamic Stochastic General Equilibrium model will produce a monetary solution to address a dyspeptic stock market or a dollar meltdown.

In the same discussion as quoted above, Chairman Ben said: "We have been debating around this table for quite awhile what the right indicator of monetary policy is." He mentioned some proposed numbers, but, in any case: "I think the only answer is that the right measure is contingent on a model." And: "[Y]ou have to have a model."

(On a different topic, unrelated to the main discussion here, Simple Ben declared: "The ideal way to deal with moral hazard is a well-developed structure that gives clear indications.... We have found ourselves in this episode in a situation in which events are happening quickly, and we don't have those things in place." He had been Fed chairman for almost three years yet mentions the Fed's negligence in not addressing Too-Big-to-Fail banks as if he forgot to order corn-on-the-cob for the Fed's clambake.)  

This slapdash approach has not changed, is obviously unattached to the real world, and will leave Chairman Yellen helpless the next time markets and financial institutions melt. The otherworldliness of it all is captured in this discussion itself. The world's financial backstop (our man Ben) goes on for several pages at a time when Goldman Sachs and Morgan Stanley could not get funding from a counterparty. This is quite different than at the FOMC meeting on September 29, 1998, after Long-Term Capital Management went belly up. Then-Chairman Alan Greenspan took on a different personality from previous FOMC meetings. He demanded answers to questions about collateral and leverage that made him wonder if modern-day bankers knew what they were doing. (He recovered from this revelatory meeting as soon as LTCM faded, in a sycophantic stunt before the derivatives lobby that pays him so extravagantly today. See pages 189-190 of Panderer to Power. )

Of course, one wants to know: are we up a creek with Chairman Janet Yellen in command? Let us compare and contrast two speeches delivered on February 27, 2014. (I thank Doug Noland, at the Prudent Bear Fund for his transcription of Dr. Issing's comments in Bundesbankification .) 

Otmar Issing, former chief economist of the Bundsebank and ECB, spoke at the Bundesbank Symposium on Financial Stability, in Frankfurt, on February 27. Unlike Bernanke and Yellen, Issing thinks financial bubbles have consequences: "[P]rice stability is not enough. And I think this has dramatic consequences for the conduct of monetary policy. For me, the implication is very clear: policy which relies on a forecast (model) based on a real economy only without a financial sector - without taking into account money and Credit in a sensible way - is not anymore state of the art." Was it ever? Possibly when 59% of American profits came from manufacturing and 9% from finance. That was in 1950.

Issing never made headway during the mortgage madness: "I'm reminded of many, many meetings here or especially in the U.S. with my friends from the Fed. Their reaction was absolutely clear: when I referred to a potential bubble in real estate, what I heard always was 'never in the last 50 years have real estate prices fallen on a nationwide aspect.' For me, this was not a comfort."

He did not stand a chance of making headway with Bernanke and Yellen in 2006 and 2007: "[T]heir reaction to my critique or argument was very relaxed: 'In the meantime, we have had much higher GDP, higher employment, more houses, etc. So compared to the cost of raising interest rates would be much too high - much too high.' I have never seen so far the comparison of the high cost of the mess we are in if we take this 'risk management' approach."

Issing addressed the hostile stupidity of the academics in charge: "I learn that we're allowed to talk of Bubbles now, which was out of the question for a long time in research - "the buildup of Bubbles goes very slowly - softly - but the collapse goes very fast. So it's obvious that that the [central] bank should react in a decisive way one prices collapse." I think Issing may not have ventured to the U.S. lately. The "bubbles do not exist" lobby is pressing its point once again, and, once again, it is from the universities.

Back in Washington, on the same day, Federal Reserve Chairman Janet Yellen talked to the Senators. She is lost in space. A few statements that will not receive interpretation:

"Fiscal policy really has been quite tight and has imposed a substantial drag on spending in the U.S. economy over the last several years..."

"I'm slightly surprised that he [Fed Board Governor Daniel Tarullo] said we are 'nowhere close' [on resolving Too-Big-To-Fail] because I personally think we've made quite a lot of progress in putting in place regulations that will make a huge differences [sic] to this...."

"I agree that an environment of low rates ... and we have had a long period of low interest rates ... can give rise to behavior that poses threats to financial stability and therefore we need to be looking at that very carefully and we are doing so in a very thorough way, I believe."

"Since the financial crisis and the depths of the recession, substantial progress has been made in restoring the economy to health and in strengthening the financial system."

Closing on a higher plane:

Shirley Temple died recently. There have been many accolades but I don't know if the tributes have discussed her admirable character. She serves as a model for children and adults alike.

Her talent was described by Will Friedwald in the Wall Street Journal: "The most obvious thing to remember Shirley Temple for - a point so overwhelming that it barely needs to be stated - is that she was the greatest child star in the history of not just the movies but all of popular culture. No other youngster so dominated the box office and no other individual, other than Franklin D. Roosevelt himself, did more to deliver both Republicans and Democrats alike from the Great Depression. But what isn't said often enough about Shirley Temple Black is that when you compare her to the many dancing ladies in the movies who couldn't really sing (Ginger Rogers, Rita Hayworth, Cyd Charisse) and those terrific singers in films who danced merely passably (Judy Garland, Doris Day), Temple emerges as the major female triple-threat of her era and since. She was a singer of uncommon ability, capable of putting a song over with the best of them in an age when the competition was Al Jolson and Bing Crosby; a dancer worthy of comparison with Fred Astaire, Gene Kelly and even her longtime costar, the great African-American tap dancer Bill "Bojangles" Robinson; and an actress who could break your heart just by looking at you."

She was born with talent; it was her unalloyed resolution that made her an exceptional person. Each morning when she showed up on the set, she knew her lines, her steps, and her songs. This five, six, and seven-year-old girl was angry, joyful, or remorseful when the shooting started. The studio did not require second takes on Shirley Temple's account. It was said her mother pushed her into show business, but such strength is a habit that comes from within. She could have demanded the concessions movie stars are noted for exacting. She never did. Her talent could never have achieved the praise bestowed by Will Friedwald without habits "rooted deep in the whole personality. They have to be cultivated like any other habit, over a long period of time, by experience." (Flannery O'Connor) Few can match her industry, but, as was said above, she is a model of character.

            The actress Louise Brooks wrote: "Anyone who has achieved excellence knows it comes as a result of ceaseless concentration."