The Wall Street Examiner » Must Read Get the facts. Thu, 02 Apr 2015 03:27:06 +0000 en-US hourly 1 The Economic Wall Straight Ahead Is Hidden Behind False Signs Of “Recovery” Wed, 01 Apr 2015 20:58:25 +0000 This is a syndicated repost courtesy of David Stockman's Contra Corner » Stockman’s Corner. To view original, click here.

This morning I had left the TV mistakenly tuned to CNBC with the sound on—-and unavoidably caught another bullish strategist jawing about the US economy’s awesome strength. This one was peddling as exhibit #1 the recent surge in C&I loans, arguing that it is a sure sign that business is gearing up for a post-winter boom.

It turns out that the $1.8 trillion of C&I loans outstanding at the end of February, in fact, were up by 14% since January 2014. But then again, when are they going to find a guest which wasn’t born yesterday. That is to say, an analyst who is capable of looking at the historic context in which the latest data points are anchored, the quality of the numbers at issue and the deeper implications of the indicators.

In this case, like most of the blizzard of bullish factoids spewed out each day on bubble vision, the purported business lending boom is not all that. The upward blip during the last 13 months was from a level which had first been reached way back in October 2008. In other words, it had taken 63 months to dig out of the deep crater that had resulted from the liquidation of the mountains of bad debt that existed on the eve of the financial crisis.

Next consider the quality and content of the purported “surge” in business lending. The skunk in the woodpile is patently obvious in the graph below.

The “surge” is almost entirely due to financial engineering and LBOs. In fact, virtually all of the growth in business lending during the past two years is due to a dramatic rise in leveraged loans from the deal business. Thus, overall C&I loans are up a modest $220 billion since October 2008, but 100% of that gain is accounted for by the 37% rise in leveraged loans outstanding since 2008.

Needless to say, even a quick peak under the hood results in just the opposite conclusion to that offered by CNBC’s bull peddler of the day. Back in some dusty economic textbook a few decades ago, it might have plausibly been argued that rising C&I loans were evidence of business expansion and a rising requirement to fund working capital and plant and equipment.

But after two decades of central bank financial repression and grotesque mis-pricing of debt, we now have an irrational scramble for yield which is actually attracting funds into anti-growth, anti-jobs and capital destroying deployments—-the opposite of the historic implication of rising business lending.

The fact is the LBOs and leveraged recaps which utilize this booming leveraged loan market invariably involve the strip-mining of cash out of enterprises in order to pay debt service, not the acquisition of new productive capital. Stated differently, this is Wall Street driven lending that arises not because businesses need funding for productive assets, but because speculators, money managers and banks desperately need “yield” in their portfolios.

Accordingly, the proceeds from such loans are more or less put to happenstance use—-and invariably end up as dividends and fees to the private equity shareholders of the leveraged borrowers.

The graph below provides the smoking gun evidence that the recent upturn in reported C&I loans is yield driven. To wit, the recently surging volume of leveraged loans was being taken down by a recrudescence of the CLO market (collateralized loan obligations).

After being essentially shutdown during the financial crisis and for several quarters thereafter, CLO issuance has come roaring back. This was especially the case after mid-2012 when the Fed’s monster QE programs drove treasury and investment grade yields toward the zero bound.

Image result for images of new CLO issuance

The truth of the matter is that in an honest free market, financial engineering contraptions like CLOs would not even exist. These are essentially “pop-up” funds that appear out the bowels of Wall Street when the Fed’s serial financial bubbles reach an advanced stage. They involve issuing debt to buy debt with some internal fund-level leverage thrown in to top-up the returns.

Stated differently, CLOs are just another financial arbitrage play in which the fast money scalps a cut out of pointless financial churning. These CLO funds are essentially artifacts of financial technology that provide no value added to the economy; and, when the inevitable main street downturn arrives, they disappear as fast as they came in a hail of write-offs and investor losses.

The only thing CLOs actually add to the financial system is instability. In fact, CLOs embody the very worst kind of liquidity and maturity mismatch. The underlying whole loans are hard to sell and have 5-7 years terms. By contrast, CLO debt is sold by Wall Street in a “bespoke” market. That is, the yield parched investors who get suckered into buying these securities are free to sell them at will——but invariably into a dealer market which “gaps” massively downward when the panic starts.

So rather than looking at the financing input into the main street economy, it would be far more sensible to look at the output. Namely, the rate of investment in new productive assets that will support productivity and output growth in the future.

Needless to say, there is none. The massive distortion and deformation of financial markets fostered by the Fed is encouraging the liquidation of American business, not its expansion. As shown below, after accounting for the depreciation of assets in current production, real net investment in American business has not even yet recovered to its 1999 level.

Net Real Domestic Business Investment

So the real story is not about business investment growth but about financial engineering. In that regard, the Wall Street claim that American business is healthier than ever before and is sitting on mountains of cash just waiting to be put to work is rank nonsense.

Yes, non-financial business have generated about $500 billion in additional cash since the financial crisis. But, on the margin, that was all borrowed money—since total credit market debt outstanding is up by nearly $2 trillion during the same seven-year period. Overall, the net debt of American business is at its highest level in history.

Non Financial Business Net Debt- Click to enlarge

One of these days, even the Wall Street bulls are going to be compelled to look under the hood of their happy time numbers. The story above is only a mild example of what they will find.

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We’re Going Down: US GDP Growth For Q1 2015 Is Now … 0 Wed, 01 Apr 2015 18:17:46 +0000 This is a syndicated repost courtesy of Confounded Interest. To view original, click here.

That’s right, sports fans! The Atlanta Fed’s GDP NOW within quarter GDP tracker now has Q1 GDP growth for q1 2015 at (drumroll) …. 0.


The reason? Structures keeps declining.


As Bruce Springsteen “sang” We’re going down.


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TPP’s Import-Fueling Potential Should be No Mystery Wed, 01 Apr 2015 17:27:29 +0000 This is a syndicated repost courtesy of RealityChek. To view original, click here.

Matthew Yglesias, who covers economics for the Obama-worshiping, is puzzled. Why are American labor unions so passionately opposed to the president’s Pacific Rim trade deal? Among the reason for his mystification: his confidence that “the TPP actually does almost nothing to increase imports of foreign manufactured goods into the United States” that could cost union members their jobs.

Yglesias provides no evidence to support his proposition; perhaps he is swallowing the White House line that, since other economies negotiating the Trans-Pacific Partnership (TPP) are much more closed than the U.S. economy’s, an agreement is sure to bring down more foreign trade barriers than American. But even if this outcome were likely – and I’ve explained why it’s not – all Yglesias needed to do was to peruse the Census Bureau’s website. The trade data he would find make clear that the U.S.-Korea Free Trade Agreement has had exactly that import-super-charging effect.

The Korea deal (KORUS) matters because the Obama administration has described its “high standards” terms as the blueprint for TPP. And the numbers show that since it went into effect, goods from Korea have flooded into the U.S. market. Since KORUS’ March, 2012 implementation, American goods imports from Korea have increased on a monthly basis by 33.65 percent (through this past January – the latest detailed trade data available). U.S. goods imports from the world as a whole during this period? They’ve actually fallen – by 4.97 percent.

Now the sharp-eyed among you will note that the above is not really a fair comparison. For America’s imports have been greatly restrained recently by the domestic energy production revolution, and South Korea doesn’t have oil and natural gas to export. Yet if you strip oil out, you find that U.S. goods imports between March, 2012 and January, 2015 rose only 6.18 percent on a monthly basis – less than one-fifth as much as the Korea increase.

Moreover, there’s a pretty compelling explanation for why the approach that has clearly failed with Korea will deliver similar results if TPP is approved: Korea, Inc., the secretive web of relationships between Korea’s government and so-called private sector that aims above all to push exports and boost trade surpluses, has not only survived KORUS’ efforts to limit its pervasive use of non-tariff trade barriers and subsidies. It’s still flourishing. (Click here to see how utter inability to analyze these practices threw Washington’s official projections for KORUS and similar deals off wildly.) That’s mainly why TPP, which includes Japan and other Asian countries using similar strategies, looks bound to flop even more spectacularly. And why America’s unions, which actually know what they’re talking about, are much more trustworthy on trade deal results than remarkably un-curious journalists.

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Big Swing And A Miss! ADP Payrolls Wed, 01 Apr 2015 14:15:27 +0000 This is a syndicated repost courtesy of Confounded Interest. To view original, click here.

Private sector employment increased by 189,000 jobs from February to March according to the March ADP National Employment Report®.

The report, which is derived from ADP’s actual payroll data, measures the change in total nonfarm private employment each month on a seasonally-adjusted basis. It rose by 189,000 but was expected to rise by 225,000 in March.

Face it. The trend for ADP payroll additions is less than impressive.


And the 10 year US Treasury yield slumped accordingly.


And the S&P 500 index slumped accordingly as well.


That was a big swing and a miss on the ADP payroll report! Another Yellen throwing curve balls at the economy.


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Mortgage Purchase Applications Rise Wed, 01 Apr 2015 13:52:37 +0000 ]]> This is a syndicated repost courtesy of Confounded Interest. To view original, click here.

Things are getting better in the residential mortgage market at least compared to last year, one of the worst ever.

Mortgage applications increased 4.6 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending March 27, 2015.


The unadjusted Purchase Index was 7.6 percent higher than the same week one year ago.


The seasonally adjusted Purchase Index increased 5.71 percent from one week earlier, but remains 66 percent below the peak years of 2005.


The Refinance Index increased 4 percent from the previous week. Things have not been the same since the mortgage rate surge in May 2013.


“There was a broad based increase in mortgage applications last week relative to the week prior. The increase in purchase volume was led by a nearly 6 percent increase in both conventional and government markets, perhaps signaling that households are finally ready to begin the home-buying season,” said Lynn Fisher, MBA’s Vice President of Research and Economics.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 3.89 percent from 3.90 percent, with points decreasing to 0.36 from 0.37 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

So, despite Magic Janet and The Federal Reserve, mortgage purchase applications remain stalled.



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Russian Manufacturing PMI: March 2015 Wed, 01 Apr 2015 11:27:00 +0000 This is a syndicated repost courtesy of True Economics. To view original, click here.

Russian Manufacturing PMI (Markit & HSBC) for March came in with new disappointment: the indicator slipped to 48.1 from 49.7 in February. This marks the second lowest reading in the series since June 2009 (the lowest reading since June 2009 was recorded in January this year at 47.6).

from Markit release: “production and new business both recorded mild declines. Employment also fell, but at a weaker rate with consumer goods producers recording modest growth. There was some positive news on the inflation front, as input and output prices continued to rise, but to much slower degrees than seen at the start of the year”.

Overall trend toward deepening contraction in the Manufacturing remains:

Ironically, February improvement in PMI to 49.7 (still below 50.0) means that 3mo average for Q1 2015 is now at 48.5 which is better than 3mo average for Q1 2014 (48.3), if only marginally. This is despite the fact that in March 2014, PMI was reading 48.3 against 48.1 in March 2015.

As reminder, Russian Manufacturing PMIs first slipped below 50 in July 2013 and remained below 50 in 15 months out of the last 21 months.

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Six out of Seven Signs the US Economy is Weaker in Q1 Tue, 31 Mar 2015 20:22:00 +0000 This is a syndicated repost courtesy of True Economics. To view original, click here.

That economic recovery in the U.S. – the engine for growth in far away places, like Ireland, the hope of the IMF, the beacon of the dream that debt stimulus is a fine way to repair structurally weakened (let alone devastated – as in the Euro area) economies is… err… coughing diesel:

Source: @M_McDonough

In basic terms, five out of six tracked Economic Surprise sub-indices are in the red now, with four of them in the red for some time. And the overall Bloomberg Economic Surprise index is in the red, and has been in the red for most of the Q1. And the overall index is falling in steep ticks… which is not good… not good at all.

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The Most Effective QE of all QEs Tue, 31 Mar 2015 18:14:00 +0000 This is a syndicated repost courtesy of True Economics. To view original, click here.

In the previous post I shared my view of the QE. Here is the best, most succinct summary of the effectiveness of the ‘most effective’ of all recent QEs: the US example via @Convertbond:

Nails it.

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The Fed’s Love Call: NYSE Margin Debt Increases With Fed’s ZIRP Policies Tue, 31 Mar 2015 18:02:19 +0000 This is a syndicated repost courtesy of Confounded Interest. To view original, click here.

Call it The Fed’s Love Call.

The NYSE Member Firm Debit Balances in Margin Accounts have boomed along with The Fed’s zero interest rate policies (ZIRP) and the massive expansion of The Fed’s Balance sheet.


Here are Nelson Eddy and Jeannette MacDonald singing “The Fed’s Love Call”.


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For Now, the Long, Strange Trip is Set to Continue Tue, 31 Mar 2015 16:27:27 +0000 This is a syndicated repost courtesy of RealityChek. To view original, click here.

If you’re totally confused about the state of the U.S. economy these days, you’re hardly alone. A quick perusal of recent economic commentary shows that the supposed best economic minds in the country are hopelessly befuddled, too – only they don’t seem to know it. Our leaders’ inability to figure out whether the current recovery is a sign of genuinely improving economic health, or mainly the product of Federal Reserve-supplied steroids, is especially critical these days. For the Fed is seriously considering putting the economy on a cold turkey path.

It’s clear that we can dismiss President Obama’s bold State of the Union claim that America has “turned the page” and had enjoyed a “breakthrough year” economically in 2014. Growth did accelerate in the middle of last year, and the unemployment rate (conventionally measured) is now about half what it was at the recession’s nadir.

But since peaking (by recent standards) at a five percent annual rate in the third quarter of last year, inflation-adjusted GDP growth slowed to 2.2 percent in the fourth quarter, and the first quarter 2015 figure will be lucky to be that high. Still sluggish wage improvement, moreover, indicates that most of the nation’s new jobs have been lousy – more specifically, nowhere near good enough to support the kind of responsible spending needed for real economic liftoff. Moreover, even the best official numbers can’t reveal whether the recovery is mainly real, and sustainable, or mainly artificial, and highly vulnerable to the return of interest rates to quasi-normal levels.

Maybe Janet Yellen, Chair of the Federal Reserve, has it figured out? Judging from her latest public remarks, not even close. Speaking March 27 at a conference sponsored by the San Francisco Fed, Yellen repeated the central bank’s “serious consideration to beginning to reduce later this year some of the extraordinary monetary policy accommodation currently in place” because its “data dependent” policy approach has finally revealed “substantial” recovery in the nation’s labor markets that she considers likely to continue because of faster growth, and the expectation that very weak recent inflation rates stem mainly from “transitory” factors.

Yet in the same speech, Yellen warned that

we must bear in mind that these very welcome improvements have been achieved in the context of extraordinary monetary accommodation. While the overall level of real activity now appears to be much closer to its potential than it was a year or two ago, the economy in an ‘underlying’ sense remains quite weak by historical standards, for the simple reason that the increases in hiring and output that have been achieved thus far have required exceptionally low levels of short- and longer-term interest rates, reflecting a highly accommodative stance of monetary policy. Interest rates have been, and remain, very low, and if underlying conditions had truly returned to normal, the economy should be booming.”

Her (weird) bottom line? As Yellen initially announced in her press conference following the last Fed policy-setting meeting, “the appropriate time has not yet arrived” even to start reducing the supply of easy money. But the economy might show enough signs of genuine strength to “warrant an increase in the federal funds rate target sometime this year” – i.e., sometime in the next nine months. That would be one heckuva turnaround in that period of time.

But maybe no one associated with government knows what they’re talking about, and we should turn to the private sector. Maybe indeed. But the newest economic forecasts from the National Association for Business Economics shouldn’t inspire much confidence there, either. According to the NABE consensus, 2015 will see inflation-adjusted annual U.S. growth rise from 2.4 percent all the way to 3.1 percent. The unemployment rate should fall even further (though slowly), wage growth will pick up gradually, consumer spending will advance faster – and corporate profit growth will fall “sharply.”

The NABE seems to see the strong dollar and its effects on U.S. exports (making them more expensive than their competitors) as a major reason for Corporate America’s comparative woes. But not only are exports still a relatively small share of the economy. The most authoritative projections anticipate the United States growing faster than most of the rest of the world for the near future.

And here’s the final (for now) complication: Where Yellen is unmistakably right is in her pointed reminder in San Francisco that, unless the Fed changes its telegraphed plans radically, any interest rate hikes it approves for the time being will be tiny, and announced very gradually. In other words, the U.S. economy will remain on its current, long, strange drug-induced trip indefinitely.

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