Tuesday, June 4, 2013

19 Cities Where Americans Are Struggling To Get By

American households are under stress again, according to the latest consumer distress index by CredAbility.

“Despite the growth in jobs and an improved housing market, our index shows that the average U.S. household has seen little improvement in the past year and took a step back in 2013’s first quarter,” according to Phil Baldwin, CEO of CredAbility.

Baldwin is referring to the rise in payroll taxes at the start of the year, which has forced people to save more.

CredAbility adds that 49 million people are still on food stamps, and nearly 12 million are still unemployed.

American households on average scored 70.73% in the Q1 Consumer Distress Index, down from 71.77% in Q4. A reading below 70% indicates a state of financial distress.

The report measures financial distress in households in metro areas with a population of over 2 million, measuring employment, housing, credit, household budgets, and net worth.

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Stocks Have Fallen Into The Red

Sam Ro | May 22, 2013, 3:33 PM | 4,004 | stocksGoogle Finance

After wobbling in the green for most of the morning, stocks are now in the red.

Markets have been digesting Fed's prepared remarks and the Q&A from this morning's testimony to the Joint Economic Committee.

Bernanke's key point: premature tightening of monetary stimulus risks slowing or ending the recovery.

This caused stocks to spike, the dollar to sink and gold to surge.  At one point, the Dow was up by over 150 points.

However, the market pared much of those gains after Bernanke said that the Fed could taper its bond purchases in the next few meetings if the economic data supported it.

The minutes of the Federal Open Market Committee, which were released at 2:00 PM ET, also had a hawkish flavor to it.

"FOMC minutes show a willingness to taper asset purchases this year. We expect the taper will begin in either late Q3 or early Q4," said Deutsche Bank's Joe Lavorgna.

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If Japan's Economy Recovers, It Could Settle One Of The Most Important Questions In All Of Economics

The talk today is about Japan.

That's in part because the stock market just hit a brand new 5.5 year high. It also comes amid increasing evidence that domestic demand is picking up, thanks to a new slew of stimulus measures, which combined are known as "Abenomics."

If the domestic economy comes roaring back to life, it will help settle one of the most important questions in economics: Can monetary stimulus be effective, when interest rates are at zero? Economists talk about the challenges of the "Zero Lower Bound" all the time.

In an interview with Business Insider last December, Goldman Sachs chief economist Jan Hatzius states:

...one of the big lessons that we’ve taken away from the past few years is that the zero lower bound on nominal short-term rates is a really big deal because it does get quite a bit more difficult for central banks to provide stimulus once you’ve hit that zero bound.

If what Japan is doing (aggressive inflation targeting + quantitative easing) works to stimulate the real economy, it will be a strong point in favor of the idea that the Zero Lower Bound is not an iron barrier that makes monetary policy less effective, but rather a point where Central Bankers must merely show more creativity and determination to keep easing.

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Here's The Chart That Says Bernanke Is Wrong And The Future Won't Be Great At All

Saturday morning, Federal Reserve Chairman Ben Bernanke told graduating Bard College students why he believes the future will be better.

In theory, this is a pretty banal argument, especially in a graduation speech.

But it looks a little different coming from an conscientious academic.

Halfway through the speech, Bernanke presents the evidence of those who argue against this view — that actually, our best, most innovative days are way behind us.

In a footnote, Bernanke discusses the folks he's really calling out.

Among them is Robert Gordon, who last year published a paper highlighting not one but six headwinds that suggest future growth will pale in comparison to the advances of the 20th century's technological advances and subsequent GDP growth.

The headwinds are:

The end of the “demographic dividend” Rising inequality Input price equalisation stemming from the interplay between globalisation and the internet The twin educational problems of cost inflation in higher education and poor secondary student performanceThe consequences of environmental regulations and taxes that will make growth harder to achieve than a century ago The overhang of consumer and government debt

Here is the chart Gordon uses to make his case, showing real, relative GDP growth over the past few centuries.

It's basically what Bernanke is arguing against:

Gordon writes:

...doubling the standard of living took five centuries between 1300 and 1800. Doubling accelerated to one century between 1800 and 1900. Doubling peaked at a mere 28 years between 1929 and 1957 and 31 years between 1957 and 1988. But then doubling is predicted to slow back to a century again between 2007 and 2100.

To be honest, it's difficult to say whether Bernanke seals the deal versus Gordon. He basically ends up saying that he doesn't really know what will happen, but that everything has always kept changing, so there's no reason to suspect the future will be any different.

As he himself concludes in this less-than-ringing endorsement of coming advances in society, " I wish you the best in facing the difficult but exciting challenges that lie ahead."


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Proof That The US Housing Market Is Finally Starting To Look Normal

Earlier today we saw that existing home sales climbed 0.6% to a rate of 4.97 million units in April. This missed expectations but was the highest pace since November 2009.

But the best news in the report was that distressed sales, which includes foreclosures and short sales, only accounted for 18% of sales.

This was down from 21% in March, and 28% a year ago.

Foreclosures accounted for 11% of sales and sold for an average discount of 16% below market value. Short sales accounted for 7% and sold at a 14% discount. 

"That’s the lowest reading since the NAR started collecting these data in 2008," wrote Capital Economics' Paul Diggle.

"Just 15 months ago, distressed sales accounted for 35% of all existing home sales.  Put another way, distressed sales are down 29% y/y while non-distressed sales are up 25%. The market is starting to take on a semblance of normality."

He also pointed out that inventory while low, is rising as rising home prices are boosting confidence. "The increase in the seasonally-adjusted months' supply of unsold stock in April, from 4.9 to 5, was slight and not a threat to continued house price gains."

Here's a look at existing homes for sale since 1983:

existing home salesCapital Economics

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Goldman Is Selling The Last Of Its Stake In A Chinese Bank, And Communist Officials Are Probably Pretty Annoyed

Goldman Sachs bought a stake in the Industrial and Commercial Bank of China before it was cool — before it had the 2nd largest IPO in the history of the world in 2006, and before it was the largest bank in the world by market cap.

Initially, Goldman owned 4.9% of the bank, whose stock is up 22% over the year. The stock's up 57.95% since its listing on exchanges in Shanghai and Hong Kong. And adding to that good news, last month, despite signs of a slowdown throughout China, ICBC reported a 12% increase in Q1 profit, according to Bloomberg.

But not even love like that lasts forever. Goldman has been unwinding its position in this stock for years, and today the Wall Street Journal reported that the affair is officially over. Goldman could raise $9.7 billion selling its remaining ICBC shares.

It sounds like a lovely goodbye, but the relationship between Goldman and ICBC has been rocky. Goldman sold stakes in the bank five times since 2006, each time analysts have pointed to a variety of reasons — simply raising cash being one of them.

Another was that ICBC is a volatile stock — in 2010 the Goldman made $747 million on its stake. Then by late November of 2011, it had lost $905 million on the stock and was selling $1.54 billion of its stake, Reuters reported.

From a Reuters piece in 2011:

"It's likely a reflection of Goldman's own desire to book some profit and hedge their risk rather than a negative view on Chinese banks," said Warren Blight, lead analyst for Chinese bank research at Keefe, Bruyette & Woods in Hong Kong.

That's definitely what the Chinese government wanted to hear, but those are just words. What matters is what the government saw — banks like Bank of America and RBS selling stakes in their massive state-owned banks.

For a clue as to how much China didn't (and doesn't) like this, know that Goldman's lock-up period for selling its ICBC stake was, initially, that the stock would become free in equal installments on April 28, 2009 and October 20, 2009.

That was then changed to an agreement in which Goldman would not be able to sell 80% of its ICBC holding until April 2010.

"Today's announcement underscores our firm’s confidence in ICBC and our commitment to China. We look forward to working closely with ICBC, one of the most important financial institutions in the world, and further developing our strategic cooperation,” said Goldman CEO Lloyd Blankfein in a release at the time.

But again, those are just words, and even as the ICBC outperformed, Goldman carried on with its sales. As equities around the world have surged, Goldman hasn't needed ICBC to make a tidy sum in its investing and lending portfolio.

In Q4 2012, ICBC stock made up 42% of Goldman's equity securities revenue — all told, the bank made $1.9 billion in investing in lending.

Then, in Q1 2013, ICBC contributed just 2% of Goldman's equity securities revenue — all told, the bank made $2.1 billion in investing and lending.

You can check it out from the table below from Goldman's quarterly report.

goldman revenueGoldman Sachs

All that said: It's hard to argue, as analysts have before, that these sales don't mean that Goldman is seeing serious issues with China's banking system. Yes, ICBC can point to positive earnings numbers in its last report, but China bears like hedge fund manager Jim Chanos think that's all smoke and mirrors anyway.

The real question at hand, he believes, is the health of Chinese credit — are loans being made, and how are they performing?

When you ask that question, you get a different story than you do by just looking at Chinese bank earnings numbers. Non-performing loans rose by 64.7 billion yuan ($10.4 billion) to 492.9 billion yuan at the end of 2012.

Meanwhile, even as credit expands, it's getting more expensive to get a loan in China, GDP growth is slowing, and the shadow banking sector is growing as well, making it hard to track where everyone's money is going and how its performing.

That's why usually stoic government officials are actually speaking out about how worried they are.

From an FT story last month:

A senior Chinese auditor has warned that local government debt is “out of control” and could spark a bigger financial crisis than the US housing market crash.

Zhang Ke said his accounting firm, ShineWing, had all but stopped signing off on bond sales by local governments as a result of his concerns...

“It is already out of control,” Mr Zhang said. “A crisis is possible. But since the debt is being rolled over and is long-term, the timing of its explosion is uncertain.”

The government will prop up banks if everything goes wrong, but FT's Jamil Anderlini points out that a Lehman-style run isn't the only way the Chinese banking sector could go down.

There are a lot of ways to skin a cat, and in this instance, Anderlini says that a banking crisis in China could come the same way it did in the 1990s (but bigger and badder). Banks will be bogged down with tons of non-performing loans but the government will force them to lend anyway. They'll expand the country's credit without contributing to real growth.

The banks, in essence, will become zombies.

So it's possible the Goldman got out before ICBC ate its brains.


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