What If Stocks, Bonds and Housing All Go Down Together?

“About the claim that central banks will never let asset bubbles pop ever again–their track record of permanently inflating asset bubbles leaves much to be desired.

The problem with trying to solve all our structural problems by injecting “free money” liquidity into financial Elites is that all the money sloshing around seeks a high-yield home, and in doing so it inflates bubbles that inevitably pop with devastating consequences.

As noted yesterday, the Grand Narrative of the U.S. economy is a global empire that has substituted financialization for sustainable economic expansion. In shorthand, those people with access to near-zero-cost central bank-issued credit can take advantage of the many asset bubbles financialization inflates.

Those people who do not have capital or access to credit become poorer. That is the harsh reality of neofeudal, neocolonial financialization. Neofeudalism and the Neocolonial-Financialization Model (May 24, 2012).

Injecting liquidity by creating credit and central bank cash out of thin air is not a helicopter drop of money into the economy–it is a flood of money delivered to the banks and financial elites. The elites at the top of the neofeudal financialization machine already have immense wealth, and so they have no purpose for all the credit gifted to them by the central banks except to speculate with it, chasing yields, carry trades and nascent bubbles (get in early and dump near the top).

Life is good for the kleptocratic financial Aristocracy: for debt-serfs, not so good.

No wonder the art market and super-luxury auto sales have both exploded higher. Thanks to the central banks’ liquidity largesse, the supremely wealthy literally have so much money and credit they don’t know what to do with it all.

If you want to borrow money to attend college, the government-controlled interest rate is 9%. If you want to speculate in the yen carry trade or buy 10,000 houses, the rate is near-zero or at worst, the rate of inflation (around 2% to 3%). If you want to borrow money for anything other than a socialized mortgage to buy a single-family home, tough luck, you don’t qualify. But if you want to speculate with $10 billion–here’s the cash, please please please take it off our soft central-banker hands.

If your speculations end badly, then no problem, we transfer the toxic trash heap of debt and phantom assets onto the balance sheet of the central bank or onto the public (government) ledger.

Given this reality, it was inevitable that the stock, bond and housing markets would all be inflated into bubbles by this monumental flood of free money. Please consider these three charts…”

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“Capitalism is now a cult, and Jamie Dimon is the self-appointed leader of the “cult of capitalism.”

That message is gleaned from a Huffington Post column by Mark Gongloff, whose headline stated that not only is the J.P. Morgan CEO and chairman a cult leader but a “very dangerous” one. Why? Because apparently shareholders have signed “a billion-year contract” to join the cult, notwithstanding portrayals of Dimon as a greedy egomaniac and poster boy for everything wrong with capitalism.

His is a monster of a cult: Warren Buffett is a member. So is CNBC’s Jim Cramer. Says Gongloff, who labels Cramer a “shouty man”: “Cramer joined Warren Buffett and many more VIPs in singing Dimon’s praises and warning of the woe that would befall shareholders” if they split his roles. Still, “the media played along, helping … Dimon keep both of his jobs” as J.P. Morgan Chase & Co.’s chief executive and chairman.

Dimon, meanwhile, was doing what any self-respecting egomaniac under such a threat would do: acting like a petulant teenager and threatening to quit.

Today, reconfirmed as leader of the cult of capitalism, Dimon could serve as the perfect example of what psychologist Ernest Becker wrote about in his Pulitzer Prize–winning classic, “The Denial of Death,” a favorite from my years at Morgan Stanley. Dimon fits the cult-leader profile: charismatic narcissist, uncompromising, manipulating and threatening to his co-conspirators in the “cult of capitalism” and to the masses marching to the drumbeat of his destiny, off another economic cliff, bigger than 2008’s….”

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“A sharp rise in mortgage rates over the last few weeks means it may already be too late for many homeowners to benefit from a refinance.

This just as thousands were gaining equity in their homes and finally becoming eligible.

At the same time, it is pushing some renters off the fence, fearing they too will miss the boat on the best conditions for home buying.

Refinances dropped 12 percent last week, while mortgage applications to purchase a home rose 3 percent and are now up 14 percent from a year ago, according to the Mortgage Bankers Association…..”

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“The latest reading on April margin debt at the NYSE showed an all-time high.  The most recent reading of $384,370MM topped the all-time high from July 2007 when margin debt reached $381,370MM.

As I’ve explained in the past, this is one sign of how the disaggregation of credit has come to dominate many borrowing trends in the last 30 years.  Instead of seeing credit used for productive purposes it has increasingly been used for things such as speculation in asset prices.  My guess is that this is largely the result of a Fed driven economy whose policies have been uniquely asset price focused leading many to speculate due to excessive faith in the “Bernanke Put” or the “Greenspan Put”.

This trend is particularly interesting during the most recent recession since household credit has remained extremely tight….”

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“Gartner Research reports worldwide server sales are down 5 percent for the first quarter of the year, with IBM, HP and other members of the top five taking the biggest hit. Server shipments declined 0.7 percent.

But the drop in server sales is not at all surprising. Cloud apps are popping up by the thousands across the market, as the developer movement speeds up. But these apps are not surfacing from that souped-up x86 server made for big workloads. Developers instead are turning to the cloud. Enterprise companies are buying fewer of those high-priced machines that customers once bought when IT budgets were plentiful.

According to Gartner, x86 server shipments were flat during the quarter, with revenues up 1.8 percent. Server revenues reflect the problems that the vendors face. All of the top five vendors suffered revenue declines in the first quarter of 2013 except for Dell which grew 14.4 percent.

RISC/Itanium Unix servers had a 38.8 percent drop in shipments and were down 35.8 percent in vendor revenue compared to the same quarter last year. Mainframes showed a 3.6 percent increase in worldwide revenue. They will never die….”

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“More and more people are borrowing against their brokerage accounts to buy condos and expand their businesses. That’s not reassuring.

FORTUNE — Like the recent bull market? How about taking a home renovation to go with it? That apparently is what some investors have been doing with their stock gains.

The recent run-up in the market, financial advisers say, has led to a resurgence of the type of loan not seen since the end of the housing boom — cash out financing. But this time, though, people aren’t tapping their inflated house for money. These days stock portfolios appear to be the well of choice.

Financial planners say in recent months clients have taken out so-called margin loans to buy real estate, fund small business acquisitions, or to provide gap financing before a traditional loan could be secured from a bank.

“No one wants to be out of the market for 90 days,” says Mark Brown, a financial planner for Brown Tedstrom in Denver. “People just don’t want to sell right now.”

Borrowing against brokerage accounts hit an all-time high earlier this year, according to data from FINRA, and has continued to go higher. Margin loans outstanding totaled nearly $409 billion at the end of April. That compares to $381 billion back in July 2007, the last time stock-market-fueled lending peaked.

Debt is often seen in bubbles, and loose lending was a key part of what led to the housing bust. So the recent rise in stock market borrowing has some people nervous, especially at a time when the market is already making new highs, and seemingly headed straight up. Despite being down on Wednesday, the market has not suffered a three-day string of losses all year, which is not typical. Nonetheless, according to a recent Wall Street Journal article, investors should be less worried about all this margin debt because people aren’t using the borrowed funds to buy more stocks, they are using it as a cheap source of fast cash…..”

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Income ranges for family of four: Highest quintile ($163K and up); fourth quintile ($110K to $163K); middle quintile ($77K to $110K); second quintile ($50K to $77K); lowest quintile (less than $50K).

NEW YORK (CNNMoney)

There are more than 200 tax breaks in the U.S. tax code, and the top 10 for individuals are by far the most expensive. How expensive? They will cost federal coffers $12 trillion over the next decade.

But the dollar benefits of those top 10 breaks are not distributed evenly across income groups.

The top 20% of households will enjoy more than half of the combined benefits of the major tax expenditures this year, according to a report by the Congressional Budget Office released Wednesday.

And within that top 20%, the benefits skew disproportionately to the highest earners.

The top 1% — who make at least $327,000 as individuals or $654,000 as a family of four — get 17% of the breaks’ value.

The largest breaks include the tax-free treatment of employer contributions to workers’health insurance; tax preferred retirement savings; state and local tax deductions; and reduced rates on capital gains and dividends.

That’s not to say that low- and middle-income households don’t benefit from the major tax breaks and wouldn’t notice if they were curtailed — a distinct possibility when lawmakers eventually do embark on tax reform.

This year, households in the middle income quintile will enjoy about 13% of the value of the biggest breaks, the budget office estimates. Those in the middle include one-person households earning roughly $39,000 to $55,000 and four-person households earning between $77,000 and $110,000.

The lowest earners, who make no more than $25,000 as singles or $50,000 as four-person households, will get only 8% of the benefit of the tax expenditures. What value they do see will come primarily from the Earned Income Tax Credit and, to a lesser extent, the child tax credit.

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“Stocks are hitting record highs on a seemingly daily basis, and BlackRock CEO Larry Fink thinks the bull market has another five or six years to go.

Investors could experience annual returns of 8 to 10 percent during that period, he tells CNBC. This could put the Dow Jones industrial Average above 28,000 in 2019.

“Sounds pretty good, doesn’t it?” he quips.

That would represent an 83 percent jump from the 15,314 level prevailing Wednesday afternoon. The Dow reached an all-time peak of 15,542 a week ago.

Given corporate earnings strength, stocks offer attractive values, Fink says.

“The S&P [500] is around 15½, 16 times earnings,” he explains. “There’s no question in my mind that equities remain … fairly cheap.” …”

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“This you can bet on: The Federal Reserve will eventually stop its $85 billion-a-month bond-buying program, an economic lifeline aimed at getting the country back on its feet after the financial crisis.

While no one knows when the central bank will start winding down the quantitative easing that has pushed down interest rates, Fed Chairman Ben Bernanke hinted last week that the taps may start running dry sooner rather than later — perhaps as early as this summer.

The very thought sent a shiver through world stock and bond markets, though investors took some comfort after a closer look at Bernanke’s remarks and reassurances from European and Japanese central banks.

Markets got back on track this week on the prevailing view that Bernanke may not act all that soon after all. Still, the underlying message was clear: All good things must come to an end.

That said, there are ways to protect your portfolio and perhaps profit from the big shift. Experts recommend three strategies — a move into cash, alternative bond funds and buying shares that have lagged the recent run-up in stock prices — among other ideas.

Here are some tactics investors might consider as the era of quantitative easing ends:

CASH IS KING….”

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Banks also reduced to a six-year low the amount they set aside in case of losses on loans, the FDIC said…..”

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“A letter that was addressed to New York City Mayor Michael Bloomberg has tested positive for ricin, The New York Times reports.

The Wall Street Journal has confirmed the news with the NYPD.

Bloomberg never personally received the poison letter.

Another letter that also tested positive for the substance was reportedly sent to a Washington, D.C. building that houses Mayors Against Illegal Guns, which Bloomberg helps run….”

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“…………..that’s a lot of stock being pulled out of the market.

Deutsche Bank

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“It’s been a crazy few weeks in the Treasury bond market.

After a big rally that began in mid-March, amid the outbreak of the Cypriot financial crisis and fears over a slowdown in global growth, Treasuries have given up all of their gains, and bond yields are now rising to the highest levels in over a year.

This morning, the yield on the 10-year U.S. Treasury hit a high of 2.23%.

Naturally, there is a lot of debate over where yields go next. Goldman Sachs, one of the prominent shops calling for higher yields, has published a call saying the sell-off in Treasuries is “for real” this time.

Despite hitting a high of 2.23% earlier, yields have since backed down to 2.15%, and bonds are now positive on the day.

And amid the wild price action, we’re seeing a massive amount of trading in the market…..”

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“NEW YORK (Reuters) – A Congressman on Wednesday called on the Department of Justice to investigate JPMorgan Chase & Co’s power trading in Michigan, as the Federal Energy Regulatory Commission (FERC) considers whether to sanction the firm.

Michigan Congressman Dan Kildee, a Democrat who sits on the Committee on Financial Services, said in a letter to the DoJ that it should pursue its own investigation into JPMorgan to see if it manipulated electricity markets.

The bank has told shareholders it has been notified by FERC staff that they intend to recommend that the five members of the commission take action over an alleged manipulative trading scheme in Michigan and California earlier this decade.

JPMorgan has denied that it manipulated power markets, and has vowed to “vigorously defend” itself and its employees.

“These allegations are serious charges, including traders devising deliberate schemes to manipulate energy prices and top bank executives lying under oath,” said Kildee in the letter, a copy of which was obtained by Reuters.

“The people of Michigan, and the American public generally, deserve a marketplace where all participants play by the same rules. I urge the Justice Department to resolve this matter by investigating these potentially illegal practices.”

JPMorgan spokeswoman Jennifer Zuccarelli declined on Wednesday to comment on Kildee’s letter, but said that the FERC notice to the bank is only a “statement of the staff’s views, and does not represent findings of the commission.”

She added “we strongly disagree” with the FERC conclusions….”

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Source

“(Reuters) – Dish Network Corp said it raised its offer for Clearwire Corp to $4.40 per share in cash, topping Sprint Nextel Corp’s bid.

Sprint raised its buyout offer for wireless service provider Clearwire to $3.40 per share on May 21 under pressure from activist shareholders.

(Reporting by Garima Goel in Bangalore; Editing by Phil Berlowitz)”

“Former Federal Reserve Chairman Paul Volcker said today the central bank will probably “fall short” by being asked to do too much.

“It’s fashionable to talk about a dual mandate, that policy should somehow be directed toward two objectives, of price stability and full employment,” Volcker told the Economic Club of New York. “Fashionable or not, I find that mandate both operationally confusing and ultimately illusory.”

With unemployment lingering at 7.5 percent — still higher than before the last recession — the Federal Open Market Committee announced May 1 that it will increase or decrease the pace of its monthly bond purchases in response to changes in inflation and the labor market. The policy makers agreed to maintain monthly buying of $40 billion in mortgage securities and $45 billion of U.S. Treasuries in a bid to boost employment.

“Asked to do too much, for instance to accommodate misguided fiscal policies, to deal with structural imbalances, to square continuously the hypothetical circles of stability, growth and full employment, then it will inevitably fall short,” Volcker said. Those efforts cause it to lose “sight of its basic responsibility for price stability, a matter that is within the range of its influence.”

Volcker, 85, served as chairman of the Fed from 1979 to 1987. He helped cut the unemployment rate to an eight-year low of 5.7 percent in 1987, his last year as Fed chairman, after reversing interest-rate increases that brought inflation down from as high as 15 percent.

Rewriting Regulations…”

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“Alcoa Inc. (AA), the largest U.S. aluminum producer, had its credit rating cut to one level below investment grade by Moody’s Investors Service after the metal’s price fell amid a global oversupply.

The long-term rating on Alcoa’s $8.6 billion of debt was lowered by one step to Ba1 from Baa3, Moody’s said in a statement today. The outlook is stable, indicating the rating won’t be reduced again soon.

“The aluminum price has been in a downward decline since reaching post-recession highs in 2011,” Moody’s said in the statement. Strength in the automotive and aerospace industries isn’t sufficient for a “significant” recovery in profitability and Alcoa won’t achieve investment-grade metrics within Moody’s rating horizon, Moody’s said.

While Alcoa has shuttered high-cost smelting capacity, expanded profitable segments and reduced costs, slowing economic growth in China and rising global production have caused aluminum prices to fall.

“We believe Moody’s decision is a greater reflection of macroeconomic conditions and the volatility of metal prices than a true statement of the financial and operating strength of Alcoa,” Alcoa said in a separate statement.

Output Cuts….”

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“MidAmerican Energy Holdings Co., the power-production unit at Warren Buffett’s Berkshire Hathaway Inc. (BRK/A), agreed to buy NV Energy Inc. (NVE) for about $5.6 billion in cash to expand in Nevada.

The acquisition will make MidAmerican the largest U.S. utility owner by customer count, according to data compiled by Bloomberg.The Berkshire unit will pay $23.75 per share, 23 percent more than NV Energy’s $19.28 closing price today, the companies said in a statement.

Buffett has been boosting investments in capital-intensive businesses as he seeks to allocate funds at his Omaha, Nebraska-based company, which had a cash pile of $49.1 billion as of March 31. MidAmerican will have assets of about $66 billion after the completion of the deal, which is expected in the first quarter of next year, according to the statement.

“By joining forces with MidAmerican, we will gain access to additional operational and financial resources,” Michael Yackira, chief executive officer of Las Vegas-based NV Energy, said in the statement.

The purchase is the largest announced acquisition of a U.S. regulated electricity company since Duke Energy Corp. (DUK)bought Progress Energy Inc. last July…..”

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“Brazil’s central bank accelerated the pace of interest rate increases, as policy makers step up efforts to slow inflation that forestalled the economy’s rebound in the first quarter.

The bank’s board, led by President Alexandre Tombini, voted unanimously to raise the benchmark Selic rate 50 basis points to 8.00 percent, matching the forecast of 19 of 57 economists surveyed by Bloomberg. Thirty-eight analysts expected a second straight 25 basis-point increase.

“The committee considers that this decision will contribute to put inflation on a decline and assure that this trend will persist next year,” policy makers said, according to their statement posted on the central bank’s website.

President Dilma Rousseff’s administration has renewed pledges to slow inflation even as Brazil’s $2.5 trillion economy has expanded less than expected by analysts for five straight quarters. While the government kept borrowing costs at a record low 7.25 percent from October through March and expanded tax cuts to spur activity, stimulus measures have failed to spark growth and driven inflation to the upper limit of the central bank’s target range. Latin America’s biggest economy unexpectedly slowed in the first quarter as higher consumer prices eroded demand.

Swap rates on the contract maturing in July, the most traded in Sao Paulo today, fell two basis points, or 0.02 percentage point, to 7.56 percent. The real weakened 1.7 percent to 2.1106 per dollar.

‘Timely Way’….”

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“The Memorial Day weekend typically marks the start of the summer vacation season, which for about three-fourths of American workers will mean the possibility of some paid time off.

The United States is the only highly developed nation that doesn’t require employers to offer paid vacation time, according to a new report from the Center for Economic and Policy Research, a left-leaning think tank.

The report examined vacation policies in 21 developed countries, including the United States. The researchers found that every country except the U.S. had laws making employers offer between 10 and 30 paid vacation days a year….”

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