Better Call Stan! Atlanta Fed’s Q1 GDP Forecast Falls to 0.5% (Retail Sales Decline for 2nd Straight Month, Weekly Earnings Growth Flat)

The Atlanta Fed’s Q1 2017 GDP forecast has declined further to 0.5%.

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2017 is 0.5 percent on April 14, down from 0.6 percent on April 7. The forecast for first-quarter real consumer spending growth fell from 0.6 percent to 0.3 percent after this morning’s retail sales report from the U.S. Census Bureau and the Consumer Price Index release from the U.S. Bureau of Labor Statistics.

Yes, retail sales advance MoM is down in March by -0.2% following February’s print of -0.3%. And CPI MoM was down -0.3% in March as well.

So, Q1  2017 GDP is now forecast to be … 0.5%.

Is this really surprising given that US Real Average Weekly Earnings growth has been generally decreasing since early 2015?

Some had better call Stan(ley Fischer) and tell him to look at the economic numbers before raising The Fed Funds Target Rate again and shrinking the Fed’s Balance Sheet!!!

Battle Royale: JPMC’s Dimon and Minneapolis Fed’s Kashkari Battle Over Bank Capital

Bloomberg has nice piece on the battle between JPMorganChase’s Jamie Dimon and the Minneapolis Fed’s Neel Kashkari.

(Bloomberg) Jamie Dimon is America’s most famous banker, and Neel Kashkari is its most outspoken bank regulator, so it’s not a shock that they would eventually come to blows. What’s interesting is that their contretemps is over an acronym that most Americans have never heard of, but one that may be central to preventing another recession.

TLAC, which is pronounced TEE-lack, is something you need to know about if you want to judge the sparring between Dimon, the well-coiffed chief executive of JPMorgan Chase & Co., and Kashkari, the very bald man who ran for governor of California on the Republican ticket and is now president of the Federal Reserve Bank of Minneapolis.

On April 6, Kashkari went after Dimon in a way that circumspect central bankers ordinarily don’t. In an essay published on Medium and republished on the Minneapolis Fed website, he challenged Dimon’s assertion in his annual letter to shareholders that 1) there’s no longer a risk that taxpayers will be stuck with the bill if a big bank fails, and 2) banks have too much capital (meaning an unnecessarily thick safety cushion). Wrote Kashkari: “Both of these assertions are demonstrably false.”

This is where TLAC comes in, so bear down for a bit of bank accounting. TLAC stands for total loss-absorbing capacity. The more capacity that a bank has to absorb losses, the smaller the risk that it will require a taxpayer-funded government bailout. So lots of TLAC is good. But not all TLAC is created equal. Kashkari argues that a lot of what Dimon calls TLAC on paper wouldn’t be available to absorb losses in a real-world crisis.

Imagine that a whale swims up the Thames River and beaches itself in the City of London, causing billions of dollars in losses to Bank X. If the loss is really big or Bank X is weak (unlike JPMorganChase, which most emphatically is not weak), then one such hit could push it into insolvency. The first thing that happens is that the price of the stock falls to zero. Shareholders, in other words, are the first to absorb losses. That’s fair: Shareholders get all the profit that a bank makes after paying its expenses, so they should have to take the hit when the bank’s profit is wiped out unexpectedly.

The fight between Dimon and Kashkari is over who absorbs the rest of the loss. According to Dimon, it’s the unsecured bondholders. (Unsecured meaning they don’t have a legal claim to any specific asset on the bank’s balance sheet.) Unsecured bondholders are informed that, sorry, there’s been a loss. They’re not going to get their interest payments anymore, and their bonds are being converted into common shares. Now they’re at the back of the line with the rest of the bank’s shareholders; they’ll get paid only if the bank starts making a profit again.

The beauty of the system outlined by Dimon is that taxpayers aren’t exposed to risk because if a bank gets in trouble it has a great, big escape hatch: It simply wipes out its bondholders, thus conserving its money.

“It sounds like an ideal solution,” Kashkari writes. “The problem is that it almost never actually works in real life.” In a financial crisis, regulators worry about contagion. If bondholders of one bank are defaulted on, those of other banks will worry they’re next and yank their support, causing a downward spiral of confidence that crashes the economy. So the regulators make sure bondholders keep getting paid.

“Indeed,” Kashkari writes, “the most recent crisis showed that even some debt holders who had been explicitly told that they would take losses during a crisis got bailed out.”

Kashkari argues that regulators and bankers should stop acting as if bonds are part of TLAC (which, remember, stand for total loss-absorbing capacity), because when push comes to shove, bondholders will absorb few if any losses. Taxpayers will be forced to step up and make sure they keep getting paid.

Kashkari also disses Dimon’s argument that banks’ safety cushions are needlessly thick. Dimon wrote to shareholders that if the Federal Reserve standards weren’t so tough, “banks probably would have been more aggressive in making some small business loans, lower-rated middle market loans, and near-prime mortgages.” Kashkari’s response? “Mr. Dimon argues that the current capital standards are restraining lending and impairing economic growth, yet he also points out that JPMorgan bought back $26 billion in stock over the past five years. If JPMorgan really had demand for additional loans from creditworthy borrowers, why did it turn those customers away and instead choose to buy back its stock?”

Mr. Kashkari has a valid point. Check out the bank capital to total assets during the housing bubble of the last decade. From 2004-2007, bank capital to total assets exceeded 10%, but fell under 10% for 2008. And we all remember TARP (the Troubled Asset Relief Program signed into law on October 3, 2008). Starting in 2o08, bank capital was strengthed to 12.74% of total bank assets by 2010, but has slipped to under 12% by 2013.

Of course, not all capital (and capital ratios) are equal. Take a look at Chase Bank’s Basel III standardized regulatory capital and advanced transitional regulatory capital. Chase Bank’s Tier 1 capital under Basel III Advanced Transition is now under 10% at 9%. JPMorgan_Chase_Co_4Q16_Basel_Pillar_3_Report

JPMorganChase has credit risk exposure to residential and commercial real estate, C&I loans, consumer auto loans and student loans.

Can any large bank survive if home prices and/or commercial real estate prices burst and fall 20%?

So while it seems that Dimon is correct (stiff the unsecured bondholders), Kashkari is also correct in that regulators may panic (again) and try to preserve the unsecured bondholders. That is, bail out the unsecured bond holders.

Maybe Dimon and  Kashkari can settle their “battle royale” by doing it “the Swanson Way.” 

When The Donald Talks! Trump Says US Dollar Too Strong (As 10Y Treasury Yield Slumps)

Like the old EF Hutton ads, when The Donald speaks, currency and bond traders listen.

(Bloomberg) President Donald Trump said he won’t brand China a currency manipulator, retreating from core campaign promise, though he argued that a strong dollar is hampering the ability of American firms to compete.

Trump, in an interview with the Wall Street Journal on Wednesday, appeared to acknowledged that China hasn’t been intervening to weaken its currency recently. “They’re not currency manipulators,” he said.

It’s a shift of opinion after Trump accused China during last year’s election campaign of manipulating its currency to gain the upper hand in trade and vowed to label the country a manipulator on his first day.

U.S. 10-year bond yields slumped and the dollar fell after Trump indicated in the interview that the U.S. currency is getting so strong that it’s harmful to the economy, while other nations “are devaluing” their currencies.

Watch the dollar crash after The Donald speaks.

Here is the Euro against the US Dollar.

The Great Britain Pound against the US Dollar?

And here is China’s Renminbi against the US Dollar.

And the US Treasury 10 year yield slumped. (Trump Slumped??)

Yes, when The Donald speaks, people listen.

MBA Residential Mortgage Application Index Hits Highest Level Since May 2010 .. And It Is Only April!!

As mortgage interest rates hit a new 2017 low, we now see mortgage purchase applications rising to its highest level since May 2010.

This new level is in spite of mortgage originations for borrowers with credit scores under 620 playing a lesser than during the financial crisis. Although mortgage originations for borrowers with credit scores under 620 are at their highest level since March 2010. So both mortgage purchase applications (SA) and under 620 credit score mortgage borrowers are at their highest levels since 2010.

With the worst wage recovery after a recession in modern history, expanding the “credit envelope” is about the only way to expand mortgage lending.

In other words, mortgage credit for borrowers under 620 FICO score is expanding at the fastest pace since Dodd-Frank and The Consumer Financial Protection Bureau were created in 2010.

Elizabeth Warren, architect of the Consumer Financial Protection Bureau.

 

Cohn Said to Back Wall Street Split of Lending, Investment Banks

Former Goldman Sachs executive Gary Cohn said he supports breaking up the too-big-to-fail (TBTF) banks that have grown to be behemoths through acquisitions.

In a private meeting with lawmakers, White House economic adviser Gary Cohn said he supports a policy that could radically reshape Wall Street’s biggest firms by separating their consumer-lending businesses from their investment banks, said people with direct knowledge of the matter.

Cohn, the ex-Goldman Sachs Group Inc. executive who is now advising President Donald Trump, said he generally favors banking going back to how it was when firms like Goldman focused on trading and underwriting securities, and companies such as Citigroup Inc. primarily issued loans, according to the people, who heard his comments.

The remarks surprised some senators and congressional aides who attended the Wednesday meeting, as they didn’t expect a former top Wall Street executive to speak favorably of proposals that would force banks to dramatically rethink how they do business.

Yet Cohn’s comments echo what Trump and Republican lawmakers have previously said about wanting to bring back the Glass-Steagall Act, the Depression-era law that kept bricks-and-mortar lending separate from investment banking for more than six decades.

In the years after the law’s 1999 repeal, banks such as Citigroup, Bank of America Corp. and JPMorgan Chase & Co. gobbled up rivals and pushed into all sorts of new businesses, becoming one-stop-shopping financial behemoths.

How true. Here is a chart of bank aggregation which resembles an economic version of the Bruce Willis film “Last Man Standing.” Call it Last Bank Standing.

It will not be easy to break up the TBTF banks, of course. Other nations have similar banks that are broad- based in terms of merging lending banks with investment banks (and insurance companies). And they have been unsuccessful, for the most part, in breaking up big banks.

And remember, The Federal Reserve approved of the massive bank aggregation. Depository concentration be damned. 

In 1994, Congress prohibited any bank holding company from making an interstate acquisition of a bank if it would result in the acquirer controlling 10 percent or more of the total insured deposits in the United States. The 10 percent deposit cap was not binding on any firm when it was imposed in 1994, but acquisitions by large commercial banks brought three firms up to the cap, and acquisitions of institutions not covered by the deposit cap put Bank of America above the cap. Growth of deposits generally, as well as each firm’s internal growth, could affect these calculations over time.

Dodd-Frank is merely one impediment to shrinking the TBTF banks. The Consumer Financial Protection Bureau (CFPB) is helping to grow the shadow banks (e.g., non-depository financial institutions) such as Quicken through regulation.

Zillow:10.5% National Negative Equity Share Declining (But Chicago And Las Vegas Have 2X National Rate)

According to Zillow (and their methodogy for calculating “underwater mortgage loans”), US negative equity hit 10.5% in Q4 2016. That is a considerable improvement of the peak of 31.4% in Q1 2012.

But more than 55 percent of all homeowners in negative equity nationwide were underwater by more than 20 percent as of the end of Q4.

Where are the negative equity “zones”? Not on the West Coast. The West Coast is home to all five major metros with the lowest rates of negative equity. As of the end of 2016, Las Vegas and Chicago had the highest rates of negative equity among the largest U.S. metros, with 16.6 and 16.5 percent of homeowners underwater, respectively.

How about EFFECTIVE negative equity rates? Even though a borrower may barely be in positive territory, brokerage fees (say 6%) on sales can push the homeowner into negative territory. The national average for EFFECTIVE negative equity still exceeds 25%.

Let’s compare Washington DC with Prince Georges County in Maryland. The share of homes with a mortgage in negative equity is almost double in PG County compared with DC. The same holds true for the shares in EFFECT negative equity (that is exactly double the rate of Washington DC).

To show how much Phoenix AZ has improved in terms of negative equity, Phoenix now has the same negative equity share as Washington DC: 10.5% and the US. But Maricopa County has a larger EFFECTIVE negative equity share of 27.3%.

But how about Chicago, home of the World Series Champion Chicago Cubs? Negative equity in Chicago is even worse than it is in Prince Georges County in Maryland!

How about Lackawanna County, PA, the home of Scranton and the Dunder-Miflin regional sales office? Even worse negative equity problems than Chicago!!

The WORST negative equity county in the US? Pulaski County in Missouri, home of the US Army’s Fort Leonard Wood with a 47.4% share of negative equity mortgages and  76.1% share of EFFECTIVE negative equity mortgages.

Despite the improvement of negative equity in the US, a number of counties (many rural) are still struggling which is an impediment to both mortgage refinancing and mortgage purchase lending despite near-record low mortgage rates.

Illinois State Pension Has $130 Billion in Unfunded Liabilities Versus $78 Billion Funded

Just so Californians don’t feel totally let down by their state and local governments, Illinois is also in fiscal hell.

According to Illinois Policy.org, Illinois’ interest on their pension funds is $9.1 billion per year. And with $130 billion in unfunded liablilities (versus $78 billion in assets), Illinois is running a perpetually underwater pension plan.

 

And Illinois’ pension debt of $130 billion is being carried at a whopping 7% interest.

Can Illinois’ pension investments earn greater than 7% per annum?

Don’t worry Nancy. I have a good grasp on Illinois’ finances!!!