Guest Post: Bubble Symmetry And Housing

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

If bubbles eventually revert to their starting level, Phase 3–capitulation and a return to pre-bubble prices–still lies ahead for the housing market.

Way back in 2006 at the height of the housing bubble, I prepared this chart proposing the housing bubble might exhibit symmetry, i.e. the decline would mirror the rise. I also proposed that the decline would be characterized by phase shifts that corresponded to the decay of whatever reason was being given for the "recovery" in housing, for example, "this must be the bottom."
Let's compare this idealized bubble symmetry with a chart from reality: housing in the bubblicious Los Angeles market.
Here's another look at the L.A. market as measured by Standard & Poors:
Hmm, what would have happened if the Federal Reserve hadn't dumped trillions of dollars into the mortgage market, and the Federal housing agencies hadn't subsidized mortgages and housing with 3% down payments and tax credits?
Perhaps all the trillions of dollars of intervention has accomplished is extend Phase 2. Central bank and state manipulation distorted the symmetry of housing's decline, but did they stave off Phase 3 permanently?
If bubbles eventually revert to their starting level, Phase 3–capitulation and a return to pre-bubble prices–still lies ahead.


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Shorting Stocks On These POMO Days Will Be Hazardous To Your Health

Previously, when previewing the next month’s POMO days, we cautioned readers by saying that “Shorting Stocks On These POMO Days May Be Hazardous To Your Health.” Courtesy of the BOJ ludicrous speed launch of its own version of POMO, which sees the combined global central bank authority raising the amount of monthly incremental liquidity to $160 billion, we are upgrading the cautionary language from “may” to “will.

Below are the May days when Kevin Henry will be injecting liquidity. Note that just like today, the second largest POMO day is once again reserved for the month end window-dressing day. Nothing escapes those Fed PhD traders. Curiously, and just like in the past, NFP day is POMO-free.

Source: NYFed


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Wall-Street Engineering Hones In On Apple’s "Offshore" Cash

Wolf Richter

On paper, Apple has no reason to borrow. Last time it issued bonds was in 1996, when it flirted with bankruptcy and absolutely had to get its hands on some moolah. After Steve Jobs returned in 1997, Apple wisely stayed away from Wall Street and did its own thing. But that era is over. And a new era is dawning upon the icon: Wall-Street engineering.

Apple sat on $144.7 billion in cash and marketable securities at the end of the quarter, yet it announced last Tuesday that it would issue bonds to help pay for $100 billion in dividends and stock buy-backs to be spread over three years – surely not to please some hedge fund managers who, after having gotten stuck in the stock on the way down, had been relentlessly hammering on the company, trying to get it to unleash a torrent of cash.

Now Goldman Sachs has apparently been anointed by Apple to lead a $17-billion bond offering, in six parts with maturities ranging from three to 30 years, according to Bloomberg’s “person familiar with the offering." Wall Street will certainly come out on top, now that it has gotten its foot in the door. Bond investors will earn a measly yield that will most likely be less than inflation over time, and Apple stockholders will watch their equity get replaced by debt.

These “people familiar with the decision” indicated to Bloomberg that CEO Tim Cook hired Goldman Sachs last year to figure out what to do with all this cash and “to help the company improve transparency and governance.” Hiring Goldman Sachs to improve “transparency?” That must have been an insider joke by the “people familiar with the decision.”

Apple stockholders are antsy. Their sacrosanct investment, instead of hitting a market valuation higher than that of Exxon, whooshed from $705 a share to $400 in seven months. “Very frustrating to all of us,” is what Cook called this phenomenon during the earnings call.

There were some challenges. The bottom fell out of the PC business. In the first quarter, worldwide shipments plunged 14%; Apple’s 2% decline was comparatively benign. More ominously, in the still red-hot smartphone market, where shipments soared 36% in the first quarter to 209.5 million units, the other kids on the block ate Apple’s lunch. Shipments edged up 6.6% year over year, to 37.4 million units, the slowest growth rate in recorded iPhone history, and market share withered to 18%, from 23% a year ago. It had gotten clobbered by Samsung whose smartphone shipments jumped 56% to 69.4 million units, and whose market share climbed to 33%.

To make us feel better, Cook promised “flat revenues year over year for the June quarter along with a slight sequential decline in gross margins.” He brimmed with optimism. After all, Wall-Street engineering would make up the difference.

Last August, Apple started paying dividends, and in October, it started buying back shares. $10 billion so far, of the $45 billion allocated for those purposes. Now the company would jack up the “capital return program” to $100 billion by 2015, so $30 billion a year, most of it through share buy-backs. To pay for it, Apple would “access the debt markets,” Cook said.

The problem: of the $144.7 billion in cash and marketable securities, “over $102 billion” were “offshore,” CFO Peter Oppenheimer explained. They’re tucked away in low-tax jurisdictions, scattered around the globe, perhaps in Ireland, Luxembourg, and other places, in mailbox companies and real outfits, through which Apple routes its transactions to generate income there, rather than in the higher-tax jurisdictions where Apple sells the majority of its products – including the US.

While that $102 billion has been sheltered from US or other taxes, it turns out to be useless: “repatriating this cash would result in significant tax consequences under current US tax law,” Oppenheimer confessed. Hence, Apple would “fund the capital return program from existing domestic cash, future cash generated in the US, and from borrowing in the US.”

The government has been bleeding red ink and owes a mind-boggling $16.76 trillion. Payroll taxes have gone up, and people are getting squeezed in other ways. But rather than paying some taxes on repatriating the minimum needed to fill in what its operating cash flow in the US can’t cover, Apple will let the cash rot in some island nation and borrow in the US to pay for dividends and share buybacks.

You can’t blame Apple for this absurdity. It’s following in the footsteps of many US corporations that fund dividends and share buy-backs with borrowed money, rather than using the cash that is stuck in some offshore tax haven. They’re doing what the corporate tax dodge code – and by extension, Congress – encourages them to do; and what the Fed, in its infinite wisdom, through its zero-interest-rate policy enables them to do.

The Eagles got it right with Hotel California: “You can check out any time you like, but you can never leave!” The San Jose City Council, facing huge budget deficits, tried to terminate life-time pension benefits for Council members. Turns out, ending wildly expensive benefits may be wildly more expensive than staying in the plan. Read…. California Pension Fund Is Hotel California.


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Tuesday Humor: GM Announces It Is Losing Money On Every Volt Sold, Will Make Up For It With Volume

In what should not come as a major surprise to anyone, GM just announced that:


There is good news: being implicitly funded by the US taxpayer, means never admitting failure.


And when failure is not an option, the only other option is even greater failure.


Slowly but surely everyone is figuring out that in the USSA, where making a profit is becoming increasingly impossible, the only credible business model is that of Amazon: lose lots of money but make up for it in volume.


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Better Purchase Than The iBond? The Original Apple 1, For The Low, Low Price Of Only $400,000

With today’s cap-arb market frenzy focused on the latest development out of Cupertino, where Tim Cook moments ago announced that Apple’s Goldman-syndicated bond issue would be $17 billion, the biggest ever for a corporate issuer (basically representing a circular cash flow stream where hedge funds give AAPL cash, so that AAPL cash pay them cash in return), some are wondering: is locking in a sub-4% yield for 30 years the best idea for a company which may not exist long before that? And with the stock recently having crushed the Apple collective, plunging 40% from its all time highs in a few short months, leaving many bottom and momentum-chasing hopefuls explaining just how they get to throw good monopoly money after bad monopoly money time after time, some are looking at alternative means of expressing their affection for the computer/cell phone/tablet company preferably coupled with a juicy ROI.

One such suggestion comes from Germany’s Auction Team Breker, which last November made news for selling an original 1976 Apple I computer for the world record price of $640,000 (€492,000). Considering the Apple I originally sold for $666.66 in 1976, this represents a jawdropping CAGR of 20%+ over 37 years, a return which trounces virtually every other asset’s return over the same time horizon, or most other time horizons.

Presenting the implied appreciation of an original Apple I purchaed in 1976 through to its auction closing price:

On 25 May 2013 collectors, capital appreciation chasers and Apple-aficionados will have the chance to buy another of the 6 surviving Apple I computers still in working order. Expected price $260,000-$400,000.

Since there were only 200 made, the scarcity and sentimental value of the otherwise completely useless piece of hardware is ensured forever. Whether the price will continue to rise at a 20% annual pace is unclear although if the pace at which central banks are injecting liquiduity in perpetuity in the market, all of which ends up for purely speculative purposes is any indication, this 37 year old computer may be a far better bet for capital appreciation, even if, like gold, it can’t be fondled, and it has no dividend.

And if owning a really, really expensive paperweight with sentimental value is not one’s cup of tea, Breker has many other products for sale at what it calls an auction of “firsts.” Among these:

  • the world’s first “Intel 4004” microprocessor in a 1971 “Busicom-141PF” (Euro 8.000 – 12.000 / US$ 10,000 – 15,000) and the first major Personal Computer, the “Altair 8800”, which kick-started the PC revolution from the cover of Popular Electronics magazine in 1975 (Euro 3.000 – 5.000 / US$ 4,000 – 7,000).
  • Three hundred years before the birth of Steve Jobs & “WOZ”, French physicist and philosopher, Blaise Pascal, was designing the first commercial mechanical calculator. The “Pascaline” of 1652 could add and subtract two numbers together; multiplication and division relied on the 9’s complements principal still used in computers today!! Because of its importance to mathematics, 9 machines still in existence are all in museum archives. The 10th is being offered here at auction (Euro 100.000 – 200.000 / US$ 130,000 – 260,000).
  • In the late 18th century, poor roads and coach travel led English inventor James Watt to build his portable copying press: the first multiple-copying machine and the first patented instrument too (Euro 3.000 – 5.000 / US$ 4,000 – 7,000)!
  • A century later, and on the other side of the British Channel, mechanical life was being designed to amuse and be admired. Luxury Parisian toy makers of La Belle Époque combined music, mechanics and magic in the creation of automata like Gustave Vichy’s “Marchande des Masques” (Euro 30.000 – 50.000 / US$ 40,000 – 65,000), perhaps inspired by Monet’s portrait of his wife Camille as “La Japonaise”.
  • Functionality came to the fore again in the 20th Century with mechanical encrypting devices such as the iconic second world war “Enigma” with codes so complex, its inventor claimed, it would take a code-breaker, working day and night, 42,000 years to exhaust them all (Euro 15.000 – 25.000 / US$ 20,000 – 33,000).
  • Also included in the auction are historic telephones, antique typewriters, telegraphy and all manner of technology. Says company founder Uwe Breker, “this sale is unique in presenting masterpieces from the spectrum of antique technology, from the 17th century to the 21st.”

Full auction details here

And for those who just must have a piece of the original Steve Jobs, here is some more on the Apple I auction.


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Apple Launches $17 Billion Bond Offering: Largest Ever For Non-Financial Firm

And there it is. Moments ago Bloomberg disclosed the final terms of the just launched Goldman-led syndication of AAPL paper. The total size: $17 billion, which surpasses the previous record set by Roche at $16.5 billion, and makes it the biggest corporate bond synidcation in history. The breakdown:

  • $1B 3Y FRN LAUNCH AT 3ML + 5 BPS

30 Year paper in a tech company whose market cap has fluctuated by roughly $500 billion in the past year, and yielding just under 4%?

Sold to you.


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How Much More Is Your CEO Making Than You?

Three years after Congress first told the SEC that it required public companies to uncloak the details of their CEO compensation relative to his lowly employees; the ever-ready SEC has yet to implement any rules. However, in an effort to ease the tough job that the SEC has, Bloomberg has calculated ratios for the Top 250 companies in the S&P 500, based on industry-specific averages for pay and benefits for the rank-and-file (since companies don’t disclose median worker pay). The table below, of the top 50 companies (meaning highest CEO pay relative to workers), suggests it remains good to be king (and Ron Johnson just made another #1 Spot earning an estimated 1,795x the average JCP employee – money well spent…).



Source: Bloomberg


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US Homeownership Rate Drops To 1995 Levels

When it comes to the US housing market there appear to be three groups of people: those who who have either unlimited cash and/or access to credit, and like the most rabid of bubble-chasing speculators, are perfectly happy to engage in a game of Flip That House for a short-term profit pending the discovery of a greater fool (often times converting the house into rental properties as numerous hedge funds have been doing on cost-free basis courtesy of the government’s REO-To-Rent program) – the are the vast minority of speculators; then there are those who currently rent and are opportunistically looking at home prices, willing to dip their toe at the right price – these too are few and far between and mostly represent a function of the natural growth of the US household offset by the availability of jobs; and then there is everyone else. Sadly, it is the “everyone else” that is the vast majority of the US population.

It is this “everyone else” that is once again being forced out of housing due to both the ramping bubble in housing prices making housing affordable primarily to those who buy with the intention of flipping, and due to the lack of available credit to those who actually need it (see sad state of commercial bank loans in the US).

Finally, it is this “everyone else” who comprises the bulk of those who have been kicked out of the American Dream, whose core pillar has always been owning your own home (with or without a massive mortgage attached), not renting.

As the US Census Bureau reported earlier today, the US homeownership rates in the first quarter of 2013 dropped by another 0.4% to a fresh 18 years low, or 65% – the lowest since 1995!

That this progressive, ongoing decline in ownership is taking place despite allegedly record home affordability is without doubt the most troubling feature of the economic “recovery” which has forced ever more Americans to shift away from owning and into renting, as can be seen by the next two charts showing the median asking rent and sale prices for vacant rent units and for sale units. While home prices have a long way to go still countrywide (excluding the occasional regional bubble market such as LA and NY), rents are already at record highs, which explains why it is every hedge fund’s dream to become a landlord.

However, it is only a matter of time before zero-cost subsidized rental passthru units owned by hedge funds who can therefore keep the rental asking price as high as they wish, forces out more and more Americans out of the Adjusted American Dream, where renting is the new buying, and leads to ever more people living in the streets.

Although, we are confident, it will be merely a matter of time before this, or some other administration, simply unleashes a “street living tax” – after all, “it is only fair” to apply austerity to hobos next. Because it has worked so well with the billionaires and trillionaires…


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Guest Post: How To Make Austerity Work

Submitted by Pater Tenebrarum of Acting-Man blog,

A Question of Spending Discipline and Reform

The Baltic States are unique in Europe in that they went through an austerity crash program a while ago already (beginning right after the 2008 crisis) and have in the meantime recovered strongly. Der Spiegel has an interesting interview with Lithuanian president Dalia Grybauskaite, in which she explains her views on the topic. It can obviously be done successfully.

Just to get this out of the way up front: we are aware that every case is unique. The problems are not the same in every country, and due to cultural norms and traditions, it may be easier to enact reform in certain countries than others. Nevertheless, no matter how many times Paul Krugman insists that no Baltic nation can possibly be held up as an example, the fact remains that they have imposed fiscal austerity and implemented wide-ranging reform measures and have succeeded.

Here are a few notable excerpts from the interview:

SPIEGEL ONLINE: In spite of the ongoing crisis, Lithuania wants to join the euro zone in January 2015. Why?


Grybauskaite:This is not a crisis of the euro zone, but a debt crisis. Some states, inside and outside the euro zone, have difficulties because of their irresponsible economic and fiscal policies.




SPIEGEL ONLINE: A new poll in six big EU countries shows that trust in the EU is declining rapidly. Are EU leaders taking this growing unease seriously enough?


Grybauskaite:This is the consequence of the crisis in Europe and people's reaction to the inability of the politicians to tackle the challenges.


SPIEGEL ONLINE: The president of the EU commission, José Manuel Barroso, said this week that austerity in Europe had reached its limit. The political and social acceptance is not there any longer. Is it time to relax the efforts?


Grybauskaite: There is not one rule you can apply to every state. In the Baltic states, after 2009 we had to implement very radical austerity measures. In Lithuania, we consolidated 12 percent of GDP in two years. We cut public salaries by 20 percent and pensions by 10 percent. Our adjustment was a lot deeper than what we see now in Southern Europe. And we saw growth return after 2 years.


SPIEGEL ONLINE: So Barroso is wrong?


Grybauskaite: Some countries need extra stimulus in specific areas. Something has to be done against high youth unemployment in Greece and Spain, for example. But in the end, there is no way around it: The debt levels have to come down.


SPIEGEL ONLINE: You say that reducing public debt is mainly about political will. Where do you see this will lacking in Europe?


Grybauskaite: I won't name countries, but reforms could be quicker in many parts. There are different mentalities and different ideas about political responsibility in the North and the South.


SPIEGEL ONLINE: Austerity is often seen as a diktat from Germany. From the perspective of a small country, is Berlin too powerful?


Grybauskaite: We need to understand the situation of the German people. They are largely responsible for paying for these bailouts. I cannot imagine a head of government whose country is paying for something not asking for certain conditions. It is legitimate that Berlin leads the way.”

(emphasis added)


She is right – as we have often pointed out in these pages, it is not a currency crisis, but a debt crisis. The euro as such seems to be doing fine, as well as can be expected from a modern fiat currency. It is the private and public sector debt mountains that have been built up over time that are the problem, not the fact that several nations use a common currency.

One might of course counter 'the common currency has caused debts to increase so much', but that is only partially true. We cannot recall that Italy or Greece had any problems growing their debt into the blue yonder in the past,  i.e., prior to the adoption of the euro. The main difference is that they used to be able to devalue their way out of problems,  thereby robbing their citizens surreptitiously. At least nowadays the cost is quite obvious to all.

Take note of the example she gives for austerity a la Lithuania (similar courses were followed in the other Baltic nations): “We cut public salaries by 20 percent and pensions by 10 percent. Our adjustment was a lot deeper than what we see now in Southern Europe. And we saw growth return after 2 years.”

The magic words here are: “cut spending”. As opposed to “raise taxes, and then raise them some more, while leaving spending almost exactly as it was before” – the preferred method in places like Italy, Spain and Greece. Yes, the debt levels have to come down – but it is not immaterial how they are coming down. No doubt it was not exactly great fun to be in the Baltics during the harsh period of adjustment. However, we are sure Greece's citizens would have been more or less perfectly fine with just two years of hardship. It is vastly different when the hardship is going into its fifth year with still no light at the end of the tunnel. In this context, Mr. Barroso's recent proclamations strike us as rather dubious. He seems to think there is a 'choice', but there very likely isn't one, as markets will sooner or later penalize countries veering from their fiscal consolidation efforts.

Cutting spending is not everything of course – economic reform is just as, if not more important. This is another area where many European governments are lacking the necessary political will and imagination. The Baltic nations still have memories of Soviet Russia's embrace – that does wonders for one's political will and the ability to endure hard times for a little while.

And finally, yes,  the paymasters must be expected to insist on conditions for keeping others afloat. Imagine if things were the other way around: if Italy, Spain, Greece, etc., were asked to bail out Germany and Finland, would they be doing so without demanding conditions? Not very likely, is it?




Lithuania: a bubble, followed by a severe bust coupled with austerity, and the return of growth- click to enlarge.



lithuania-industrial-production (1)

The ups and downs of industrial production in Lithuania. Note that production began to improve well before the contraction in GDP ended- click to enlarge.




The budget deficit as a percentage of GDP. Lithuania is already getting close to the Maastricht ratio again – click to enlarge.




There are ways and means to deal with a major bust and fiscal troubles. None of them are painless, but some make more sense than others.


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Cypriot Parliament Approves Bailout

As was announced earlier today, the Cypriot parliament was set to vote on the country’s deposit confiscatory bail in, a vote that was largely expected to pass. Moments ago it did.


And with that, the resulting depression that is about to be unleashed in Cyprus is nobody else’s fault but of the country itself, its politicians and ultimately, its people. So dear Cyprus, you may have a 20% GDP drop every year for the foreseeable future and triple digit unemployment, but at least you will have the EUR and your Stockholm Serf Syndrome.


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