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This Fed is on a Mission

This Fed is on a Mission

QE Unwind starts Oct. 1. Rate hike in Dec. Low inflation, no problem.

The two-day meeting of the FOMC ended on Wednesday with a momentous announcement that has been telegraphed for months: the QE unwind begins October 1. It marks the end of an era.

The unwind will proceed at the pace and via the mechanisms announced at its June 14 meeting. The purpose is to shrink its balance sheet and undo what QE has done, thus reversing the purpose of QE.

Countless people, worried about their portfolios and real estate investments, have stated with relentless persistence that the Fed would never unwind QE – that it in fact cannot afford to unwind QE.

The vote was unanimous. Even no-rate-hike-ever and cannot-spot-housing-bubbles Neel Kashkari voted for it.

The Fed also telegraphed that it could raise its target range for the federal funds rate a third time this year, from the current range of 1.0% to 1.25%. There is only one policy meeting with a press conference left this year: December 13, when the two-day meeting ends, remains the top candidate for the next rate hike.

This has been the routine since the rate hike last December: The FOMC decides to change its monetary policy at every meeting with a press conference: December, March, June, today, and December.

Even hurricanes won’t push the Fed off track.

The Fed specifically mentioned Harvey, Irma, and Maria. No matter how destructive, they won’t impact the economy “materially” over the “medium term” and therefore won’t impact the Fed’s policies:

Hurricanes Harvey, Irma, and Maria have devastated many communities, inflicting severe hardship. Storm-related disruptions and rebuilding will affect economic activity in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term.

…click on the above link to read the rest of the article…

Who Gets Hit by Mortgage Losses in Harvey and Irma Areas?

Who Gets Hit by Mortgage Losses in Harvey and Irma Areas?

“We need to ask for a policy change because the burden with these losses is too big.”

Somebody is going to pay for losses on mortgages of homes that were destroyed by Hurricanes Harvey and Irma. It’s a just a question of who.

The taxpayer is on the hook, along with some investors. But then there are the servicers of mortgages guaranteed by the Government National Mortgage Association, for short Ginnie Mae. The largest of them is Wells Fargo, but they mostly include smaller non-banks such as PennyMac and Quicken Loans. The amounts could be large. And now they’re asking for a bailout of sorts.

In total, 4.3 million properties with nearly $700 billion in outstanding mortgage balances are located in FEMA-designated disaster areas in Texas and Florida, according to a preliminary estimate by Black Knight Financial Services:

  • Disaster areas of Hurricane Harvey: 1.18 million mortgaged properties with $179 billion in unpaid mortgages.
  • Disaster areas of Hurricane Irma: 3.14 million mortgaged properties with $517 billion in unpaid mortgages.

Many of these homes survived mostly unscathed. So the mortgage balances of homes that have been severely damaged or destroyed remain uncertain but are significant.

And who picks up the losses on these mortgages?

  • Federal flood insurance for insured homes, but payouts are capped. Taxpayers will bail out the insurance program.
  • Investors in private mortgage-backed securities (MBS) backed by mortgages that are not guaranteed by the government. Losses on those mortgages flow through to investors.
  • Banks take the losses on any mortgages they hold on their books and that are not guaranteed by the government.
  • Government Sponsored Enterprises (GSE), such as Fannie Mae and Freddie Mac, will be hit with losses on mortgages they guaranteed, packaged into MBS, and sold to investors. Some of the losses will be borne by private-sector investors via risk-transfer securities. The remaining losses will be borne by taxpayers.

…click on the above link to read the rest of the article…

Catalonia’s Defiance of Spanish Authority Turns into Rebellion

Catalonia’s Defiance of Spanish Authority Turns into Rebellion

“Do not underestimate the power of Spanish democracy.”

With these words, eerily reminiscent of a line once spoken by Star Wars villain Darth Vader, Spain’s Prime Minister Mariano Rajoy brought to a close a week of frenzied drama. It began with a foiled attempt by the Spanish police to close down the official website for the Catalan independence referendum. As often happens with web-based raids, the official site was up and running again within minutes, albeit with a different domain name.

Next, the Public Prosecutor’s office ruled that the referendum is now illegal “beyond all doubt” and instructed the Civil Guard, National Police, Catalan Police (Mossos d’Esquadra) and local police forces to act to stop it. It also launched criminal investigations against the entire Catalan government, the Speaker of the Catalan Parliament, the leaders of two separatist municipal associations and more than 700 Catalan mayors (representing 75% of Catalonia’s municipalities) for agreeing to cooperate with the planned plebiscite.

On Friday, Spain’s Finance Ministry joined the fracas by introducing a motion that would hand Madrid much greater control over how Catalonia spends its money in an effort to block the regional government from using state cash to pay for an illegal independence referendum. It has also frozen Catalonia’s monthly advance of the national liquidity fund (FLA), worth some €1.4 billion a month, and demanded that banks report any transactions related to the referendum vote to the central government.

The ultimate goal is to turn the Catalan regional government into an empty shell of an institution — one that has no autonomy, or for that matter any practical function or purpose.

…click on the above link to read the rest of the article…

Can You Really “Shut Down” a Nuclear Power Plant before a Hurricane?

Can You Really “Shut Down” a Nuclear Power Plant before a Hurricane?

Soothing words before the storm: “Our nuclear plants are now shut down.”

There are those who believe the answers to life’s most pressing questions can be found in one of two movies: “The Godfather” (part one) or “The Princess Bride.” In the latter movie, think of the Spaniard’s vaguely taunting response: “You keep using that word. I do not think it means what you think it means.”  Which might also be the reply to: “Our nuclear plants are now shut down.”

Right now we are thinking about the Turkey Point and St. Lucie nuclear power stations in South Florida, in the aftermath of hurricane Irma. But we could have been referring to the South Texas Nuclear Project south of Houston, just a week or two earlier.

Those Westinghouse pressurized water reactors have six modes of operation, sort of like gears in a car. The highest level of performance, mode 1 includes power operations all the way up to 100% power. Mode 6, the lowest level of operation, describes a plant in the state of being refueled.

Senior management at NextEra’s utility subsidiary, Florida Power & Light, placed their nuclear reactors in mode 4, “hot shutdown,” as the hurricane advanced towards the plants. (Mode 5 is cold shutdown with far lower internal reactor temperatures.)

In so-called hot shutdown, a nuclear plant has one primary requirement for ongoing safe operation — a reliable supply of electricity (assuming competent staff of course).

Even though nuclear plants produce electricity for the grid, they also require large amounts of electricity to maintain their own operations particularly in this instance for: 1) cooling the fuel in the recently operating nuclear reactor core and 2) cooling the spent fuel pools where used fuel rods are placed after removal from the reactor. These activities are known as residual heat removal.

…click on the above link to read the rest of the article…

The Next Spanish Bank Teeters, at Worst Possible Time

The Next Spanish Bank Teeters, at Worst Possible Time

The timing could not have been worse: just as Spain faces its biggest constitutional crisis in over 40 years with Catalonia’s independence vote, another bank has begun to wobble.

Liberbank, Spain’s eighth largest lender, was spawned in 2011 from the shotgun marriage of three failed cajas (savings banks), Cajastur, Caja de Extremadura and Caja Cantabria. The new bank’s shares were sold to the public in May 2013 at an IPO price of €0.40. By April 2014, they were trading above €2, a massive 400% gain.

But by April 2015, the stock had started sinking. By May 2017, it was trading at around €1.20. Then came the collapse of Banco Popular in early June, which took many investors (but not WOLF STREET readers) by surprise, triggering a further crash in Liberbank’s stock as shareholders feared they would be next.

Scenting blood, short sellers began piling in, and just as the stock entered free-fall, the government intervened by imposing a temporary ban on short selling. The stock stabilized and even began to recover. By mid-July it had recrossed the psychological €1-threshold. Rumors began circulating that the short-selling ban would soon be lifted.

But in late August, after reaching €1.07, the stock’s progress began to waiver. At the beginning of this week Liberbank’s shares once again became a penny stock. Someone knew something…

Indeed. On Wednesday evening, the bank announced that it would expand its capital by €500 million, and these brave shareholders would be diluted. The response was to sell: shares plunged over 12% on Thursday and a further 5% on Friday.

The fear is understandable. Spanish investors are still smarting from Santander’s hurried takeover and bail-in of Banco Popular. For the first time since the Global Financial Crisis, shareholders and subordinate bondholders of a failing Spanish bank were not bailed out by taxpayers. Speculators were shocked and appalled.

…click on the above link to read the rest of the article…

Worst US Consumer Data Hack Ever? Equifax Confesses

Worst US Consumer Data Hack Ever? Equifax Confesses

Your data was likely stolen. Here’s what you can do to protect yourself even after the hack, and Equifax doesn’t want you to do it.

Equifax, as a consumer credit bureau, collects financial, credit, and other data on every US consumer. It has names, birth dates, social security numbers, driver’s license numbers, bank account numbers, credit card numbers, mortgage data, and payment history data, including to utilities, wireless service providers, and the like. It collects data on bank balances, loan balances, credit card balances, credit card purchases, and myriad personal details. It has massive digital dossiers on every consumer in the US and in some other countries. And it sells this data to other companies, such as banks, credit card companies, car dealerships, retailers, and others, as a routine part of its business model. That’s how it makes money.

But when someone breaks in and steals this data without paying Equifax for it, well, that’s a huge deal. And it is.

Turns out, Equifax got hacked – um, no, not today. Today it disclosed that it had discovered on July 29 – six weeks ago – that it had been hacked sometime between “mid-May through July,” and that key data on 143 million US consumers was stolen. There was no need to notify consumers right away. They’re screwed anyway. But it gave executives enough time to sell 2 million shares between the discovery of the hack and today, when they crashed 13% in late trading.

Given the quantity and sensitivity of the stolen data, it may well be the biggest and worst breach in US history.

That stolen data “primarily includes”:

  • Names
  • Social Security numbers
  • Birth dates
  • Addresses
  • “In some instances,” driver’s license numbers.

In addition, the stolen data includes:

  • Credit card numbers of around 209,000 US consumers
  • “Certain dispute documents with personal identifying information” of around 182,000 US consumers.
  • “Limited personal information for certain UK and Canadian residents.”

…click on the above link to read the rest of the article…

Toronto Home Price Bubble Descends into Bear Market

Toronto Home Price Bubble Descends into Bear Market

With surprise rate hike, Bank of Canada turns against housing market.

Home sales in the Greater Toronto Area, the largest housing market in Canada, plunged 34.8% in August compared to a year ago, to 6,357 homes, with sales of detached homes and semi-detached homes getting eviscerated:

Sales by type:

  • Detached houses -41.6%
  • Semi-detached houses -37.3%
  • Townhouses -27.5%:
  • Condos -28.0%.

Even as total sales plunged, the number of active listings of homes for sale soared 65% year-over-year to 16,419, with 11,523 new listings added in August, according to the Toronto Real Estate Board (TREB).

“The relationship between sales [plunging] and listings in the marketplace today [soaring] suggests a balanced market,” the report explained, adding hopefully:

“If current conditions are sustained over the coming months, we would expect to see year-over-year price growth normalize slightly above the rate of inflation. However, if some buyers move from the sidelines back into the marketplace, as TREB consumer research suggests may happen, an acceleration in price growth could result if listings remain at current levels.”

And the average price of all homes, at C$732,292 in August, plunged 20.5% from the crazy peak in April (C$920,761). By this measure, it has now entered a bear market.

The average price in April had shot up 30% year-over-year. To cool this nutty business, the Ontario government introduced a laundry list of measures on April 20. It included most prominently a 15% transfer tax on nonresident foreign speculators. That appears to have done the trick.

Given the enormous price gains in recent years, the market remains hyper-inflated, and the four-month downturn into a bear market hasn’t even brought prices back to the year-ago level, with the average price for all types of housing up 3%, and the condo price up 21.4% year-over-year.

…click on the above link to read the rest of the article…

What Will Markets Do if Congress Pushes US into Default? And “Trump Nationalism” Faces the Globalist System

What Will Markets Do if Congress Pushes US into Default? And “Trump Nationalism” Faces the Globalist System

Here I am with radio host Jim Goddard on This Week in Money, holding forth on the chances that Congress won’t raise the debt ceiling in time and will push the US into default — if it does, “curl up into a fetal position and wait till the dust settles.”

And Jim asked if “Trump nationalism” would be better than the globalist system in place now. Better for whom? And what are the forces lined up against him on this? Sparks fly.

This is how monetary policies have crushed the value of labor. Read…  The US Cities with the Biggest Housing Bubbles

What Did Harvey Do to the Wind Farms on the Texas Coast?

What Did Harvey Do to the Wind Farms on the Texas Coast?

Downed power lines was the biggest problem. 

Oil-and-gas state Texas is by far the largest wind power producer among US states. With an installed capacity of 21,044 MW, and with 5,437 MW under construction as of the end of 2016, Texas is well ahead of Iowa, with 6,974 MW of capacity and 338 MW under construction, oil-and-gas state Oklahoma with 6,645 MW capacity and 1,609 MW under construction, and well, in 4th place green-energy state California… Just sayin’

During the windiest parts of the day, wind power typically supplies 20% of the power in Texas, according to grid operator Electric Reliability Council of Texas. Most of the wind farms are in West Texas, far away from the coast. During the hurricane, they continued operating normally. But a little over 2,000 MW of capacity is located in coastal areas, in hurricane country. So how did they fare?

According to a report by the Southern Alliance for Clean Energy (SACE):

At noontime on Friday, August 25th, the Texas coastal wind projects were operating at 95% output, an exceptionally high output level (also called a capacity factor).

As expected, several wind farms curtailed power production when wind speeds exceeded safety limits. Also, as local grid connections failed and power outages affected the entire region, wind farms remained offline until grid connection could be re-established.

Between 3-4 PM, as conditions deteriorated, wind power production dropped by approximately 800 megawatts, with a regional operation rate of about 47%.

Over the next three days, wind power production generally increased during the daytime, and declined at nighttime – similar to “normal” coastal wind power production levels. At no time did power production from all coastal wind farms reach zero.

This chart by SACE shows power generation for each of the four days, starting with August 25 (red line):

…click on the above link to read the rest of the article…

Fearing Contagion, Russia Bails Out Bondholders in its Biggest Bank Collapse Yet

Fearing Contagion, Russia Bails Out Bondholders in its Biggest Bank Collapse Yet 

“The panicky mood has been dampened down,” as other banks are rumored to be teetering.

True to the playbook of bank bailouts, the Central Bank of Russia (CBR) decided to bail out Bank Otkritie Financial Corporation, the largest privately owned bank in the country, and the seventh largest bank behind six state-owned banks.

The Central Bank put in an undisclosed amount of money in return for at least a 75% stake. This is likely to be Russia’s biggest bank bailout ever, well ahead of the current record holder, the $6.7 billion bailout of the Bank of Moscow in 2011.

Otkritie and its businesses would operate as usual, the Central Bank said. The banks obligations to creditors and bondholders, which include other Russian banks, would be honored to avoid contagion.

The controlling shareholder of Otkritie bank is Otkritie Holding, with a 65% stake. The bank had grown by wild acquisitions, grabbing other banks, insurers, non-pension funds, and the diamond business of Russia’s second largest oil producer Lukoil. Otkritie Holding is owned by executives of Lukoil, state-owned VTB bank, Otkritie, and other companies. So clearly, this bank is too big to fail.

Lukoil is also one of Otkritie’s largest clients. So Lukoil CEO Vagit Alekperov said in a statement that he saw no risks for Lukoil associated with the bail out, and that Lukoil supported the Central Bank’s decision.

In July, according to Reuters, Kremlin-backed rating agency ACRA downgraded Otkritie to a BBB- rating, citing the “low quality of its loan portfolio.”

On August 17, Moody’s placed Otkritie on review for possible downgrade, citing two big issues:

  1. “The recent elevated volatility of the bank’s customer deposits, which puts pressure on its liquidity position and negatively affects its funding costs”
  2. The bank’s “increased involvement in financing the large financial and industrial assets of its controlling shareholder Otkritie Holding.”

…click on the above link to read the rest of the article…

The US and the World: Wolf Richter on the Keiser Report

The US and the World: Wolf Richter on the Keiser Report

“These things can go on for a long time — until they can’t…”

Here I am with Max Keiser on the Keiser Report, tackling the global schemes of our crazy times: the shifting economic relationships between the US, its allies, and China whose authorities are trying furiously to keep the precarious bad-debt-burdened financial system from imploding. Enjoy the video…

The upside of the control Chinese authorities have over their banking system is fake stability. The downside is too ugly to contemplate. Read…  So When Will China’s Debt Bubble Finally Blow Up?

Peak US Asset Prices? Japanese Acquisitions Hit Record

Peak US Asset Prices? Japanese Acquisitions Hit Record

Their buying binge in the US goes into the “Contrarian Indicators” category.

After eight phenomenal years of surging stock prices in the US, buyers are getting cold feet: Acquisitions targeting US companies dropped 15% so far this year, to $789 billion, according to Dealogic. In Japan, it’s worse: Acquisitions targeting Japanese companies have plunged 41% to $33.6 billion.

But despite the M&A downturn in both countries, there is one peculiar element that is booming: Japanese companies are acquiring US firms at record pace. This year’s 141 deals exceed the prior record for this time of the year by 18%.

In a deal announced on August 24, SoftBank, a Japanese multinational telecommunications and Internet conglomerate that already owns some US jewels such as Sprint and has $135 billion in interest-bearing debt, invested $4.4 billion in US startup WeWork. The deal is rumored to value WeWork at $20 billion.

The deal, done via SoftBank’s Vision Fund, has two parts: $1.4 billion in funding to help WeWork expand in Asia (which includes the previously announced $500 million investment in WeWork China), and $3 billion in funding for WeWork’s parent company.

US commercial real estate – the sector WeWork is in – boomed for seven years straight and prices reached such highs that even the Fed is now consistently mentioning it as one of the big reasons for removing “accommodation” and unwinding QE. It’s worried about $4 trillion in debt that is collateralized by this inflated commercial real estate.

So just in the nick of time. According to Dealogic, SoftBank’s $4.4 billion deal is Japan’s largest outbound real estate deal on record.

SoftBank is all over the place. In June, it announced that it would take two robotics firms – Boston Dynamics and Schaft – off Alphabet’s hands, after Alphabet tried to unload them for a year. Terms of the deal were not disclosed.

…click on the above link to read the rest of the article…

Next Brick to Drop on UK Economy: Housing Bubble Deflates

Next Brick to Drop on UK Economy: Housing Bubble Deflates

London home prices are already tanking, as demand sags.

The symbiotic sectors of construction and real estate have been a vital engine of economic growth in the United Kingdom for decades, but that could be about to come to an end. In the words of Paul Smith, the chief executive of the UK’s largest independent lettings and real estate agency, Haart, “unaffordability in the UK’s property market is now reaching crisis point.” If drastic measures are not taken to tame prices, the UK could lose its place as a property owning democracy, he warns.

The latest figures published by the Office for National Statistics (ONS) reveal that the average cost of a home jumped by £10,000 in June from a year earlier, to £223,000. In the last eight years prices have surged by almost 50%. Its National House Price Index is now 18% higher than during the peak of the prior housing bubble (September 2007). This chart is for the UK overall. But home prices in London have now turned the other way.

Demand is already sagging. In the first six months of 2017 alone, first-time buyer registrations dropped by almost 20% across Haart branches. It seems that a trend that began in London is now going nationwide.

For well over a decade soaring property prices have priced most Londoners out of the market. The number of homeowners in London in the 25 to 29 age bracket has dropped more than 50% since 1990. Foreign buyers have virtually cornered the market, acquiring as much as three-quarters of all new-build housing in the capital in recent years.

…click on the above link to read the rest of the article…

Fitch Threatens US with Downgrade

Fitch Threatens US with Downgrade

Did it forget how the US government hounded Standard & Poor’s?

Bitter irony! Just yesterday, I had a conversation with Bill Tilles, and we agreed on all three points. This morning, we’re already proven wrong on one of them:

  1. A government shutdown as Congress fails to pass spending levels for fiscal 2018? Yes, it could happen.
  2. A failure to raise the debt ceiling, thus pushing the US government into default, or “selective default?” Very unlikely. Lawmakers are political animals that use charades and posturing to accomplish their goals, but they’re not stupid (we hope).
  3. A threat by US ratings agencies to slash the US credit rating due to the debt-ceiling charade and the consequences of a “selective default?” No way, we agreed. Ratings agencies learned their lesson from how the US government hounded Standard & Poor’s after its 2011 downgrade of the US.

A new day, and we’re already wrong. Standard & Poor’s may have learned its lesson. But Fitch Ratings hasn’t – though its language this morning was a lot kinder and gentler (emphasis added).

If the debt limit is not raised in a timely manner prior to the so-called “x date,” Fitch would review the US sovereign rating, with potentially negative implications. We have previously said that prioritizing debt service payments over other obligations if the limit is not raised – if legally and technically feasible – may not be compatible with ‘AAA’ status.

In the most recent letter to Congress, Treasury Secretary Steven Mnuchin said that the US would run out of money by the end of September. This can likely be stretched into October. Just this week, Senate Majority Leader Mitch McConnell swore there was “zero chance” that “we won’t raise the debt ceiling.”

But Fitch adds that Congressional posturing alone could cause a downgrade – the same reason S&P downgraded the US during the debt ceiling fight in 2011. Fitch:

…click on the above link to read the rest of the article…

US Gross National Debt to Spike by $800 Billion in October?

US Gross National Debt to Spike by $800 Billion in October?

The other option: too ugly to even imagine.

“There is zero chance, no chance we won’t raise the debt ceiling,” swore Senate Majority Leader Mitch McConnell (R., Ky.) at an event in Louisville, Kentucky, on Monday.

He who couldn’t get his Republican ducks all lined up in a row to get any major legislation passed this year was confident that the Senate would pass a bill that would raise the debt ceiling so that the government could continue to pay for things that Congress told the Government to pay for, and so that the government could service its debts, rather than default on them.

Treasury Secretary Steven Mnuchin was there with him, pleading once again for a “clean” debt-ceiling increase, according to the Wall Street Journal. His “magic super Treasury powers” that allow the government to conserve cash to avoid having to issue more debt will expire at the end of September, he said.

“This is not about spending money,” he said. “This is about paying for what we’ve spent, and we cannot put the credit of the United States on the line.”

The debt ceiling is just under $20 trillion. While the government can issue bonds to redeem maturing bonds – and it does this all the time – it cannot allow the gross national debt to go beyond the debt ceiling.

But because it has to continue to pay for things that Congress mandated in its various spending bills over the years, the Treasury scrounges up the money from other government accounts, robbing Peter to pay Paul, so to speak. For example it temporarily short-changes the Civil Service Retirement and Disability Fund. These “extraordinary measures,” as they’re called, or the “magic super Treasury powers,” as Mnuchin called it, run out after a while.

…click on the above link to read the rest of the article…

Olduvai II: Exodus
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Olduvai II: Exodus
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Olduvai III: Cataclysm
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