TRADE DEFICIT - Largest-ever trade deficit

GLOBAL RISK - World Economic Forum

Mortgage Lenders Ease Rules for Home Buyers in Hunt for Business 04-18-14 WSJ

Banks Ease Standards Enacted After the Housing Boom Turned to Bust

FALLING ORIGINATIONS

• 2012 $2.0T
• 2013 $1.8T
• 2014 $1.1T -36%

FALLING CREDIT SCORES

FALLING DOWNPAYMENTS

HOUSING -Household Formations & First Time Buyers Collapse

CREDIT RISK - Cracks Showing in Credit Markets

NEW WORLD OF CREDIT TRADERS:

"On Friday I did a piece titled “There is NOT a Credit Bubble” and just this morning, I recommended cutting all CDX IG22 shorts, and going long Credit – with IG CDS as the favorite way, followed by AAA CLO or off the run high yield and leveraged loans.

There will still be trading opportunities to get short credit, I just don’t think that now is the time, and although I think we are not in a bubble, the easy money has been made and we are closer to the top than the bottom of the cycle."

CAR LOANS

• High Risk Zip Code Growth
• Car sales are being held up by sub-prime car lending which like 2008 is securitized and sold as ABS's through the shadow banking system to yield hungry institutions. The situation has improved for borrowers in recent years, and that has been credited with helping spur a sharp upturn in the U.S. auto industry, which collectively moved more than 15.5 million vehicles in 2013—the highest figure since the recession began.
• According to a recent Moody's report, loans that originated last year had the highest delinquencies since those that originated in 2008.

• 2013 Leasing Increased from 22% to 26%
• In Q1 2014 rose to 28%
• 6% on 22% (27% increase) in 15 months and accelerating
• Jeep Grand Cherokee = $29,395 Purchase

1. Mileage Penalties
2. Insurance Issues
3. Maintenance

READ DETAILS IN OUR LATEST REPORT:

Consumer Credit Cracks - The 'New Shadow Banking' Collateral Problem - 21 Apr 2014 

HOUSING

• Cash Deals - 60% of all Existing Sales, 80% of Condos in NY, Florida and Nevada
• HELOC Non-Performing Loans
• Household Formations and First Time Buyers

STUDENT LOANS

• Rising Non Performing Levels
• Forgiveness - WSJ Coverage
• Older Using as Lending Income after tapping out 401K/IRA Loans
• Text Book Costs

CREDIT CARS

• High Risk Zip Code Growth

SHIPPING CREDIT

• 100 Tons of Soybeans unable to get shipping credit
• Baltic Freight Rates Plummeting

BOTTOM LINE: Credit Markets are Warning!

Read Also: Chris Ciovacco - Credit Markets Are Saying Be Careful With Stocks

STUDENT DEBT - Caps & Loan Forgiveness Growing

RETAIL CRE - Imploding Retail Floor Space Requirements

Retail Store Closures Soar In 2014: At Highest Pace Since Lehman Collapse 04-21-14 Zero Hedge

What a better way to celebrate the rigged markets that are telegraphing a "durable" recovery, than with a Credit Suisse report showing, beyond a reasonable doubt, that when it comes to traditional bricks and mortar retailers, who have now closed more stores, or over 2,400 units, so far in 2014 and well double the total amount of storefront closures in 2013, this year has been the worst year for conventional discretionary spending since the start of the great financial crisis!

From Credit Suisse's Michael Exstein

Since the start of 2014, retailers have announced the closure of more than 2,400 units, amounting to 22.6 million square feet, more than double the closures at this point in 2013 (940 units and 6.9 million square feet). After several years of attempting to cut overhead costs, the acceleration in store closures appears to be a response on the part of retailers to cope with the challenge of ecommerce and structural declines in foot traffic, and the need to address declining levels of in-store productivity. The year-to-date totals for store closing activities now challenges 2009 as the most recent year for the highest number of store closings announcements.

While distressed retailers (eg. Radio Shack) and bankruptcies, which have reached a three-year peak year-to-date, make up 63% of the unit closures in 2014, they comprise only 34% of the total square footage closed. On a square footage basis, broadline retailers  contributed over 28% of closures, with M, DDS, JCP, TGT, and Sam's Club participating in right-sizing their store bases.

Office supply stores have been equally significant contributors to the rationalization process as they grapple with the effects of broader distribution and deeper online penetration. We expect this trend to continue as Office Depot evaluates its real estate in the wake of its merger with OfficeMax. Even dollar stores and drug stores, which combined have consistently built out hundreds of stores per year, are beginning to reel back on expansion, with Family Dollar and Walgreens both planning to shutter  underperforming stores.

The acceleration in retail closings follows several years of negative sales growth for many retailers. After slashing expenses and taking a more disciplined approach to spending, there appear to be few levers left to pull, as the top line growth remains difficult. Mall-based stores (both department store anchors and specialty apparel) in particular appear to have taken advantage of leases that have come up for renewal, as opportunities to close underproductive stores. Those that have not participated in the trend to close stores—such as higher end retailers (eg. JWN, Bloomingdale's, and Saks)—have been relocating existing stores to more productive malls, or areas of existing malls. JWN for example recently announced the relocation of its Westfield Horton Plaza San Diego store to an upgraded area within the same mall, and is doing the same thing in Honolulu at the Ala Moana Center.

Of course, it wouldn't be a Wall Street sellside piece if there wasn't a bullish spin on the data:

We would view more momentum in store closures as a positive for the retail industry. Retail as a whole remains overcapacitied.... further rationalization appears to be a necessary change in trend where even during good economic times the store base is being adjusted

Yup - nothing but blue skies ahead.

In fact, here is some more good news. As Bank of America notes, Consumer Durable spending - another key component of any, well, durable recovery - is founering. In their words: "Durable spending has had a very weak recovery by historic standards. The ratio of consumer durables to GDP shows that while the share of spending has recovered, it remains at recessionary levels."

Don't worry, that too is "positive" for the... making shit up industry.

Of course, who needs to spend on durables when one can just spend on stocks that in the new normal can never, ever go down?

US ECONOMY - A Country In Decline from Consuming More than it Produces

PATTERNS - Credit Divergence

PATTERNS - Credit Divergence

Bond Market not Buying cuurent Market Strength

Credit Market not Buying cuurent Market Strength

STATISM - How it Eventually Implodes

Before an empire collapses, it first erodes from within. 

The collapse may appear sudden, but the processes of internal rot hollowed out the resilience, resolve, purpose and vitality of the empire long before its final implosion.
What are these processes of internal rot? Here are a few of the most pervasive and destructive forces of internal corrosion:

1. Each institution within the system loses sight of its original purpose of serving the populace and becomes self-serving. This erosion of common purpose serving the common good is so gradual that participants forget there was a time when the focus wasn't on gaming the system to avoid work and accountability but serving the common good.

2. The corrupt Status Quo corrupts every individual who works within the system.Once an institution loses its original purpose and becomes self-serving, everyone within either seeks to maximize their own personal share of the swag and minimize their accountability, or they are forced out as a potentially dangerous uncorrupted insider.

The justification is always the same: everybody else is getting away with it, why shouldn't I? Empires decline one corruptible individual at a time.

3. Self-serving institutions select sociopathic leaders whose skills are not competency or leadership but conning others into believing the institution is functioning optimally when in reality it is faltering/failing.

The late Roman Empire offers a fine example: entire Army legions in the hinterlands were listed as full-strength on the official rolls in Rome and payroll was issued accordingly, but the legions only existed on paper: corrupt officials pocketed the payroll for phantom legions.

Self-serving institutions reward con-artists in leadership roles because only con-artists can mask the internal rot with happy-story PR and get away with it.

4. The institutional memory rewards conserving the existing Status Quo and punishes innovation. Innovation necessarily entails risk, and those busy feathering their own nests (i.e. accepting money for phantom work, phantom legions, etc.) have no desire to place their share of the swag at risk just to improve sagging output and accountability.

So reforms and innovations that might salvage the institution are shelved or buried.

5. As the sunk costs of the subsystems increase, the institutional resistance to new technologies and processes increases accordingly. Those manufacturing steam locomotives in the early 20th century had an enormous amount of capital and institutional knowledge sunk in their factories. Tossing all of that out to invest in building diesel-electric locomotives that were much more efficient than the old-tech steam locomotives made little sense to those looking at sunk costs.
As a result, the steam locomotive manufacturers clung to the old ways and went out of business. The sunk costs of empire are enormous, as is the internal resistance to change.

6. Institutional memory and knowledge support "doing more of what worked in the past" even when it is clearly failing. I refer to this institutional risk-avoidance and lack of imagination as doing more of what has failed spectacularly.

Inept leadership keeps doing more of what once worked, even when it is clearly failing, in effect ignoring real-world feedback in favor of magical-thinking. The Federal Reserve is an excellent example.

7. These dynamics of eroding accountability, effectiveness and purpose lead to systemic diminishing returns. Each failing institution now needs more money to sustain its operations, as inefficiencies, corruption and incompetence reduce output while dramatically raising costs (phantom legions still get paid).

8. Incompetence is rewarded and competence punished. The classic example of this was "Good job, Brownie:" cronies and con-artists are elevated to leadership roles to reward loyalty and the ability to mask the rot with good PR. Serving the common good is set aside as sychophancy (obedient flattery) to incompetent leaders is rewarded and real competence is punished as a threat to the self-serving leadership.

9. As returns diminish and costs rise, systemic fragility increases. This can be illustrated as a rising wedge: as output declines and costs rise, the break-even point keeps edging higher, until even a modest reduction of input (revenue, energy, etc.) causes the system to break down:

A modern-day example is oil-exporting states that have bought the complicity of their citizenry with generous welfare benefits and subsidies. As their populations and welfare benefits keep rising, the revenues they need to keep the system going require an ever-higher price of oil. Should the price of oil decline, these regimes will be unable to fund their welfare. With the social contract broken, there is nothing left to stem the tide of revolt.

10. Economies of scale no longer generate returns. In the good old days, stretching out supply lines to reach lower-cost suppliers and digitizing management reaped huge gains in productivity. Now that the scale of enterprise is global, the gains from economies of scale have faltered and the high overhead costs of maintaining this vast managerial infrastructure have become a drain.

11. Redundancy is sacrificed to preserve a corrupt and failing core. Rather than demand sacrifices of the Roman Elites and the entertainment-addicted bread-and-circus masses to maintain the forces protecting the Imperial borders, late-Roman Empire leaders eliminated defense-in-depth (redundancy). This left the borders thinly defended. With no legions in reserve, an invasion could no longer be stopped without mobilizing the entire border defense, in effect leaving huge swaths of the border undefended to push back the invaders.

Phantom legions line the pockets of insiders and cronies while creating a useful illusion of stability and strength.

12. The feedback from those tasked with doing the real work of the Empire is ignored as Elites and vested interests dominate decision-making. As I noted yesterday in The Political Poison of Vested Interests, when this bottoms-up feedback is tossed out, ignored or marginalized, all decisions are necessarily unwise because they are no longer grounded in the consequences experienced by the 95% doing the real work.

This lack of feedback from the bottom 95% is captured by the expression "Let them eat cake." (Though attributed to Marie Antoinette, there is no evidence that she actually said Qu'ils mangent de la brioche.)

The point is that decisions made with no feedback from the real-world of the bottom 95%, that is, decisions made solely in response to the demands of cronies, vested interests and various elites, are intrinsically unsound and doomed to fail catastrophically.

How does an Empire end up with phantom legions? The same way the U.S. ended up with ObamaCare/Affordable Care Act. The payroll is being paid but there is no real-world feedback, no accountability, no purpose other than private profit/gain and no common good being served.

That's how empires collapse: one corrupted, self-serving individual at a time, gaming one corrupted, self-serving institution or another; it no longer matters which one because they're all equally compromised. It's not just the border legions that are phantom; the entire stability and strength of the empire is phantom. The uncorruptible and competent are banished or punished, and the corrupt, self-serving and inept are lavished with treasure.

This is how empires collapse: one complicit participant at a time.

STATISM - How it Eventually Implodes

Before an empire collapses, it first erodes from within. 

The collapse may appear sudden, but the processes of internal rot hollowed out the resilience, resolve, purpose and vitality of the empire long before its final implosion.
What are these processes of internal rot? Here are a few of the most pervasive and destructive forces of internal corrosion:

1. Each institution within the system loses sight of its original purpose of serving the populace and becomes self-serving. This erosion of common purpose serving the common good is so gradual that participants forget there was a time when the focus wasn't on gaming the system to avoid work and accountability but serving the common good.

2. The corrupt Status Quo corrupts every individual who works within the system.Once an institution loses its original purpose and becomes self-serving, everyone within either seeks to maximize their own personal share of the swag and minimize their accountability, or they are forced out as a potentially dangerous uncorrupted insider.

The justification is always the same: everybody else is getting away with it, why shouldn't I? Empires decline one corruptible individual at a time.

3. Self-serving institutions select sociopathic leaders whose skills are not competency or leadership but conning others into believing the institution is functioning optimally when in reality it is faltering/failing.

The late Roman Empire offers a fine example: entire Army legions in the hinterlands were listed as full-strength on the official rolls in Rome and payroll was issued accordingly, but the legions only existed on paper: corrupt officials pocketed the payroll for phantom legions.

Self-serving institutions reward con-artists in leadership roles because only con-artists can mask the internal rot with happy-story PR and get away with it.

4. The institutional memory rewards conserving the existing Status Quo and punishes innovation. Innovation necessarily entails risk, and those busy feathering their own nests (i.e. accepting money for phantom work, phantom legions, etc.) have no desire to place their share of the swag at risk just to improve sagging output and accountability.

So reforms and innovations that might salvage the institution are shelved or buried.

5. As the sunk costs of the subsystems increase, the institutional resistance to new technologies and processes increases accordingly. Those manufacturing steam locomotives in the early 20th century had an enormous amount of capital and institutional knowledge sunk in their factories. Tossing all of that out to invest in building diesel-electric locomotives that were much more efficient than the old-tech steam locomotives made little sense to those looking at sunk costs.
As a result, the steam locomotive manufacturers clung to the old ways and went out of business. The sunk costs of empire are enormous, as is the internal resistance to change.

6. Institutional memory and knowledge support "doing more of what worked in the past" even when it is clearly failing. I refer to this institutional risk-avoidance and lack of imagination as doing more of what has failed spectacularly.

Inept leadership keeps doing more of what once worked, even when it is clearly failing, in effect ignoring real-world feedback in favor of magical-thinking. The Federal Reserve is an excellent example.

7. These dynamics of eroding accountability, effectiveness and purpose lead to systemic diminishing returns. Each failing institution now needs more money to sustain its operations, as inefficiencies, corruption and incompetence reduce output while dramatically raising costs (phantom legions still get paid).

8. Incompetence is rewarded and competence punished. The classic example of this was "Good job, Brownie:" cronies and con-artists are elevated to leadership roles to reward loyalty and the ability to mask the rot with good PR. Serving the common good is set aside as sychophancy (obedient flattery) to incompetent leaders is rewarded and real competence is punished as a threat to the self-serving leadership.

9. As returns diminish and costs rise, systemic fragility increases. This can be illustrated as a rising wedge: as output declines and costs rise, the break-even point keeps edging higher, until even a modest reduction of input (revenue, energy, etc.) causes the system to break down:

A modern-day example is oil-exporting states that have bought the complicity of their citizenry with generous welfare benefits and subsidies. As their populations and welfare benefits keep rising, the revenues they need to keep the system going require an ever-higher price of oil. Should the price of oil decline, these regimes will be unable to fund their welfare. With the social contract broken, there is nothing left to stem the tide of revolt.

10. Economies of scale no longer generate returns. In the good old days, stretching out supply lines to reach lower-cost suppliers and digitizing management reaped huge gains in productivity. Now that the scale of enterprise is global, the gains from economies of scale have faltered and the high overhead costs of maintaining this vast managerial infrastructure have become a drain.

11. Redundancy is sacrificed to preserve a corrupt and failing core. Rather than demand sacrifices of the Roman Elites and the entertainment-addicted bread-and-circus masses to maintain the forces protecting the Imperial borders, late-Roman Empire leaders eliminated defense-in-depth (redundancy). This left the borders thinly defended. With no legions in reserve, an invasion could no longer be stopped without mobilizing the entire border defense, in effect leaving huge swaths of the border undefended to push back the invaders.

Phantom legions line the pockets of insiders and cronies while creating a useful illusion of stability and strength.

12. The feedback from those tasked with doing the real work of the Empire is ignored as Elites and vested interests dominate decision-making. As I noted yesterday in The Political Poison of Vested Interests, when this bottoms-up feedback is tossed out, ignored or marginalized, all decisions are necessarily unwise because they are no longer grounded in the consequences experienced by the 95% doing the real work.

This lack of feedback from the bottom 95% is captured by the expression "Let them eat cake." (Though attributed to Marie Antoinette, there is no evidence that she actually said Qu'ils mangent de la brioche.)

The point is that decisions made with no feedback from the real-world of the bottom 95%, that is, decisions made solely in response to the demands of cronies, vested interests and various elites, are intrinsically unsound and doomed to fail catastrophically.

How does an Empire end up with phantom legions? The same way the U.S. ended up with ObamaCare/Affordable Care Act. The payroll is being paid but there is no real-world feedback, no accountability, no purpose other than private profit/gain and no common good being served.

That's how empires collapse: one corrupted, self-serving individual at a time, gaming one corrupted, self-serving institution or another; it no longer matters which one because they're all equally compromised. It's not just the border legions that are phantom; the entire stability and strength of the empire is phantom. The uncorruptible and competent are banished or punished, and the corrupt, self-serving and inept are lavished with treasure.

This is how empires collapse: one complicit participant at a time.

ECONOMIC OUTLOOK WITH RICHARD DUNCAN

More on Market Watch Services

FLOWS - Liquidity, Credit & Debt

A TREACHEROUS MARKET AHEAD

The stock market may be in for a nasty plunge. The second quarter has gotten off to a very bumpy start and the odds are that there is much worse to come.

Valuations are stretched due to the liquidity that the Fed has been injecting into the financial markets through Quantitative Easing. But QE is being wound down and is due to end by November. It looks like the smart money has begun to get out of stocks before the liquidity dries up. The NASDAQ is now down 8% from its year-to-date high; and the Dow, while still only 2.5% below its all time high, had three triple-digit down days last week.

This skittish behavior now is all the more worrying because the liquidity in the financial markets will continue to be quite excessive through the end of this quarter. Even with “tapering”, the Fed will still inject $145 billion into the markets during Q2. Meanwhile, the government, which normally removes a great deal of liquidity from the markets by borrowing to fund its budget deficits, probably won’t have a budget deficit during the second quarter. It’s likely to have a surplus since Americans pay taxes in April. Therefore, the government won’t have to borrow much, if anything at all, this quarter.

The problem with liquidity only arrives in the third quarter. QE will be reduced to $85 billion then, while the government will have to borrow approximately twice that amount to fund its third quarter budget deficit. Then, in the fourth quarter, liquidity conditions become considerably worse. The Fed will only inject $20 billion as QE comes to an end, while I estimate the government will have to borrow something like $240 billion. From that quarter on, there will be a significant liquidity drain.

The fourth quarter is still some time off, however. If the markets are this nervous now, when there is still so much excess liquidity, just imagine what could happen when the liquidity dries up and then begins to be drained from the financial markets by government borrowing.

The risks are all the greater given that market valuations are already expensive. The Shiller Cyclically Adjusted PE Ratio (the CAPE ratio) shows the Dow to be on 25 times earnings, well above its average since 1881 of 16.5 times. And, more broadly, the ratio of Net Worth to Disposable Personal Income (i.e. Wealth to Income) is also flashing a bright red warning signal that asset prices in general may be unsustainably high. Since 1952, that ratio has averaged 525%. During the NASDAQ bubble it peaked at 615% and then fell sharply when that bubble popped. It hit an all time high of 660% in 2006 during the property bubble; and then fell sharply again during the subsequent crisis. By the end of last year, it had climbed back to 639%. That suggests we may be nearing the limit of how far the Fed can drive up asset prices and net worth through fiat money creation.

I had thought that excess liquidity might push the stock market even higher during the second quarter, before the evaporation of liquidity caused a big selloff sometime during the second half. In this scenario, I had imagined that, as liquidity dried up in the third quarter, the yields on government bonds and mortgages would rise, causing the stock market and property market to fall. It’s too early to rule this scenario out. Things may still play out that way.

However, the market action over the past two weeks suggests a different scenario is also possible. In this scenario, stock investors panic and get out of equities even before the liquidity drain begins to push up interest rates. They then use the cash they receive from selling stocks to invest in “safe haven” government bonds, pushing bond prices up and bond yields down even further.

In either scenario, the Fed would most probably feel compelled to reverse course on tapering QE and announce that it will continue creating fiat money on into 2015. The alternative would be to accept a new recession caused by a stock market crash. I don’t believe the Fed would dare allow that to happen.

So, it looks to me that it is only a matter of time before the Fed has to extend QE. When it does, stocks will surge, net worth will recover and recession will once again be averted – for a while. But, a lot of bad things could happen to the stock market between now and then.

The market may yet recover its composure and, fuelled by excess liquidity, move higher over the next couple of months. It seems to me, however, that the risk-reward tradeoff is becoming less and less favorable by the day. The old stock market adage is “Sell in May and go away”. This year, it’s just possible that May may be too late.