Stocks seem set to end their lengthy winning streak on disappointing news. The PPI fell for a 3rd consecutive month on an accelerating trend stoking deflation fears as it dropped .5% cutting the annualized rate by almost half to just 2.7%. Industrial Production managed to gain .1% despite substantial decline in autos, parts and non-durable goods. Manufacturing capacity utilization fell fractionally to 71.6%.
JP Morgan reported that it earned an impressive sounding 4.8 billion in the second quarter but the closer you looked the worse in got. True to finance sector form their earnings report had more in common with a circus sideshow than a real earnings statement. While loan write offs are lower for the bank the 1.5 billion reduction in loss reserves, and commensurate increase in earnings, given the fundamentals of real estate and the economy don’t make a lot of sense but there you go. I imagine they will join B of A and Citigroup with a mea culpa quite soon regarding the ‘ahem” accidental use of repo 105 transactions to spruce up their “ahem” audited books and records.
On the subject of balance sheets I came across a very interesting report of late that looked at real estate from the perspective of historical mortgage debt to equity. This has a substantial and material impact on bank balance sheets, think toxic assets amongst other items as will see in a minute. The official party line is that banks simply need to resume lending so that borrowers can continue spending and that real estate is now very affordable, primarily based on interest rates. While government debt, including sovereign and municipal gets a fair amount of coverage by the media, very little space is devoted to consumer debt, which of course includes mortgage debt.
The study found that the US economy had 4 million surplus housing units, 25% of mortgages had negative equity and that mortgage debt was 4 trillion over its historical average, which represents about 30% of GDP. Hard to picture a return to a normal economy anytime soon with that overhang.
The report went on to illustrate that historically mortgage debt equaled 40% of the value of the total housing stock. In 2006 the report noted that the aggregate value of residential real estate reached 23 trillion and was encumbered with 10 trillion in mortgage debt. Housing’s value has since fallen to about 16 trillion, while the debt has only slipped about a trillion, leaving 10 trillion meaning that historically debt remains 4-trillion too high and this is where we come back to the finance sectors balance sheets.
As that is where we find the toxic assets, meaning the MBS, foreclosed real estate and other collateral whose value is both impaired and excessively encumbered by the previously mentioned historically high mountain of debt. The reason this doesn’t show on said balance sheets is primarily because of the assorted accounting gimmicks both allowed and encouraged by the regulators enabling the finance sector to use mark to model asset pricing, essentially their opinion of what something is worth. This of course dramatically improves the condition of their balance sheet, as opposed to the mark to market model that would most likely precipitate wholesale capital calls and wide spread financial institution failure.
Hi and welcome to The Profit Motive, I’m your host Caleb Lawrence. Once upon a time in America the media acted as the watchdog of the corporations and the state. In the modern era it’s all about ratings and profits, opinion has been substituted for news and frequently is presented as fact. 
