KeNo's Housing and Economic Portal: Friday May 22 Housing and Economic stories

TOP STORIES:

Chicago Faces $2.2 Billion Bank Payout After Rating Cut to Junk - (www.bloomberg.com) Chicago may have to pay banks as much as $2.2 billion after Moody’s Investors Service dropped its credit rating to junk, deepening the fiscal crisis in the third-largest U.S. city. The company’s decision Tuesday to cut Chicago’s $8.1 billion of general obligations two ranks to Ba1, one step below investment grade, allows banks to demand that the city repay debt early and exposes it to fees to end swaps contracts, Moody’s said in a statement. Mayor Rahm Emanuel plans to refinance $900 million of debt to reduce the penalties. The downgrade adds to the financial pressure on Chicago, which was already the lowest-rated of any big U.S. city except Detroit. It follows an Illinois Supreme Court ruling last week that safeguards retirement benefits, casting doubt on Chicago’s ability to curb its $20 billion pension-fund shortfall.

US shale has 'blinked' in battle against OPEC: IEA - (www.cnbc.com) U.S. oil producers appear to have lost their battle with OPEC (Organization of the Petroleum Exporting Countries) over market share, but the war is only just beginning, the International Energy Agency (IEA) warned Wednesday. "In the supposed standoff between OPEC and U.S. light tight oil (LTO), LTO appears to have blinked," the Paris-based energy think tank said in its new monthly report. "Following months of cost cutting and a 60 percent plunge in the U.S. rig count, the relentless rise in U.S. supply seems to be finally abating." The price of oil has collapsed from near $120 a barrel in June last year to lows of around $45 a barrel in January, although it has since bounced back to around the $60-a-barrel level. This dramatic fall in prices was due to weak demand, a strong dollar and booming U.S. oil production, according to the International Energy Agency (IEA).

The Middle Class Has a Debt Problem - (www.bloomberg.com) Of all the burdens weighing on the American middle class, one has grown immensely in recent years: debt. Absent reform, it presents one of the gravest threats to the prosperity of the typical family. For much of the past century, easier access to credit benefited most Americans. It helped them buy what many see as the necessities of a middle-class life -- a home, a car, an education. Those assets, in turn, gave them the stability and earning power they needed to build wealth. Regular mortgage payments acted as a form of saving, making home ownership almost synonymous with financial security. More recently, though, borrowing has taken on a very different character. During the housing boom of the early 2000s, it became a way to bet on house prices, or to turn home equity into the spending money needed to compensate for stagnant incomes. After the housing bust, the excesses shifted into other areas, such as auto loans designed to end in repossession, and student loans that leave graduates too indebted to move out of their parents' home.

Greenspan: Get ready for another taper tantrum - (www.cnbc.com) Another market disruption from higher interest rates is virtually certain, according to former Federal Reserve Chairman Alan Greenspan. "Just remember we had the 'taper tantrum.' And we're going to get another one," Greenspan said Wednesday at the Global Private Equity Conference in Washington, DC. "This is a very tough period to get through," he added about the Fedincreasing interest rates. "Normalization is great, but the process of getting there is going to be very rocky." Greenspan said there was no way to get around bond market volatility but said it was necessary to help the Fed and other central banks reduce overall debt. He did not give specifics on how fast Fed Chair Janet Yellen should increase rates, currently predicted to be a highly gradual process from near-zero.

No Bubble Here: In SF, $1.5 Million for 750 Sq. Ft. Flat, Rent a Bed for $1,000/Month - (www.oftwominds.com) The incredible luxury of having a bedroom to yourself is out of reach for all but the very well-paid. Having an apartment to yourself requires serious money. Those who say there are only two sure things in life, death and taxes, should add a third sure thing: realtors and stock market mavens will deny there's a bubble even when it's obvious to everyone the bubble has already reached insane levels of overvaluation. And so here we are yet again, with housing and stocks both hitting price levels that make no sense in terms of traditional measures of value. And since these pesky metrics make it impossible to claim there's no bubble, those benefiting from the bubble have to claim that this time it's different: not only is the current bubble rational, there's no reason it can't keep expanding indefinitely. In a zero-yield world, it's perfectly reasonable for corporations to borrow trillions of dollars to pump up their own stocks with buy-backs. Profits may be sagging but thanks to the miracles of Cargo-Cult mumbo-jumbo such as margin expansion, profits don't really matter that much. What counts is the central banks have our back: to guarantee a profit, just buy stocks now before the central banks push valuations even higher.

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