Showing posts with label US housing bubble. Show all posts
Showing posts with label US housing bubble. Show all posts

Sunday, March 19, 2017

Yellen’s Most Dovish Rate Hike

The US Fed hiked interest rates for the second time in three months last week

But instead of a perceived tightening, the perception of a dovish rate hike prompted for a decline of the USD which combusted global risk assets.

Alhambra’s Joseph Calhoun handily wins the quote of the week: The market was starting to price in four (today’s plus two more) and that had to come out of the market after the meeting. This was the most dovish rate hike in the history of rate hikes. Greenspan’s old conundrum was that long term rates weren’t rising as the Fed hiked. The conundrum today is that even short term rates aren’t rising as the Fed hikes. Two year note yields are right back to where they were after the December rate hike. 

Ms. Yellen actually poured oil into the fire when she said: “Even after this increase, monetary policy remains accommodative, thus supporting some further strengthening in the job market and a sustained return to two percent inflation”

She also introduced the word “symmetric” in the FOMC statement which meant flexibility in their inflation targeting: “And it's a reminder, 2 percent is not a ceiling on inflation. It's a target. It's where we always want inflation to be heading. And there will be some times when inflation is above 2 percent, just like it's been below 2 percent. We're not shooting for inflation above 2 percent. But it's a reminder that there will be deviations above -- above and below when we're achieving our objective.”

I have recently opined that the likely reason for the rate hikes may hardly be due to the reading of statistical tea leaves like output gaps but rather that the Fed behind the curve. [Has the Fed “Fallen Behind the Curve”?(March 11, 2017)]

From the perspective above, it’s easy to see the likely factors or influences that may have altered the perspective of the majority officials of the US Federal Reserve.

If the FED has indeed been behind the curve, timid rate hikes will only further bolster the underlying risk appetites.

And Ms. Yellen’s observation that this may “potentially require us to raise rates rapidly sometime down the road” may become self-fulling prophecy.

This is what I meant by falling behind the curve.

Instead of impeding further ramps in asset prices, half-hearted rate increases serve only to accelerate a feedback loop.  In 2004-2006, the Fed raised rates by 17 times! Yet prices of property and the S&P escalated further. US housing prices topped a few months before the Fed’s last rate hike.

In sales, this would be equivalent to “selling a price increase”. In anticipation of a price increase, buyers would buy more quantity of items than they would under normal circumstances. By the same token, timid rate hikes, instead, whet the people’s appetite to load up on debt which they use to chase after asset bubbles. That’s what happened during the last credit cycle which ended with the Lehman bankruptcy.

Yet in the previous cycle, the FED raised rates about four years after (or in 2004) it began cutting rates in 2001 in response to the dotcom bust.

In the current cycle, the Fed hiked rates in late 2015, seven years after it began to slash rates in 2007 in response to the Great Recession.

Seen from the context of the S&P, the first time the Fed increased rates the bull market was only 1 and a half years old or at its first leg.

In the current setting, the Fed increased rates in December 2015 when the bullmarket was about 7 years old!

The point here is that modern day central banks are afraid to take the proverbial punch bowl away because of they are in mortal dread of debt deflation. Debt signifies a monster which they have created, which ironically, they have been afraid to confront.

Yet the question is if the aging US bullmarket would still have the stamina to carry through amidst the tremendous amount of malinvestments that have been acquired or accumulated through the years.

As I have been pointing out here, near vertical record US stocks has been founded from increasing questionable quality. It has been practically been pillared on hope backed by rationalizations and by the herding effect predicated on the fear of missing out.

In the 4Q US flow of funds, US stocks were driven secondarily by corporate buybacks and primarily by retail investors who chased after passive funds.

Here’s Mr. Ed Yardeni with the details:  (bold mine)

(1) Supply-side totals. Net issuance of equities last year totaled minus $229.7 billion, with nonfinancial corporate (NFC) issues at -$565.7 billion and financial issues at $269.7 billion. The increase in financials was led by a $283.9 billion increase in equity ETFs, the biggest annual increase on record. The decline in NFC issues reflected the impact of stock buybacks and M&A activity more than offsetting IPOs and secondary issues. 

(2)
 Demand-side total. To get a closer view of the demand for equities, let’s focus now on the quarterly data at an annual rate rather than at the four-quarter sum. This shows that equity mutual funds have been net sellers for the past five quarters, reducing their holdings by $151.3 billion over this period. Over the same period, equity ETFs purchased $266.4 billion, with their Q4-2016 purchases a record $485.4 billion, at a seasonally adjusted annual rate. Other institutional investors have been selling equities for the past 24 consecutive quarters, i.e., during most of the bull market! Foreign investors have also been net sellers over this same period. 

So smart money sold while retail investors piled in.

The normally bullish Mr. Yardeni concluded: “The bottom line is that the current bull market has been driven largely by corporations buying back their shares, as I have been observing for many years. More recently, we have been seeing individual investors increasingly moving out of equity mutual funds and into equity ETFs.Both kinds of buyers tend to be much less concerned about historically high valuation multiples than more traditional buyers are. We may be witnessing the beginning of an ETF-led melt-up, which may simply reflect individual investors pouring money into passive stock index funds. Lots of them seem to bemore interested in seeking out low-cost funds rather than cheap stocks. In this case, valuation multiples would lead the melt-up, until something happens to scare investors out of those passive funds, which could trigger either a correction or a nasty meltdown. It is obviously a bit late in the game to start only now to be a long-term investor given that stocks aren’t cheap no matter how valuation is sliced and diced.”

And there’s one thing I forgot to mention last week.

The US treasury injected hundreds of billions of funds into the system in anticipation of the expiration of the US debt ceiling last March 15 from the start of the year. Since this has almost been similar to a credit easing, this may have driven the record-breaking “Trump bump trade”. Unfortunately, this is a liquidity illusion. The first reason: the Fed’s hiking cycle would mean trimming of excess reserves in the system. The next reason is that when the debt ceiling will be lifted, the US treasury will likely sell huge amounts of debt into the system which means it would entail draining a lot of liquidity in the system.

 
And just how will a drain in liquidity impact the already pressured US retail industry led by the restaurant and the department stores? Retail sales grew at the weakest pace in 6 months last February.

Even worst, credit instruments to shopping malls seem as Wall Street’s next biggest shorts!

From Bloomberg (March 13, 2017):

Wall Street speculators are zeroing in on the next U.S. credit crisis: the mall.

It's no secret many mall complexes have been struggling for years as Americans do more of their shopping online. Now they're catching the eye of hedge-fund types who think some may soon buckle under their debts, much as many homeowners did nearly a decade ago.

Like the run-up to the housing debacle, a small but growing group of firms are positioning to profit from a collapse that could spur a wave of defaults. Their target: securities backed not by subprime mortgages, but by loans taken out by beleaguered mall and shopping center operators. With bad news piling up for anchor chains like Macy's and J.C. Penney, bearish bets against commercial mortgage-backed securities are growing.

Wow, if US shopping malls become the epicenter of a crisis, this will likely spread across the globe the world! Guess what would happen to Philippine malls???

As a final thought, it wasn’t just the FED that hiked rates. Countries which had their currencies pegged to the USD like Hong Kong, UAE and Kuwait raised interest rates. China’s PBOC raised rates on repos (open market operations) and medium lending facility 10 hours after the FED hiked. While the BOJ kept policy unchanged, rumors floated of a “stealth tapering” where the BoJ would miss hitting its annual LSAP targets.

With global stocks on a tear as liquidity is being withdrawn, just how sustainable can this environment be?

As a final note, the Geert Wilders, the far-right contender lost the Netherland’s national elections last week.

Saturday, May 24, 2014

PBOC’s Zhou Admits China May Have Housing Bubble in ‘Some Cities’

Last Sunday I wrote (bold original)
As you can see, bubbles have risen to levels where authorities can’t hide them anymore. Instead of denying them, what they are doing today has been to downplay their risks.
China’s central bank governor has just affirmed my observation.

From the Bloomberg:
China may have a housing bubble only in “some cities,” a issue that’s difficult to resolve with a single nationwide policy, the nation’s central bank Governor Zhou Xiaochuan said.

China is a big country with multiple housing markets, many of which are still drawing new inhabitants from the countryside, Zhou said yesterday in an interview in Kigali, Rwanda, where he was attending the African Development Bank’s annual meeting.

“China is still in the process of urbanization, so there may be some kind of volatility in the supply-demand relationship,” Zhou said. “But if you look at the medium-term of urbanization, I think we still have a very good market for home sectors.”
The downscaling of risks by suggesting that bubbles are local rather than national have been an institutional or conventional response of authorities.

The US experience. 

The Washington Post on outgoing US Fed Chair Alan Greenspan in 2005…
Greenspan has said recently that he sees no national bubble in home prices, but rather "froth" in some local markets. Prices may fall in some areas, he indicated. And he warned in a speech last month that some borrowers and lenders may suffer "significant losses" if cooling house prices make it difficult to repay new types of riskier home loans -- such as interest-only adjustable-rate mortgages.


some fantastic quotes from Ben Bernanke the above video (bold mine)

In 2005
INTERVIEWER: Tell me, what is the worst-case scenario? Sir, we have so many economists coming on our air and saying, "Oh, this is a bubble, and it's going to burst, and this is going to be a real issue for the economy." Some say it could even cause a recession at some point. What is the worst-case scenario, if in fact we were to see prices come down substantially across the country?

(1:05)  BERNANKE: Well, I guess I don't buy your premise. It's a pretty unlikely possibility. We've never had a decline in house prices on a nationwide basis. So what I think is more likely is that house prices will slow, maybe stabilize: might slow consumption spending a bit. I don't think it's going to drive the economy too far from its full employment path, though.
More:
INTERVIEWER: So would you agree with Alan Greenspan's comments recently that we've got some areas of that country that are seeing froth, not necessarily a national situation, but certainly froth in some areas?

(1:34) BERNANKE: You can see some types of speculation: investors turning over condos quickly. Those sorts of things you see in some local areas. I'm hopeful — I'm confident, in fact, that the bank regulators will pay close attention to the kinds of loans that are being made, and make sure that underwriting is done right. But I do think this is mostly a localized problem, and not something that's going to affect the national economy.
When the real estate bubble bust became apparent July 2007
(4:0) BERNANKE: The pace of home sales seems likely to remain sluggish for a time, partly as a result of some tightening in lending standards, and the recent increase in mortgage interest rates. Sales should ultimately be supported by growth in income and employment, as well as by mortgage rates that, despite the recent increase, remain fairly low relative to historical norms. However, even if demand stabilizes as we expect, the pace of construction will probably fall somewhat further, as builders work down the stocks of unsold new homes. Thus, declines in residential construction will likely continue to weigh on economic growth in coming quarters, although the magnitude of the drag on growth should diminish over time. The global economy continues to be strong, supported by solid economic growth abroad. U.S. exports should expand further in coming quarters. Overall, the U.S. economy seems likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008 to a rate close to the economy's underlying trend.
Déjà vu?

The PBoC, the US Federal Reserve, or even the Bangko Sentral ng Pilipinas all speak of the same language. It’s the language of statistical smokescreens, blanket deniability, blindness, the defense of the status quo, and most importantly, the implied worship of bubbles.

Thursday, May 01, 2014

US GDP Grew by .1% hit by EM Contagion and Housing Downturn

Thanks” to US government spending on “Obamacare”, which spared the US economy a negative growth rate, 1st quarter statistical GDP grew by a paltry .1%! [As a side note: Shouldn't record stocks be saying otherwise? Or more signs of redistribution from Main Street to Wall Street, thus the dichotomy or parallel universe?]

While the mainstream has attributed the substantial slowdown to “weather”, I have been saying that such represents a part of the unfolding periphery-to-the-core phenomenon of the global bubble cycle.

Last February I wrote
If emerging markets has been attributed by some as having pulled out the global economy from the recession of 2008, now will likely be the opposite dynamic, the ongoing mayhem in emerging markets are likely to weigh on the global economy and equally expose on the illusions of strength brought upon by credit inflation stoked by inflationist policies.
I have also pointed out in March signs of a material decline in growth rates of exports by many of the world’s major exporters would imply that the “world will be faced with a dramatic decline in the rate of growth” 

image

My observations of slowing exports seem to have been validated by the Wall Street Journal “Combined exports from Asia's four export powerhouses—China, Japan, South Korea and Taiwan—slid 2% in the first three months of this year from the same period last year.”

And this has not just been in Asia, as I recently posted  “global trade in early 2014 registered its “first negative reading since October 2012”.  

I also noted in the same post that in the US a 130 basis points hike in interest rates has impacted housing negatively that will likely have a spillover effect on the GDP.
And according to the US BEA data, finance, insurance, real estate and leasing accounts for the largest share of US GDP (in 2013 19.67% of Gross Value added) add construction’s share 3.6%, finance and housing accounts for one fifth of the statistical GDP. So a sustained slowdown in real estate industry will materially weigh on US GDP.
All these revealed in the US 1st Quarter GDP

Here is a summary of the “puny” .1% growth from the Wall Street Real Time Economics Blog: (bold mine, double asterisk mine)
Hey, Big Spender

Consumer spending accounts for more than two-thirds of U.S. economic output, and it rose at a seasonally adjusted annual rate of 3.3% in the fourth quarter. It slowed in the first quarter, but not much, growing at a 3% pace. Spending on goods slowed to a 0.4% pace, but spending on services – like health care and energy** – rose to a 4.4% pace. Personal consumption expenditures were the single biggest boost to economic output in the first three months of the year, and helped offset big drags on growth like trade.

Businesses Close Their Checkbooks

Spending by businesses was another story. Fixed nonresidential investment fell at a 2.1% rate in the first quarter after surging 7.3% in 2012 and rising a more modest 2.7% in 2013. Spending on equipment fell at an annual pace of 5.5% in the first quarter of 2014, the worst drop since the second quarter of 2009, after rising at a 10.9% pace in the fourth quarter of 2013.

Exports a Boost No More

Net trade subtracted 0.83 percentage point from GDP growth in the first quarter as exports lagged and the trade gap widened. Exports fell at a 7.6% pace, the most since the recession ended in 2009. Trade had been a big boost to economic output in the second half of 2013, contributing 0.14 percentage point in the third quarter and 0.99 percentage point in the fourth quarter. Stay tuned, though: Trade data from March will be released by the Commerce Department next Tuesday, which could lead to significant revisions in GDP.

Housing Hurting

The U.S. housing recovery’s slowdown was a drag on GDP in the first quarter. Residential fixed investment — spending on home building and improvements — pulled down GDP growth to the tune of 0.18 percentage point in the first quarter after contributing 0.33 percentage point to GDP growth for all of last year.

Inventories Drag

A big buildup in private inventories helped boost economic output in the third quarter last year to a 4.1% annual rate. In the first quarter of 2014, by contrast, slowing inventories subtracted 0.57 percentage point from GDP growth. A measure of GDP that strips out inventory changes, final sales of domestic product, grew at a 0.7% pace in the first quarter, down from its 2.7% pace in the fourth quarter.
**increase in energy spending has been due to energy “price inflation
 
So we have a combo of weak consumer, a downturn in housing, capital spending and likewise in global trade which means a broad based slowdown that has been cushioned only by government spending in health services and energy spending via higher price inflation. Yet the forces that counterbalanced the fall in the statistical economic growth has their own respective costs that will billed to taxpayers and to US dollar holders in the future.

So the recent rise in interest rates (via higher bond yields) and the initial smack down on Emerging Markets by the same force, have both become significant factors in the US economic slowdown. Think of it, yields of 10 year treasuries have barely breached the 3% level yet we get all these signs of troubles. The 3% barrier has almost been reached in September and was touched last in December (see chart here) while today trades range bound between 2.6% and 2.8%. So for me, the 3% looks like a crucial threshold level indicative of the viability or serviceability of the critical mass of world debts denominated in US dollars. In short, the farther yields of US 10 year notes go beyond 3%, the greater the likelihood of chains of default. For now, events have been suggesting of a slow motion progression of internal entropy.
The US 1st quarter GDP should represent a red flag for emerging markets. Again as I wrote last February: (bold original)
if the adverse impact of emerging markets to the US and developed economies won’t be offset by growth (exports, bank assets and corporate profits) in developed nations or in frontier nations, then there will be a drag on the growth of developed economies, which would hardly be inconsequential. Why? Because the feedback loop from the sizeable developed economies will magnify on the downside trajectory of emerging market growth which again will ricochet back to developed economies and so forth. Such feedback mechanism is the essence of periphery-to-core dynamics which shows how economic and financial pathologies, like biological contemporaries, operate at the margins or by stages.
Contradictory forces of significantly slowing economic growth combined with the Federal Reserve’s continued tapering—the Fed cut monthly asset purchases to $45 billion at the April meetingamidst  record (Dow Jones) stock market…looks like ingredients for the Wile E. Coyote moment.

Saturday, April 26, 2014

130 bps Rate Hike Throws Cold Water on US Housing Boom

All it took was a 130 basis point rate hike to put a brake in the US housing market boom.

Writes David Stockman at his Contra Corner:
the domestic headwinds are already evident in the stunning roll-over in the housing market during the last several months. Now that the “flash” boom in housing prices is over owing to the hasty retreat of the big LBO funds from the short-lived “buy-to-rent” market, the underlying weakness of organic demand has become starkly evident.

Sales are now down significantly from year ago levels in major markets all across the country, and, as the following list makes clear, it was not the weather that did it. Instead, it was 130 basis points of interest rate normalization—-and that is just the beginning.

The salient fact of the matter is that the decades long era of “refi madness” is over. During the first quarter, gross mortgage originations totaled just $235 billion—the lowest rate in 14 years. Stated differently, the mortgage issuance run rate is now about $1 trillion on an annualized basis—-a level that represents just 30% of the normal volume since the mid-1990s.

And the stalled-out housing finance engine is not unique. Its just the leading edge illustration of what happens when credit-fueled rebounds no longer happen. Indeed, the crash of Q1 mortgage finance volumes shown below demonstrates that the very notion of “escape velocity”, or what in truth is really a euphemism for a credit fueled growth surge, is an obsolete relic of a bygone era.
March  sales volume remained the slowest since July 2012, when it was 4.59 million.
Major metros with decreasing sales volume from a year ago included:


  1. San Jose (down 18%)


  1. San Francisco (down 15%)


  1. Los Angeles (down 14%)


  1. Rochester, N.Y., (down 14%)


  1. Sacramento (down 13%)


  1. San Diego (down 12%)


  1. Orlando (down 12%)


  1. Las Vegas (down 12%)


  1. Providence, R.I. (down 12%)


  1. Phoenix (down 11%)


  1. Riverside-San Bernardino, Calif. (down 11%)


  1. Hartford, Conn., (down 10%)


  1. Boston (down 8%)

In short, this time is different. The debt party is over. The era of financial retrenchment and living within our means has begun. It might even be that “selling the dip” is about to become the new normal.  Even this morning’s Wall Street Journal could not powder the pig.

image
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The Zero Hedge also exhibit how the current real estate slowdown are being reflected on homebuilder stocks (including lumber)

And according to the US BEA data, finance, insurance, real estate and leasing accounts for the largest share of US GDP (in 2013 19.67% of Gross Value added) add construction’s share 3.6%, finance and housing accounts for one fifth of the statistical GDP. So a sustained slowdown in real estate industry will materially weigh on US GDP.

Add to this have been growing signs of strains in the technology sector.

Some have been banking on manufacturing to offset the above. Manufacturing has a 12.4% share to 2013 GDP. But the $64 trillion question is, manufacturing sold to whom? 

In early March I noted that the EM contagion has materially slowed down external trade which implies lower global growth. From the trade aspect my projection has been confirmed by the Netherlands Bureau for Economic Policy Analysis which noted that global trade in early 2014 registered its “first negative reading since October 2012”. 

Now we will see how this plays out with world’s statistical GDP

So far, the periphery-to-the-core feedback mechanism has been in progress as seen globally and within specific economies.