January 13, 2015

A Non-Stop Parade Of Asset Price Bubbles

A report from Barron’s. “Asia last week witnessed two high-profile examples of what could be a disturbing trend in its credit markets: strategic defaults. Fund managers told reporters at the Wall Street Journal that Shenzhen-based property developer Kaisa Group Holdings appeared to have missed a deadline for making a payment on a $500 million bond despite having, on paper at least, enough cash flow to do so. In Malaysia, state-controlled development company 1Malaysia Development delayed for a second time payment on a $560 million bridge loan, renewing questions about its financial health as bankers speculated that the delays might be a way to pressure lenders into renegotiating the loan. ”

“Every company that defaults on a loan payment has its own sob story to tell and the bigger the debt, the more dramatic the tale. The truth is that there are scads of lawyers in Hong Kong’s financial district who can tell you that this has been going on for many months now: heavily indebted companies deciding to thumb their noses at creditors even though they have cash to repay.”

From NASDAQ. “Kaisa Group Holdings Ltd. said late Monday it has missed $23 million in interest payments that it was due to pay last Thursday. Adding to Kaisa’s troubles, at least 15 Chinese financial companies have asked a court to freeze the firm’s assets, hurting the developer’s ability to sell off projects to raise funds and pay back lenders. Kaisa’s troubles are particularly worrying for offshore investors, who have little protection when companies on the mainland go bust. They get paid long after domestic investors and have no direct access to assets on the mainland because of capital restrictions.”

“‘If the company has defaulted on its offshore bonds and winds down, the entire credit market is interested in how this is processed, the length of time and how much of its assets foreign investors would ultimately get,’ said Jim Veneau, head of fixed income for Asia at AXA Investment Management, which has $716 billion in assets.”

From Bloomberg. “Charlene Chu, the former Fitch Ratings Ltd. analyst known for her warnings over China’s debt risks, said that the dangers are increasing as the outlook for the nation’s growth deteriorates. ‘We’ve got the biggest debt bubble that the world has ever seen and credit is continuing to grow twice as fast’ as the economy, Chu, a partner of Autonomous Research Asia Ltd., said in an interview in Hong Kong today with Bloomberg Television’s Angie Lau. ‘We’ve got deflation looming on the horizon.’”

“People with more positive views on China ‘believe that the country can grow its way out of the problem, but mathematically that’s impossible when something is twice as big as something else and growing twice as fast,’ Chu said.”

Real Estate Business. “Australia’s weakest capital city is set to continue its poor performance in 2015, according to a leading market commentator. SQM Research managing director Louis Christopher said Darwin is currently the weakest capital city market, with climbing vacancy rates as a particular problem. ‘Darwin is a classic example of what I call a ‘shallow’ housing market. By that I mean there is not a lot of market volume and depth, and therefore prices can rapidly swing one way or the other. Right now, it’s swinging south, primarily due to the commodities downturn,’ he said.”

From Financial Feed on Australia. “With predictions that property price growth would slow a little more this year, CoreLogic RP Data research director Tim Lawless said the housing market would undergo a dynamic shift geographically. ‘I wouldn’t say much slower but definitely slower, and we are seeing that trend across virtually everywhere apart from Adelaide and Hobart at the moment,’ he said. ‘Brisbane is relatively level, we are not seeing the same sort of slow down as what say Perth or Darwin or Canberra is or for that matter Sydney or Melbourne.’”

“Mr Lawless said the Melbourne housing market would continue to slow this year as investor demand had been dampened by low rental yields and tighter finance controls around investment lending. ‘We are already seeing with inner city apartments in Melbourne there are a relatively high proportion of resales in that market that are loss making,’ he said.”

The Japan Times. “The population keeps aging and shrinking, but new housing keeps getting built even though Japan has a glut of unused dwellings. According to statistics from the internal affairs ministry last July, vacant dwellings increased by 8.3 percent from five years earlier to 8.2 million units in 2013, growing faster than the 5.3 percent rise in total residential units to 60.6 million. That vacancy rate represents 13.5 percent of all housing units, the highest-ever ratio, and means 1 in 8 dwellings is empty.”

“The ministry statistics, compiled every five years, show this ratio has grown nonstop from 2.5 percent in 1963: Vacant units have increased faster than total units during this entire period. The Nomura Research Institute estimates that by 2023 the ratio of vacant residences will reach 21.0 percent, or 1 in 5, as the population continues to decrease. And during that time nearly 5.8 million new units will be built. The Nomura Research Institute relegates such abandoned units to the ‘other’ category. They numbered some 3.18 million, or 5.2 percent, of total residential dwellings in 2013. The institute expects the figure to rise to 5.03 million, or 7.5 percent, of a forecast 66.4 million units by 2023.”

From Fox Business. “In considering this aging bull market, some sobering facts from John P. Hussman, Ph.D., of the Hussman Funds: ‘Recall that the 2000-2002 [market] collapse wiped out the entire total return of the S&P 500 in excess of Treasury bill returns, all the way back to May 1996.’ Hussman adds: ‘The 2007-2009 collapse wiped out the entire total return of the S&P 500 in excess of Treasury bill returns, all the way back to June 1995. If the S&P 500 was to experience nothing but a run-of-the-mill 34% bear market decline over the coming three years, it will have underperformed Treasury bills for what would at that point be an 18-year period since 1999.’”

“Stock markets correct every three years or so in the double digits. This bull market is in its sixth year. The S&P 500 is up 202%, and the Dow has risen 171% since March 2009; the Federal Reserve’s zero bound rate policies, launched in December 2008, would have entered the first grade by now. Markets now are no more long term than the Federal Reserve’s policy decisions, the markets have been in a through-the-looking-glass period when Wall Street has been obsessed about central bankers’ forward thinking on rates, and not CEOs’ forward thinking on earnings.”

“‘I still believe that the attempt by central bankers to prevent the private sector from deleveraging via a non-stop parade of asset price bubbles will end in tears,’ says Hussman. ‘But I no longer think that anyone can say when.’”

Bits Bucket for January 13, 2015

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