April 26, 2015

Up, Up, And Away

The used house salespeople ponder the housing bubble. “This spring buying season is off to a strong start—in fact, prices are going up faster than they were just a few months ago, according to nearly every recent metric. So does that mean we’re in a bubble? Nope, that’s just what happens when demand increases faster than supply. After all, existing-home sales were up 9% year over year in March, according to the National Association of Realtors®. Inventory is also increasing, but not as fast as sales, resulting in a tight supply getting even tighter.”

From Morningstar. “The other big news this week was that U.S. housing data, though not fantastic, appears to indicate that the U.S. housing industry has established a bottom. Early spring shoots are clearly beginning to turn into new blossoms, especially in the new home sector. Don’t be fooled by some flaky month-to-month data points; the pattern in the yearly statistics appears to be moving up, up, and away for now.”

News 4 Jax in Florida. “Homes in Northeast Florida are going so quickly, sometimes they don’t last for even a day on the market. Realtors say it’s a seller’s market in Northeast Florida and prices are rising. ‘What’s also bringing more buyers are the rates out there right now,’ Slate said. Those low rates have people wanting to invest. ‘More people are thinking, ‘Why are we renting right now? Why are we paying someone else’s bills?’ Slate said. ‘After a little down payment, they can pay their own bills and investment.’”

CBS 58 in Wisconsin. “Spring time means the ‘for sale signs’ are going up and broker Lisa Ashley says the housing market is soaring. Ashley says, ‘Things were really booming last year, but this year things are exponentially busier than last year.’ Ashley says, ‘Along the north shore in Milwaukee, and in Shorewood, Whitefish Bay, Fox Point, all those areas have a ton of activity.’”

“It’s keeping Lisa busy, and sellers getting a better deal than they bargained for. ‘Some properties with the agents in my office are getting multiple offers and getting over asking price depending on what they look like.’”

From Bloomberg. “As U.S. commercial-property values surge to records, led by gains in large cities such as New York and San Francisco, some segments of the Manhattan market may be getting overheated, the executives said. Skyrocketing prices for New York’s best buildings are the biggest impediment for foreign buyers seeking commercial-property deals in the city, said Extell Development Co. President Gary Barnett. The Chinese are wary of repeating the mistakes Japanese investors made in the 1980s when they bought at the top of the market and took huge losses in the following decade, he said.”

“‘Today’s markets are frothy and everybody knows that,’ Barnett said. ‘The bottom line is it’s very very hard to find really good deals today in New York City or in any of the trophy locations in the world. In order for them to come in, they’re going to have to join the crowd and pay up.’”

From Fox Business. “In the past two decades alone investors’ fortunes have risen and fallen with the technology bubble of the late 1990s and the far-more encompassing housing bubble of the 2000s. In both of those latter cases, the U.S. Federal Reserve played a key role both in fostering the economic environment (mostly by keeping interest rates low) that initiated the bubble and in assuring investors and other market participants that everything was copacetic.”

“Lance Roberts, chief strategist at STA Wealth Management, said financial bubble cycles have become self-perpetuating in the last two decades as the Fed has ‘manipulated’ monetary policy in response to a crisis only to create conditions conducive to another bubble, which sets the cycle in motion again.”

“Enter the Fed again with more low interest rates to offset a recession combined with lax lending standards and government policies hell bent on promoting home ownership and the result is the 2008 financial crisis. Here comes the Fed again, this time with the lowest interest rates since the Fed started dictating such things and an extraordinary and unprecedented stimulus program known as quantitative easing in which the Fed purchased trillions of dollars of U.S. Treasuries to pump liquidity into U.S. financial markets.”

“Central bankers are hardly ignorant of the risks associated with their policies, be they low interest rates, an untested bond-buying program or a hard lean toward greater transparency. ‘The Fed is resigned to the fact that the low interest rates are a necessary evil. The consequences of a bubble are much less than the consequences of low growth and economic stagnation,’ said Mark Williams, a former Fed examiner who now teaches banking at Boston University.”

“While stock and bond prices may be elevated, low interest rates and the Fed’s array of other measures initiated in the wake of the financial crisis seven years ago have promoted economic growth and prevented the U.S. from slipping into another depression. ‘It seems to me the tradeoff has been worth it,’ Williams said. ‘So far it appears this gamble has paid off.’”

From David Stockman. “Zero Hedge recently revealed that $5.3 trillion of government debt trades at subzero interest rates. In today’s fiscally profligate world that is a thundering tell There are no markets left in any meaningful sense of the word- just a raging casino infected with the madness of the crowds and the central bank pied pipers who mesmerize them. Every day there are new confirmations of the mania.”

“Over the past two decades the People’s Printing Press of China issued virtually unlimited bank reserves in the process of buying up dollars to peg the RMB exchange rate in support of its national policy of export mercantilism. This, in turn, has enabled China’s total public and private credit outstanding to soar from $2 trillion at the turn of the century to $28 trillion today.’

“Needless to say, there is a huge problem when you turn rebar, concrete and wallboard into tulip bulbs. Namely, when the price mania finally stops not only do the speculators who put their savings into empty apartment units get crushed, but, more importantly, demand for new units quickly evaporates, causing an devastating contraction up and down the building supply chain.”

“There is no better measure of the true contraction underway in China than the price of iron ore. The Wall Street stock peddlers will tell you not to be troubled by the 70% plunge from the 2012 highs and the 35% drop just in the last nine months. According to them, its all the fault of the big global miners who went overboard opening up massive new iron ore pits and mining infrastructure.”

“And it is true that cheap debt and roaring stock markets encouraged the likes of BHP, Rio Tinto and Vale to go on a capital spending orgy that is unprecedented. The Big Three alone have added more new iron ore capacity in the last six years than even existed at the turn of the century. Yet this wasn’t an aberration or a case of one-off exuberance. The over-investment in iron ore capacity was just a mirror image of the same massive over-investment in the waterborne iron ore industry’s principal customer. That is, the Big Three miners were only attempting to stay abreast of the massive over-investment in the steel-making, steel-fabricating and steel-based construction sectors in China.”

“So the collapse in iron ore prices is just the whip-end of a deflationary crisis that is fast overtaking China and the entire world economy for that matter. But in a mania there is no way of telling sundown from sunrise. In fact, the fast money gamblers feast on sundown economics because the latter is precisely the mechanism by which cash is cycled back into the casino. So today’s action in the Red Chips and the Big Macs was not about price discovery; it was just the mania bubbling higher yet again.”

Bits Bucket for April 26, 2015

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