It’s Got Bubble Written All Over It
A report from iAfrica. “The CEO of the ERA South Africa property group, Gerhard Kotzé says, ‘We now learn that South Africa had the best performing housing market in the world over the longer term according to figures from the authoritative ‘Economist’ magazine. The publication’s Global House Price Index shows that SA house prices rose by a cumulative 418 percent over the past 12 years (1997-2009). That far outstrips any of the other 20 housing markets tracked by the index. The next best performers were Australia, Britain and Spain with growth of 181 percent, 175 percent and 167 percent respectively. More importantly, the Economist reports that South Africa is one of only a few countries in the world that has house prices back at their peak levels of 2008.’”
“‘Home owners still hard pressed to meet their mortgage payments will look askance at these numbers. However, for those who have managed their financial affairs well it’s apparent that property remains an excellent investment. However, in keeping with the old adage that ‘It is not timing the market that counts, but time in the market’ then home buyers should continue to buy in on the basis of sound investment principles. It’s certainly not the time to start speculating,’ adds Kotzé.”
From Modern Ghana. “There is something going on here which has not happened before. People here are snapping up luxury condos and town-homes like there is no tomorrow, and some smart developers in town are responding to the brisk demand very briskly too. Demand for luxury real estate in safe residential neighborhoods has become a sport. People can’t wait to see the ground broken by a developer in these neighborhoods before they swoop in to register their interest quickly.”
“The Airport Residential Area in particular has become a haven for high rise condominiums and town homes. Driving through this area these days feels like driving through the Wilshire corridor in Beverly Hills, California. Condo units here are selling from US $295,000 and up, depending on number of bedrooms and baths. Savvy investors are snapping up these properties briskly at today’s prices because they know that these will be the multi-million-dollar properties of tomorrow, just as it happened in New York, Los Angeles, London, Paris or Tokyo over the years.”
From Bloomberg. “Billionaire investor Sam Zell’s Equity International is seeking to raise about $500 million to step up investment in Brazilian real estate. The firm will invest as much as two-thirds of the money in Brazilian companies tied to the residential and commercial property industries, CEO Officer Gary Garrabrant said. ‘Our enthusiasm for Brazil could not be higher,’ Garrabrant said in a May 18 interview in Sao Paulo. ‘You’ve got this local demand that’s unparalleled.’”
“‘There are less than 400,000 mortgages in Brazil — I think there are 400,000 mortgages on the Upper East Side of Manhattan,’ Garrabrant said. ‘Will the Brazilians catch up? No question.’”
“Equity International may invest in Colombia for the first time with its new $500 million fund, Garrabrant said. Colombia has ‘great demand’ for affordable and middle- income housing, he said. The firm is also looking at opportunities in China and ‘frontier markets’ including Vietnam, Indonesia and Morocco.”
The Real Deal. “Asking prices for homes in some areas of Belize have dropped by as much as 50 percent, according to David Cox, a director with international property investment consulting firm Property Frontiers. ‘Although local agents claim only a slight fall in Belize real estate prices, the reality is different,’ Cox said.”
“Beachfront condos with asking prices of $250,000 are not unheard of, according to the Vancouver Sun, which noted that relaxed residency laws also add to Belize’s appeal among retirees. Of course, there are some drawbacks for newcomers to Belize. Prime Minister Dean Barrow announced in March that the general sales tax was climbing to 12.5 percent in the coming fiscal year, a 25 percent increase, in order to help deal with rampant poverty.”
The Times Transcript in Canada. “The 2010 Re/Max Recreational Property Report reveals that out-of-area bargain hunters are helping to keep the heat cranked up on the Shediac Bay area cottage real estate market, and it seems more and more of those buyers are American. That kind of outside pressure has helped maintain the pace in the Shediac Bay area, and push up the starting price of a three-bedroom, winterized recreational property on a standard waterfront lot to $230,000 compared to $200,000 last year.”
“‘If you look at the opportunity, once you made your money elsewhere, and you want to still travel, that’s a bargain compared to other areas,’ he said, noting that 1,000-square-foot waterfront condos in Vancouver are priced in excess of $3 million. ‘In Calgary or Toronto what could you find for $230,000?’”
“While $230,000 is the starting price, Gagnon said cottages are selling for prices in excess of $1 million and even $2 million in the area. And Gagnon said prices will continue to rise in those high-density cottage areas as waterfront properties become increasingly scarce. He said that increased scarcity is pushing prices in those areas closer to asking prices in Nova Scotia’s prime cottage country. ‘It’s availability. As it becomes more rare, everything goes up, values goes up, and we definitely can compare our area to some of those nice ones in Nova Scotia, and we have the nice weather, especially in the summer,’ said Gagnon.”
“Gagnon said it’s only a matter of time until development in the already prime cottage areas pushes buyers to venture further up and down the coast for better deals. ‘It’s a matter of time once everything is sold or at a certain price,’ said Gagnon. Gagnon said the always-changing landscape of the real estate market means buyers are taking advantage of deals now before prices start to climb significantly along other stretches of the coast.”
“‘If you see something that’s really nice you might as well buy it now because in five years it may be gone, or you might not be able to afford it,’ said Gagnon.”
The Regina Leader Post in Canada. “That ‘little piece of heaven’ you always dreamed about — a lakefront cottage overlooking one of the lakes in Saskatchewan’s scenic Qu’Appelle Valley — just got a little bit more expensive. According to Re/Max, a three-bedroom, winterized recreational property on a standard waterfront lot on Last Mountain Lake will set you back $400,000 — and that’s the starting price.”
“‘If you’re looking at lakefront properties, you’re generally going to be looking at $1,500 to $2000 per foot,’ said Craig Adam, a realtor with Re/Max Crown Real Estate in Regina. ‘So if you want 100 feet of lakefront, that’s going to cost you $200,000 — at least. That’s just for the lot. Is it serviced, does it have water, does it have natural gas? How far out of the city is it?’”
The Sydney Morning Herald in Australia. “It is Melbourne’s mega house. The 481-square-metre (or 52-square) behemoth at Alamanda village in the outer western suburb of Point Cook is the largest display home ever in Melbourne. With five bedrooms and five bathrooms, it is even bigger than socialite Rose Porteous’s Toorak townhouse on Irving Road - which is on the market for $7 million - but is a 10th of the price.”
“Australia already lays claim to having the largest new homes in the world, having overtaken the US in 2008-2009 in the wake of the financial crisis, according to the Bureau of Statistics. Porter Davis says it has been surprised by the lack of interest in its 52 square display mansion since it was built 18 months ago and would not build another display house of that size again.”
”’Buyers in the recent years have gone for the hamburger with the lot and we’ve built houses up to 60 squares,’ director Paul Wolff said. ‘But at the moment the majority of our sales are in the smaller or lower-end homes, and all our products are being downsized. The land market changed very quickly and it caught us napping a little.”’
“However, SQM Research property analyst Louis Christopher said block sizes under the new regulations were still oversized compared with the rest of the world and he did not think buyers’ taste for large homes would change. ”The general trend for bigger and bigger dwellings continues, despite the number of occupiers per dwelling having fallen,’ he said. ‘We regard our house as a status symbol and unless we have a major economic downturn, it’ll keep going because we have the block sizes to do it.”’
YourMortgage in Australia. “Any hope of a revival in the first homebuyer market in Western Australia now appears to be in vain, with the latest data showing the number of first-time buyers sinking to a new low. Alan Bourke, REIWA president, said the latest FHOG data for April, coupled with reiwa.com sales and listings data, confirm the softening trend across many markets. ‘The effects of six interest rate rises and the collapse in first homebuyer activity since January is now evident in all market indicators for Perth and Regional WA. The artificial boom of first-time buyers triggered by the Commonwealth grant has now well and truly ended.’”
“REIWA also found that overall sales activity fell by 15% in Perth during April, with preliminary data for May suggesting there has been no further improvement. ‘This trend is matched with a steady increase in listings, which have risen,’ said Bourke. It’s a similar story in regional WA, with reiwa.com showing sales falling in Mandurah, Bunbury and Geraldton during April. ‘All of REIWA’s broad market measures suggest there is little pressure on prices,’ Bourke added.”
Property Community in Australia. “There is no speculative real estate bubble in Australia, according to the country’s Reserve Bank. The bank’s head of financial stability Luci Ellis said that house prices have recovered from their small decline of 2008 to post increases of between about 12 to 15%, depending on the measure. ‘We do not have a credit fuelled speculative boom on our hands. However, it would not be desirable for the current situation to turn into one. It will therefore be important for lenders to remain prudent in their standards,’ she said in a speech.”
“‘It will be equally important for prospective borrowers to have realistic expectations, and not to rely on a hoped for capital gain in order to service their debts,’ she told a residential property conference.”
ABC News in Australia. “Ellis says most of Australia’s heavy housing debt burden is resting with those most able to afford it. ‘Our assessment is that the increase in debt has broadly been concentrated in the hands of those generally more able to service it,’ she told a residential property conference.”
“However, she also cautions that investors should not race into the market expecting capital gains in housing to continue indefinitely and underpin their ability to service their debts. ‘If too much of the response to faster population growth comes as faster growth in housing prices, this could be built into people’s expectations,’ she warned. ‘If price expectations become over-optimistic and encourage too much investor demand, the result could be disappointment - or worse.’”
Money Morning Australia. “Ms. Ellis would naturally deny the existence of a credit boom considering it’s her employers that have caused it. We liked this comment in her closing ‘Final Thoughts’: ‘Recent data suggest that we do not have a credit-fuelled speculative boom on our hands. It would not be desirable for the current situation to turn into one.’ We have this image of Ms. Ellis standing in front of a large bubble that she’s tried to cover with an overcoat, insisting to passersby that there’s nothing to see.”
“But what ‘recent data’ would Ms. Ellis be referring to? I mean, it couldn’t be the data from the Australian Bureau of Statistics (ABS), the chart of which Ms. Ellis used to open her presentation. Because pardon us for commenting, that’s got bubble written all over it.”
“Prof. Steve Keen pointed out in an article for Business Spectator last week that if population growth running faster than new dwelling growth leads to rising house prices, why didn’t house prices fall between 1955 and 2004 when dwelling growth exceeded population growth? The simple answer is that the real driver of house prices is easy credit. Plain and simple. And when that stops – which it hasn’t yet remember… POP!”
The Southland Times in New Zealand. “Southern property investors would be calling their accountants to look at how changes to the tax system announced in yesterday’s budget would affect them, financial leaders said. WHK principal Neil McCara said he believed the changes would cool the housing market. He said other measures designed to take the heat out of property, such as cuts to the official cash rate had not worked. In the south, property investment was an option considered by many “mum and dad investors” whom may now be reconsidering their holdings and future potential investment. The announcement would shift the behaviour of Kiwis away from an over-reliance on property, Mr McCara said. ‘These changes will force that,’ he said.”
“Harrex Group director Brendon Harrex said the tax changes provided an incentive for capital retention by business and for additional funds to flow towards business investment rather than property. That was clearly viewed by the Government as a more productive use of funds than the tax incentives offered by property investment, Mr Harrex said. ‘There has been plenty communicated about the concerns around New Zealand’s tendency to over-invest in property.’”
The Peoples Daily in China. “After China’s State Council launched new policies to curb the spike in housing prices, the number of transactions in first-tier cities declined sharply. Feng Lun, Chairman of the Board of Vantone Group, said that the new policies would result in a 20 percent to 30 percent decline in housing prices. ‘The new policies will lead to a fundamental change in the ‘function’ of the real estate industry, leaving little chance for a rapid rebound,’ Feng said.”
“Pan Shiyi, president of SOHO China, also said that home prices would go back to the 2009 level, down 15 percent to 20 percent. ‘The government is determined to regulate China’s real estate industry this time, and is preparing a series of measures to prevent home prices from rebounding,’ said Wang Haibi.”
“Some analysts thought that regulations may have failed to consider some aspects of the market and housing prices would start rising again soon.”
From Xinhuanet in China. “The strict measures rolled out by the Central Government to rein in soaring property prices over the past month have delayed purchases by potential buyers in most urban areas. However, high housing prices are still hanging over many major Chinese cities, domestic media reported in recent days. In Beijing, property prices grew by 14.7 percent in April year on year, peaking in the past 10 months, the China Daily cited statistics from the capital’s statistics bureau. The average housing price inside Beijing’s fourth ring road from January to April reached 34,112 yuan (US$5,016) per square meter, it said.”
“In April, the price of newly built houses in Shenzhen reached 20,567 yuan per square meter, a year-on-year increase of about 67 percent, while the total area sold in the city dropped to 291,200 square meters, a year-on-year decrease of about 61 percent, statistics from the Shenzhen bureau of land and resources showed.”
“‘Shenzhen’s property market is starting to show a downward trend with drops in both transaction and price,’ a report from the city’s major realty agency Shenzhen Centaline said, according to the Shenzhen Economic Daily. Shenzhen Centaline sold only 422 houses between April 16 and May 15, a 89.6 percent decrease compared with the 30 days prior to the implementation of the new curbing measures, while their average price dropped by 9.17 percent, the Shenzhen Economic Daily said.”
“Property prices in second- and third-tier cities are also increasing slightly, attracting speculative homebuyers to avoid the strict macro-control policies. Chen Long, an analyst from the Wuhan Efang Research Center, said most property developers are not planning to offer any discounts on housing prices and most potential homebuyers are adopting a wait-and-see attitude at the moment.”
“Relatively low housing prices and relatively free policies have also attracted speculative property buyers to invest in second- and third-tier cities, industry figures showed. Electricity in a large number of houses in 660 cities had not been used for more than six months, indicating an unexpectedly high vacancy rate in the country, according to recent records from the State Grid.”
The Toronto Star. “Clouds of thick black smoke shrouded central Bangkok on Wednesday morning, and the sound of live gunfire echoed from the main anti-government protest site, as the government’s final assault began. The anti-government protests by the Red Shirts, formally called the United Front for Democracy Against Dictatorship, have occupied three-square kilometers of Bangkok for weeks, paralyzing the city. More than 60 have died in bloody battles between protestors and government troops since violence erupted on April 10.”
“Protesters have accused the government of Prime Minister Abhisit Vejiajiva of ruling in the narrow interests of the country’s moneyed and well-connected elites, especially those who are intertwined with the country’s royalty. A short 10-minute taxi ride away from the protest zone, at the Esplanade shopping plaza, there was no shooting, nor any sign that anything in this city was amiss.”
“The Esplanade is like an entirely different city: no clack of guns, no bursting grenades, just soft muzak, soothing indoor water fountains, and chic shoppers in pursuit of first-world goods. It’s a reminder of the great divide that exists in Thai society, between those who have and those who don’t — a fact that fuels the discontent in Thai society that underpins the Red Shirts’ protests today.”
“In the Metro Sky showroom on the second floor, for example, 45 square metre, 1-bedroom condos are selling for $110,000 — beyond the reach of many in a country where the average annual income is just $4,000. Not surprisingly, soft-spoken sales rep Kulacha Lertsupanan is watching developments across town with a wary eye. There has been a noticeable drop in customers since the troubles began, she notes, and those who are looking seem less willing to spend money now.”
‘She’s worried, she says, but has faith that the crisis will ultimately pass — like so many in Thai history. ‘I think the value of condominiums here will continue to rise,’ she says.”
One of my favorite Buffy St. Marie songs:
http://www.chiamare.net/buffy-sainte-marie-quappelle-valley-saskatchewan.html
——————————————————
a lakefront cottage overlooking one of the lakes in Saskatchewan’s scenic Qu’Appelle Valley —
Ghana.
Now THAT sounds like a great investment idea.
Is that near Kentucky?
What a cheerful report. Thank you Ben. Now back
to my morning coffee.
“Billionaire investor Sam Zell’s Equity International is seeking to raise about $500 million to step up investment in Brazilian real estate. The firm will invest as much as two-thirds of the money in Brazilian companies tied to the residential and commercial property industries, CEO Officer Gary Garrabrant said. ‘Our enthusiasm for Brazil could not be higher,’ Garrabrant said in a May 18 interview in Sao Paulo. ‘You’ve got this local demand that’s unparalleled.’”
Frackin’ equity locust.
I am really starting to appreciate these horrifying international bubble posts. Just like the plague came from Central Asia and followed trade routes to devastate Europe, and like HIV emerged from deep in the African rainforest, traveled the Kinshasa highway, and then spread throughout the world, the disease of real estate mania erupted out of Orange County, California, and is now raging on six continents.
My alarm bell always goes off when Americans start talking about investing in a place where few of them have ever visited and where all their information comes from salespeople.
‘Beachfront condos with asking prices of $250,000 are not unheard of, according to the Vancouver Sun, which noted that relaxed residency laws also add to Belize’s appeal among retirees’
Yeah, this one is something. You don’t hear much out of Belize, and I doubt these are USAans doing most of the buying. It sure as hell isn’t the locals.
I’m curious if anyone knows where these condos are. If it’s beachfront, it’s probably on one of the cays, which are about 3 feet above sea level. Good luck when the next hurricane comes by. I remember long ago reading about a house for sale there, that if it got washed away by a storm, they just floated/hauled it back into place. More like a tree house on stilts. (BTW, last time I heard, tens of thousands of Taiwanese bought dual citizenship in Belize in case China blew up).
“I remember long ago reading about a house for sale there, that if it got washed away by a storm they just floated/hauled it back into place.”
Lol. Instead of concrete foundations build the house on pontoons.
Belize is an amazing place, but not in the way most people think about. Aldous Huxley wrote some interesting things about it. When I was last there in the mid-90s, I watched little one-man sail boats bringing in raw sugar to Belize City harbor, piled at the sailors feet. Probably took the guy two or three days to bring in $25 worth of sugar.
I was in Belize last year. Just about all of the commercial activity in the interior - stores, laundries, etc. - were owned and run by Taiwanese. The locals, not distinguished by their energy or industriousness, mutter about it under their breath. In the nicer areas, every air conditioner is secured with its own iron cage and private security is omnipresent. I predict anti-Chinese riots there within the next few years.
That’s an interesting development. I admit I wasn’t paying too much attention, but I don’t recall seeing that many Asians there in the 90’s. There is a love/hate relationship with outsiders in Belize. They don’t have much of an economy, so they depend on outside money. Lot’s of natural beauty, corruption and crime. ‘Disneyland without the guardrails’ is how one expat described it to me once.
It’s been 10+ years since my wife and I were in Belize. I don’t recall seeing many asians. I thought the RE was overpriced even back then. I loved the place (I tend to like remote areas) my wife hated it. If the wind was weak the sand fleas would eat you alive!
Well said.
If nothing else, this RE Bubble has shown us just how inebriated people are today about property. There seems to be no end to the constant, persistent RE euphoria.
All one needs is simple math skills to realize just how unsustainable prices are today… even AFTER the “crash”.
It appears as though we are roughly at 2003 price levels… although this is not uniform throughout the country.
Wake me up when we’re back to 1996 nominal prices!!
Zzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzz…………….
Bring on the Bubbles! Some people never learn. To hell with the world economy, lets get in now at “the bottom” before the prices really start rising as the salesman, expert spokeman says, commissions be damed. This is the buy of a lifetime isn’t it?
That statement by the Australian Reserve Bank’s “head of financial stability” is going to end her career in the near future. Once China’s bubble pops, Australia is going to have the worst depression in its history, and Ms. Ellis will have to come to the U.S. to find a high-level job in economic policy-making, because we richly reward error here and even subsidize it with public dollars.
One of the things I noticed (and liked) when I visited Australia in the late 1990s was that houses were more modest. Too bad that’s falling by the wayside. I hope the people are still more modest.
I’ve been there a couple of times recently.
Rest assured… they are building like crazy there.
They’re just as “high” on RE as we were 3 years ago.
One thing about what people say AFTER a peak passes: how could the people in charge not see this coming? Check out the charts from the story above:
‘ pardon us for commenting, that’s got bubble written all over it. Well, our version has anyway’
http://www.moneymorning.com.au/20100519/no-bubble-here-move-along-please.html
How anyone at the Aust. central bank couldn’t see a problem here is mystifying?
‘Ms. Ellis would naturally deny the existence of a credit boom considering it’s her employers that have caused it’
Credit can GET someone into a house, but it can’t KEEP someone in a house. I am stunned at how many people, apparently all over the world, have managed to drink whatever kool-aid washes away knowledge of the “2.5 times gross income” rule.
And in most other countries you don’t get to write off your mortgage interest either.
Maybe we should start literally writing “bubble” over all the charts we show people. I like that idea.
Fed-engineered irrational exuberance has one “legendary investor” rationally concerned, and I feel the same way: How does investing even make sense when markets are so distorted that one cannot begin to guess fundamental value from prices?
I certainly hope the Fed auditors explore the question of to what degree the Fed is deliberately propping up asset prices, and how they expect markets to properly price risk in their risk-premium-free ZIRP environment.
* The Wall Street Journal
* THE INTELLIGENT INVESTOR
* MAY 22, 2010
Why One Legendary Investor Is More Worried Than Ever
* By JASON ZWEIG
…
Mr. Klarman specializes in buying securities that nauseate other investors. As the credit crisis exploded, he put more than a third of his assets into high-yield bonds and mortgage-related securities. I asked him what he had meant, in a recent letter to his clients, when he compared the financial markets to a Hostess Twinkie. “There is no nutritional value,” he said. “There is nothing natural in the markets. Everything is being manipulated by the government.” He added, “I’m skeptical that the European bailout will work.”
Some members of the audience gasped audibly when Mr. Klarman said, “The government is now in the business of giving bad advice.” Later, he got more specific: “By holding interest rates at zero, the government is basically tricking the population into going long on just about every kind of security except cash, at the price of almost certainly not getting an adequate return for the risks they are running. People can’t stand earning 0% on their money, so the government is forcing everyone in the investing public to speculate.”
“We didn’t get the value out of this crisis that we should have,” Mr. Klarman told the audience. “For our parents or grandparents, it was awful to have had a Great Depression. But it was in some ways helpful to carry a Depression mentality throughout their later lives, because it meant they were thrifty with their money and prudent in their investment decisions.” He added: “All we got out of this crisis was a Really Bad Couple of Weeks mentality.”
You could have heard a pin drop as Mr. Klarman proclaimed, “I am more worried about the world, more broadly, than I ever have been in my career.” That’s because you can make good investing decisions and still end up with bad results if you reap your profits in currencies that do not hold their purchasing power, he explained.
“Will money be worth anything,” asked Mr. Klarman, “if governments keep intervening anytime there’s a crisis to prop things up?”
…
‘There is nothing natural in the markets. Everything is being manipulated by the government…The government is now in the business of giving bad advice…By holding interest rates at zero, the government is basically tricking the population into going long on just about every kind of security except cash, at the price of almost certainly not getting an adequate return for the risks they are running. People can’t stand earning 0% on their money, so the government is forcing everyone in the investing public to speculate’
What’s amazing is that this has been going on for years. In the context of this international topic, let’s revisit; remember the Asian ‘Crisis’ of the 90’s? Now we have massive RE bubbles all over Asia and Australia. The Mexico/Russian defaults, LTCM, the tech/internet/housing bubbles? What year did greenspan mention ‘irrational exuberance’? Just in the US alone, we’ve papered over about 3 recessions that should have happened, but didn’t. Recessions serve an economic function, and when it isn’t allowed to play out, all sorts of distortions result.
And let’s look at where we are; what if we said, back in 2006, that the US would have a national unemployment rate of 10%+, that the home loans would be strictly government backed, largely thru failed GSEs? And all this in light of negative short term rates? Hell back then, the big worry was the carry trade. Now the whole global economy looks like a central bank carry trade.
This is the CB equivalent of thelma-louise; spooky stuff, and I would be happy to see these historic distortions resolved with as little economic pain as possible. But truthfully, that isn’t how it usually works out.
“This is the CB equivalent of thelma-louise; spooky stuff, and I would be happy to see these historic distortions resolved with as little economic pain as possible. But truthfully, that isn’t how it usually works out.”
Do you remember the ending? Now I am imagining how it would look with TTT and BB riding the car over the edge of the cliff…
Well, this is what has me shaking my head; remember when the housing bubble in the US was along the lines of, ‘yes it is, no it isn’t.’ All very academic and entertaining for the media/public. Then the SHTF and it’s this huge disaster. Look at the Australia accounts. Could there be any more complacency? And we hear about the global markets being whipped about by a crisis in Greece? Greece is a small pimple on the global financial butt compared to these bubbles around the world.
This is one thing to consider; nowadays people can see that Alan Greenspan was not some financial messiah, but rather a complete fool. I’m guessing the current crop of central bankers are as foolish or more, but they and the governments behind them are driving this convertible.
It’s unconscious back-door socialism. The government won’t take control of the economy, instead, it will take the economy in receivership. Nobody, including the government, will really understand that this is what has happened until after it’s happened.
“It’s unconscious back-door socialism.”
Not sure I get that point. Socialism tries to make the wealth distribution as flat as possible. By contrast, the Fed’s crony capitalistic wealth reallocation scheme appears to enrich whoever owns the largest banks on Wall Street while making Main Street households implicitly pay for bailouts and bonuses of managers who cast hundreds of billions of dollars into the sea. Politicians get a cut through the campaign contributions financed through Wall Street bonus largess.
If you understand why crony capitalism equates to socialism, I would appreciate you educating me, ’cause I am missing it.
“What’s amazing is that this has been going on for years.”
On a more optimistic note, many things which would have earned a HBBer a ‘tinfoil hat conspiracy theorist’ label four short years ago are pretty much out in the open now:
- Remember when Big Hank Paulson insisted the TARP was ‘not a bailout?’
By now, ‘bailout’ is a term that has spread like a contagion world wide: A search of ‘bailout’ on Google currently yields 11.5 million results in 0.37 seconds. That is a quite an information cascade, no?
- The Fed’s asset price support program (e.g. MBS purchases to suppress mortgage lending rates and prop up the values of U.S. housing prices and toxic mortgage securities) is discussed openly in the MSM, effectively pulling back the curtain from the realm of the Fed’s non-monetary-policy wealth-reallocation activities.
Still to come:
1) Congressional auditors getting to the bottom of what is within the scope of the Fed’s monetary policy mandate and what is not;
2) Mass awareness among the American people that the Fed is financially engineering wealth flows away from Main Street and towards Wall Street;
3) Anyone with ties to Gollum and other Wall Street Megabanks is politically tarred and feathered;
4) Political reaction to the above at the voting booth this November.
We can hope…
0% interest is a lot more than I could make by investing with goldman sachs.
Some members of the audience gasped audibly when Mr. Klarman said, “The government is now in the business of giving bad advice.”
And that caused people to gasp? Clearly no deep thinkers or astute observers in this particular audience.
“government…tricking the population into going long on just about every type of security except cash” — Klarman
“has been going on for years” — Ben Jones
Ditto. I like to say the stock market has been in a bubble ever since IRA’s were invented. This is a line I came up with a year or two ago. But it was only last week that I bothered to look up when IRA’s WERE invented. Et voila !! — 1974. OK, Dec 74 was the month of the last legitimate stock-market bottom. And I put 100% of my dough in stock in January 1975. And took almost all of it OUT of stocks that same year after gaining 50%. The market continued to rise and rise, way beyond any reasonable relationship to future earnings, because the stock-fund salesmen were doing so well on the boomers’ IRA contributions. I grant you I’d have done OK staying with that bubble, but I’m much happier with a concrete cash flow.
Back then, it was possible to get a decent cash flow from publicly-traded vehicles, muni bonds, A- industrial bonds, etc. It has become harder and harder to do this, except in the grips of the big scare of 18 months ago. I remember telling Big V of HBB when stocks were in the 7000’s a year ago that they were STILL in a bubble. And of course I continue to believe that, a fortiori, now that the DJIA is 10K.
And that, along with my resentment of the mortgage interest deduction, is the reason why most of my $$$ is in single mortgage deeds.
Sits on the fence post eating popcorn and nonchantly watching the Twinkies implode.
Hi Ben!
Here in Vancouver we are at the stage you describe. ‘yes it is, no it isn’t.’ And we have a crystal ball to the south, but we ignore it.
I’ll repeat what I posted in our local housing bubble blog VCI:
On the way to work, in Richmond, I pass by large conglomerated new complexes being built quickly-quickly. Crowded cardboard houses on top of each other, with only a narrow access road between the units – no sidewalk, no playground.
On the way to a hike through Maple Ridge we saw many new complexes being built, working hard on the weekend in the middle of the forest, a sea of crowded cardboard units with no space in between them.
New developments are announced on daily basis. Small dwellings with planned obsolescence for 500K-1M.
If this is the peak, as we hope, the proportions of the bust will be epic. I am having a hard time imagining the outcome. This is Florida or Detroit at least.
Pass the popcorn!
Regards
arit
Hi arit,
Yeah, I don’t have room to post all the insanity:
‘John’s 732-square-foot condominium is on the second storey in a stacked townhouse complex. He has a few issues to contend with before his new condo is comfortable, according to certified interior decorator Sharyn Kastelic. ‘My major beef is the kitchen. I’m appalled by the location of the washer and dryer,’ says Kastelic. ‘The builder could just as easily put the laundry in the storage room where the smell of bleach will not mingle with cooking aromas.’
‘The inaccessible counter corners constitute a waste of space. If the refrigerator and washer and dryer were reversed, John would have an extra 30 inches of counter. And he would gain even more space if he removed one sink. Kastelic also advises ripping out the breakfast bar, as there’s no room for stools. Dimness will be another problem. The walls dip in and out and the one living room window will not provide enough natural light for the kitchen, corridor and designated dining area.’
‘Kastelic suggests using the alcove for dining and installing a padded bench for two under the window. A 42-inch-round glass table and a pair of lowback (not to block the light) chairs facing the window would work best. The small foyer closet (under four feet wide) will hardly take a couple of winter coats, according to Kastelic.’
‘Nothing can be done about this, but John can dress up the entrance with a classy overhead fixture and that’s about it,’ she says.’
‘If you have a plan, send it to Best-Laid Plans, Condos, Toronto Star… http://www.yourhome.ca/homes/decor/interiors/article/811764–kitchen-no-place-for-washer-and-dryer
‘Family reunions are taking on new meaning in the real estate market, according to a recent survey by Coldwell Banker Real Estate LLC. A survey of its real estate professionals in both Canada and the United States found that a large percentage have noticed in the past year an increase in homebuyers looking for a property to accommodate more than one generation of their family.’
‘Another factor, of course, is the cost of housing and the loss of retirement funds some people may have felt over the financial market meltdown in the past year. The increased financial costs in home ownership is evident in the Calgary market. The average MLS sale price of a single-family home in Calgary month-to-date until Wednesday was $486,064 which is up from $460,378 for the month of April and up from $436,427 in May 2009. The average MLS sale price of a condo in Calgary month-to-date is $310,709, up from $289, 588 in April and $275,212 in May 2009.’
“‘Now they’re able to pool their resources . . . and bring their families back home,’ said Geha, adding that he has talked to a number of contractors and builders who are making special arrangements in homes to accommodate older people.’
http://www.calgaryherald.com/life/Necessity+drives+family+reunion+real+estate+deals/3055062/story.html
“It is becoming a trend, a very strong trend,” he said.
“‘Now they’re able to pool their resources . . . and bring their families back home,’ said Geha, adding that he has talked to a number of contractors and builders who are making special arrangements in homes to accommodate older people.’
———————-
I definitely see this becoming a trend. It’s upsetting that our planners are not working on a way to include granny flats or guest houses on a large number of lots.
arit,
Your link bemeprotest is funny. Especially the one about Jack and Lost.
I am honored, SanFranciscoBayAreaGal - BeMeProtest is my creation. It is my “grain of sand” - enabling people to protest from the comfort of their computers (or smartphones).
Regards
arit
From that description, you are close to the peak. I live in Florida, and it was easy to tell when residential construction reached the phase where the end product was a pure commodity meant to be bought, sold and traded, rather than lived in. Whatever was put up never surpassed what was paved over.
Every time a collection like this of articles about bubbly foreign markets is posted the same thoughts enter my head. Where does this money come from? It can’t be the same players, can it?
The hedge fund idiot could be one explanation, but he’s probably not investing in mortgages. More likely he’s funding development, right?
If it’s a carry trade funded by our esteemed government, who are the players? The same investment banks? I thought they were buying up all of our treasuries. Foreign banks? Didn’t they get hit hard enough in 2008?
I’m still at a loss to explain who is funding Canada’s boom.
This is just my opinion, but the short answer is the central banks and fractional reserve banking systems. The longer, more complicated answer is that manias finance themselves up to a point. Remember how rich everyone felt during the boom? Back in the day, we would say that what was going on wasn’t ‘real.’ Someone would chime in and say, ‘well that 300k in my bank account looks real to me.’
So it is and it isn’t an illusion. Then we can all recall the statements, ‘the music stopped and there were no chairs,’ or ‘we ran out of greater fools,’ ‘it was a ponzi scheme.’ Some people DO get paid in ponzi schemes or find a chair when the music stops. But so many more are wiped out that it doesn’t matter much.
Between the herd “investment” bubbles in the dot coms, stocks and RE,
Main Street in deep debt and is gonna go through a severe period of Loss and Risk Aversion dispite what the PTB do and say.
bink,
IMHO, this excess “investment activity” is due to a couple of things:
1. exceedingly low interest rates around the world — largely because derivatives can now mask the price of risk, and because of the world’s central banks colluding to force everyone into riskier assets/investments.
2. The growing wealth disparity leaves on portion of the world’s population very poor, but the small number who are growing richer are doing so by leaps and bounds. There is a LOT of money out there looking for a place to grow. Huge wealth disparities leads to a misallocation of resources (focus on speculation/investing/asset price appreciation) and cause social/political unrest. We are in a very dangerous situation WRT the wealth divide, IMHO — all around the world.
I’m sure you’re right on both points. However, who are the parties taking out these loans to invest in risky mortgages? It could be sucker investors like pension funds, I suppose. But I can’t think of any that haven’t already been burned by mortgages in some fashion. Fannie/Freddie can be blamed for many US mortgages, but who is the active sucker overseas?
From what I’m hearing in the U.S., there are a lot of very, very wealthy Chinese investors. Some of these with tens of billions of dollars. They are looking for something…anything… to grow their money.
I always find it ironic that some of the wealthiest people in the world are never satisfied. They must always be looking for ways to grow, and grow, and grow their money. It’s like those dogs that will eat themselves to death. There is no “off” switch.
The bit about South Africa is interesting. Ten years ago, almost every non-Afrikaaner I met was trying to get an exit visa. It’s a beautiful country, and I can see how some parts of Cape Town might become Vancouver-ish, but otherwise, house prices quadrupling in twelve years? You’ve got to be kidding me.
This is a country that can’t even keep the lights on. Even Mexico is better than that.
“smart developers.” The oxymoron du jour!
‘Protesters have accused the government of Prime Minister Abhisit Vejiajiva of ruling in the narrow interests of the country’s moneyed and well-connected elites, especially those who are intertwined with the country’s royalty.’
Except for the presence of an officially-recognized royalty class, Thailand appears to be governed similarly to current U.S. governance.
Oops…
Business Briefs 5/22/2010
Published: May 22, 2010
Bailout losses hinge on stocks
WASHINGTON - The Treasury Department indicated Friday it expects taxpayers will lose billions less from bailouts than earlier estimated. The problem is, its revised forecast assumes Treasury’s shares of bailed-out companies are gaining value despite this week’s plunge in stock prices.
…
Was Alan Greenspan the ‘real’ fat fingered guy?
The 2004 Fed Transcripts:
A Methodical, Diabolical Destruction of America’s “Wealth”
By Frederick Sheehan|May 13, 2010, 12:52 PM|Author’s Website
The Federal Reserve releases transcripts of the Federal Open Market Committee (FOMC) meetings with a five-year lag (as required by law, the Fed would like to burn them). Transcripts for 2004 meetings were released on April 30, 2010. The Dow Jones Industrial Average fell 998 points on May 6, 2010. The 2004 transcripts help explain why the Dow could have disappeared last week.
The Setting
To refresh memories, the Fed had cut the fed funds rate to 1.00% in June 2003. America leveraged up on free money (“free,” since inflation was higher). The mortgage boom etched itself on the national conscience. The 2004 FOMC meetings were filled with discussions of whether and when the Fed should tighten. (“Tighten,” meaning, raise the funds rate from 1.00%. Raising the rate should tighten, or restrict, access to credit.) The result of FOMC talk was to increase the funds rate after each of the FOMC meetings, starting in June through the end of the year. Each time it was raised by 0.25%. In practice, this is the Fed’s minimum rate change. The FOMC raised the funds rate to 1.25% in June 2004, to 1.50% in August, to 1.75% in September, to 2.00% in November, and to 2.25% in December. It would continue with a total of 17 consecutive 0.25% boosts, until the funds rate reached 5.25% in June 2006. This gave the impression the FOMC was walking on eggshells.
FOMC transcripts in 2004 confirm the Fed was afraid of markets. Its concerns about the economy were only a derivative function of how market volatility could disrupt consumer spending. (Over 100% of economic growth after the post-2001 recession had been consumer spending.) The Fed understood rising asset prices boosted consumer spending. As I discuss below, the FOMC was not simply fixing short-term interest rates. It was now interfering with long-term interest rates, the stock market, and the housing market. This distorted the entire structure of prices through the economy and we know how it ended – no better than the Politburo’s central planning.
In 2004, the FOMC knew that when it raised the funds rate, financial markets might exhibit any number of unintended consequences. In June, Chairman Greenspan stated a policy change to avoid such turmoil: “By committee desire, we have been changing the funds rate only at meetings. That was not the case in the past.” He wanted the markets to know it could rely on the Fed’s constancy.
…
Africa?
AFRICA?!?
What’s next, Antarctica? They aren’t making any more ice, you know.
Greenland is next, thanks to global warming.
Who moved my recovery cheese?
WSJ Blogs
* May 20, 2010, 11:47 AM ET
This Could Get Bad, Fed Says
By Grainne McCarthy
For anybody who was hoping to hear some reassuring comments from the Federal Reserve about the global economy, come back later.
According to Dow Jones Newswires’, Fed Governor Daniel Tarullo is slated to tell a hearing in Congress that Europe’s debt crisis poses serious risks to the U.S. economy because it can hurt exports and revive stress in global financial markets.
This quote grabbed our attention: “In the worst case, such turmoil (in Europe) could lead to a replay of the freezing up of financial markets that we witnessed in 2008.”
Of course, the Fed has to present the risks as it sees them but for a top Fed official, this doesn’t really strike us a way of helping to calm jittery markets.
In sobering remarks, Tarullo warned that deeper contraction could even stall the recovery of the entire global economy, with serious consequences for the U.S., which is still struggling with an unemployment rate close to 10%.
Okay people,
If Canada, Austaralia, Brazil and South Africa property markets are the next to pop…….
how can a small US investor profit from it?
Short ADR’s and royal bank of Canada
All risky Canadian mortgages are guaranteed by the government. The banks can’t lose.
Except that their current income stream will dry up.
Hae to answer my own question…
but I see Toronto Dominion (TD) is rolling over - like everything else - after matching it’s 2008 peak…
near 70 now….30 was the low during the march ‘09 sell off….traded under 10 back in 1996….Hmm….
Psychology Today: Why Some Stray Dogs Have Joined the Greek Riots
May 22nd, 2010
Harry Truman said, “If you want a friend in Washington, get a dog.” In modern Athens, though, some of the dogs themselves have become political animals.
In the Greek capital, any dogs found roaming the streets are taken in, neutered, and given vaccinations. Then they’re outfitted with a blue collar, denoting their “stray” status, and released back into the city where they sleep peacefully on the streets, sidewalks, and even at the Parthenon, where they’ve become something of a tourist attraction.
Greece has been rocked recently by violent protests over the government’s “austerity program1.” And some of the city’s stray dogs have now seemingly joined the rioters, perhaps in a show of solidarity.
The AP reports: “Photographers have documented the presence of several yellowish dogs at boisterous anti-government protests over the years, barking and baring their teeth at police in what appears to be canine political statements. One, Kanellos … was a constant companion for over a decade to anarchist rioters until he died, in July 2008.”
Kanellos still has his own Facebook page, with 10,000+ fans and a song dedicated to him. According to the New York Post, one fan asked, “What brings him to the riots? Does he believe in the overthrow of private ownership? Does he see the rioters as his pack?”
Since not all the stray dogs in Athens have joined the protesters, and since we don’t have enough details on how the two or three dogs who have are behaving, it’s a mistake to try and draw any conclusions about all canine behavior from this phenomenon. Nevertheless, whenever we come upon a unique, naturally-occurring behavior in dogs (i.e., one that happens spontaneously and isn’t induced in a laboratory experiment designed to prove how “smart” dogs are), it gives us an opportunity to examine whether the current models of behavior can satisfactorily explain the anomaly.
…
The Icelandic volcano, which may continue erupting for at least another year going forward, is a great symbol of the global banking crisis, which is similarly likely to continue erupting and exacting a terrible financial toll going forward for “longer than expected.” Here is a video on how to pronounce its name.
Financial crisis of 2007–2010
From Wikipedia, the free encyclopedia
The financial crisis of 2007–present is a crisis triggered by a liquidity crisis in the United States banking system. It has resulted in the collapse of large financial institutions, the bailout of banks by national governments and downturns in stock markets around the world. In many areas, the housing market has also suffered, resulting in numerous evictions, foreclosures and prolonged vacancies. It is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s.[1] It contributed to the failure of key businesses, declines in consumer wealth estimated in the trillions of U.S. dollars, substantial financial commitments incurred by governments, and a significant decline in economic activity.[2] Many causes have been proposed, with varying weight assigned by experts.[3] Both market-based and regulatory solutions have been implemented or are under consideration,[4] while significant risks remain for the world economy over the 2010–2011 periods.[5]
The collapse of a global housing bubble, which peaked in the U.S. in 2006, caused the values of securities tied to real estate pricing to plummet thereafter, damaging financial institutions globally.[6] Questions regarding bank solvency, declines in credit availability, and damaged investor confidence had an impact on global stock markets, where securities suffered large losses during late 2008 and early 2009. Economies worldwide slowed during this period as credit tightened and international trade declined.[7] Critics argued that credit rating agencies and investors failed to accurately price the risk involved with mortgage-related financial products, and that governments did not adjust their regulatory practices to address 21st century financial markets.[8] Governments and central banks responded with unprecedented fiscal stimulus, monetary policy expansion, and institutional bailouts.
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The financial crisis of 2007–present is a crisis triggered by a
liquiditysolvency crisis in the United States banking system.Exactly. I was just going to post the same thing, Carl.
They will fail in their efforts to “fix” this crisis for as long as they view it as a “liquidity” crisis. There is plenty of liquidity. Lots of very wealthy people out there with lots of money they don’t know what to do with.
The problem is solvency. The entire foundation of the wealth pyramid is crumbling because “the masses” are dead broke. You can only divert money to the rich for so long. At some point, there is no more money left to suck from the working class. They are broke.
I often see in print how taxpayers in the U.S. and the Eurozone are the ones who are paying for bailouts, but the reasoning is murky to me. If a central bank suddenly conjures up new money out of thin air as a book entry in a computer’s storage banks, and uses the newly conjured money to bail out those who got in over their heads with spending beyond their incomes, exactly whose ‘money’ is it, anyway?
For that matter, is it really money, or simply a license for rogue central bankers to offer forbearance wherever they see fit?
Series: Economies in crisis
We commend Angela Merkel for her leadership in Europe
* Editorial
* The Observer, Sunday 23 May 2010
* Article history
The crisis in the eurozone is rapidly evolving into a test of strength between European governments and global financial markets.
The stakes were raised last week when Angela Merkel, German chancellor, announced a ban on naked shorting, a particularly sharp financial transaction by which traders gamble on falls in the prices of assets they don’t actually hold.
The prohibition is unlikely to ease pressure on the single currency, at least in the short term. In fact, the unilateral move was interpreted by markets as an act of erratic regulatory spite, resulting in more panic selling.
There are good reasons to dislike naked shorting. It distorts markets and has no obvious social value. But it didn’t start the euro crisis. The underlying problem is vast budget imbalances between the economies of the different countries that share the currency.
Germany emerged from the credit crunch with its national finances in good shape. Greece is practically insolvent. The natural economic solution is a transfer of capital from the country with a surplus to the one with a deficit. Berlin has indeed approved a massive bailout fund for weaker eurozone states.
But it isn’t obvious to many Germans, who have also suffered a recession, why their savings should be used to pay off Greek debts.
There is also a strong feeling in Germany that the scale of the bailout has been dictated by blind market panic and cynical speculation rather than rational appraisal of the economic situation.
It has not escaped Ms Merkel’s notice that many of the creditors who now demand extreme fiscal austerity of European citizens would be out of business had they not last year been rescued with European taxpayers’ money.
The German chancellor’s leadership in shoring up Europe’s finances is commendable. Her anger is also wholly justified.
Without ‘Shorting’, naked or otherwise, we would have never found out the truth about Enron or Worldcom.
Angela Merkel’s ban on naked short-selling is brave, not naive
The German chancellor knows that the EU is locked in a power struggle with financial markets over the debt crisis
o Ruth Sunderland
o The Observer, Sunday 23 May 2010
o Article history
Angela Merkel’s government has imposed curbs on financial speculators. Photograph: Tobias Schwarz/Reuters
The condescension rained on Angela Merkel’s unilateral clampdown on speculators is misplaced.
The German chancellor is not naive about the workings of capitalism – she knows that democratically elected leaders are locked in a power struggle with financial markets over how the debt crisis is resolved, and on what timetable. Speculators are amoral and their tunnel vision goes no further than financial gain. They have no interest in the wider body politic, but the side effect of their actions can be to usurp the prerogative of governments, forcing them to take more draconian actions than they would wish.
It is true that speculators exploit genuine flaws, but they can wreak their own havoc by magnifying and accelerating events, inflicting more pain on innocent citizens in the process: just ask any Greek facing austerity measures. They create emergencies, when measured progressive and united responses to complex problems would be far better.
The credit default swaps holding eurozone governments hostage are opaque, unregulated and ripe for reform. A ban on naked short-selling is not the unprecedented, unworkable lunacy Merkel’s detractors would have you believe. Hong Kong made it a criminal offence in the wake of the Asian crisis in the late 1990s, and officials there believe this has been helpful in the current crisis.
Despite the discrediting of the financial sector, a belief persists that markets are all-powerful. But allowing a free rein to speculators subverts democracy.
We may sometimes despair of our leaders but it cannot be right that they are trampled by unaccountable and unelected traders, acting purely for their own profit and with no thought for the wider social good.
Merkel was foolhardy to act alone – and the fact she went freelance at a time when unity in the eurozone is desperately needed is alarming in itself – but her instinct that the markets must be tamed is entirely correct. This is a battle that governments cannot afford to lose.
Again, I’ll point out that everyone is trying to blame short-sellers.
Nobody is looking at the **real** problem: the forces that drive markets UP in the face of deteriorating fundamentals…which are like red flags to short sellers who, naturally, take that side of the bet — the much riskier side, I might add — and it’s the short-sellers who put in a bottom when things are declining because THEY HAVE TO BUY IN ORDER TO CLOSE THEIR POSITIONS. The might be the only buyers around when things are falling. If you ban short selling, it’s entirely possible that the market will drastically overshoot to the downside as there will be far fewer buyers when the SHTF.
Who’s afraid of the big bad bank,
The big bad bank,
The big bad bank?
Who’s afraid of the big bad bank,
Tra-la-la-la-laaa.
Banks deny big is bad with fightback against global moves to break them up
The shake-up in the oversight of Wall Street could stop banks that take deposits in the US from engaging in risky activities
* Jill Treanor
* guardian co uk, Friday 21 May 2010 20.02 BST
Peter Sands, chief executive of Standard Chartered is picking up the cudgels to defend the role of big international banks. Photograph: Felix Clay
The world’s biggest banks are preparing a rearguard action against attempts by governments around the world to split them up.
Papers to be presented on Monday by Peter Sands, chief executive of Standard Chartered, will make the case for the role of international banking groups. Work on the banks’ defence case began before the US passed legislation yesterday to shake up Wall Street but is being finalised at a time when the UK government is pledging to launch a commission to look at ways to break up banks.
Sands is chairman of a committee on regulation run by the Institute of International Finance that will front the lobby group’s review of how to tackle banks perceived to be “too big to fail”. The Standard Chartered chief has proved influential in the debate, being at the helm of a bank that survived the financial crisis without a taxpayer bailout. He has previously made the case against breaking up banks.
Analysts were today trying to gauge the impact on banks around the world of the biggest shake-up in the oversight of Wall Street since the 1930s. The changes could stop banks that take deposits in the US from engaging in risky activities such as derivatives or proprietary trading, where the bank’s own money is used to take market positions.
However, shares in Goldman Sachs, one of the Wall Street firms expected to be hit hardest by President Obama’s reforms, rose yesterday, when the laws passed by the Senate were found to be less draconian than feared. “So much of it is still up in the air,” one Wall Street specialist said.
It is not yet clear exactly how the Volcker rule – named after the former Federal Reserve boss Paul Volcker and intended to stop banks’ riskier business – will operate in practice. Along with the crisis hitting the eurozone, the uncertainly has helped to unsettle share markets, and comes as bankers in Britain wait for more details about a new commission to be overseen by a cabinet sub-committee chaired by George Osborne, the chancellor.
Bruce Packard, banks analyst at Seymour Pierce, said that the implications for the UK banks of changes being made in the US were still unclear.
“Both HSBC and Royal Bank of Scotland [RBS] have US deposits, and have large ‘global markets’ businesses – over a third of revenue, and currently more than two-thirds of profits,” Packard said.
“The key uncertainty is how ‘prop trading’ will be defined by the regulator – for instance whether the final version of the reform bill that goes to Obama should allow banks to continue to trade swaps. Large US banks have warned that proposed changes were contributing to the market turmoil,” Packard added.
…
Large US banks have warned that proposed changes were contributing to the market turmoil,” Packard added.
———————-
Which is exactly why we need these changes.
I have yet to hear a valid reason for allowing depository institutions to engage in proprietary trading (or any other “risky” practices). Who care if they’ll be less profitable? And who cares if we lose market share? They certainly weren’t worried about Joe Sixpack’s job when it was offshored. Why should we now care about them?
WEALTH dot net
The Journal of True Capitalism, Honest Markets and Rational Economics
8 March 2010
Is The Federal Reserve Insolvent?
With Geoffrey Batt
The ongoing troubles at the GSEs are no secret: it is public knowledge that Fannie had a 5.38% delinquency rate at December, while Freddie just passed the 4% threshold in January; both continue to rise rapidly each month. The fact that the mortgage-bond spread has just hit a record tight is merely an ongoing artifact of the Fed’s endless meddling in the mortgage market, with the sole purpose of keeping rates artificially low, and preventing banks from being forced to take massive writedowns on their entire loan book. This is all well known. What, however, seems to have escaped public attention is what the impact of these delinquencies is on the one largest holder of Mortgage Backed Securities, the Federal Reserve. What also seems to have escaped the public is that the Fed is now the world’s largest bank, with total assets near $2.3 trillion. We provide a weekly update of the Fed’s balance sheet and while we briefly note the liability side, our, and everyone else’s, attention, is traditionally focused on the asset side. Yet a more detailed look at the liability side reveals something very troubling, specifically that the Fed’s capital, i.e. equity buffer, which as of most recently was $53.3 billion (a comparable metric for plain vanilla banks is their equity buffer, or Tier 1 Capital, or however the FASB wants to define it on any given day when it is covering up massive capital shortfalls) is in fact negligible and could well be substantially negative, if the Fed were to account for the rapidly rising level of delinquencies in its one largest asset holdings: the $1.027 trillion in settled MBS. And while there is no possibility of a run on the Fed, the reality is that the Fed now likely runs with a negative real capital balance, meaning that the US Federal Reserve is now essentially insolvent.
…
As for the topic at hand, we turn to pp 23-24 of the presentation:
* Central bank operations generate fluctuating levels of net earnings (seigniorage), most of which are turned over to the Treasury as revenue
* Central bank balance sheets sometimes go into the red. The Treasury may then recapitalize it by creating, and giving to the central bank, new government debt
* [The Fed's] Independence meant that the legislature and the Treasury did not complain [much] about seignorage fluctuations or about the effect of interest rate changes on the Treasury’s interest expense
* Fed can always “print money” to pay its bills.
* There is no possibility of a run on the Fed, since its liabilities make no conversion promise.
* A commitment to a path for inflation or the price level makes the balance sheet matter.
* Without Treasury backing, the Fed must rely on seigniorage to raise revenues, and that can conflict with inflation-control goals.
So here is the crux of the issue: the only way to deal with a mark-to-market of the Fed currently is to embrace monetization. It is no longer a question of semantics, of who promised what: it is the only mechanical way by which the Fed can dig itself out of a capital deficiency. With GSE delinquencies exploding, and with the Fed (and Congress) singlehandedly facilitating imprudent lender policy by allowing ever more borrowers to become deliquent without consequences, the MBS delinquency rate will likely hit 10% over the next 6-12 months. At that moment, someone will ask the Fed: “what is the true basis of your capital account?” And when the Fed is forced to justify a valid response, is when monetizaton will begin.
Since the market deals in expectation absolutes, all it would take for rates to breach the inflection point black swan and commence going up, is the mere possibility of open monetization.
What we hope to show with this exercise is that no course of action, even the one currently employed by the Fed, can continue in perpetuity: you can’t have infinitely low housing rates in an environment of exploding delinquencies, as even more MBS are onboarded on the taxpayer’s balance sheet. The reality is that inflationary conerns will come to a fore, and have a material impact on rates, the second all these speculations are voiced in a more reputable arena. At that point the game will be up; the Fed’s attempt to continue the status quo will be over, and the relentless rise up in rates will begin, culminating with the long-awaited Minsky moment.
As for the timing of this development? We will join the Bob Janjuah camp on this one. While few have the guts to take the money printer head on, doing so early is certainly suicidal. Yet with each passing day, all those who are fully aware that the Fed’s course is one of self-destruction, grow bolder, until finally one day a new class of investors - the Fed vigilantes will emerge, looking for cheap opportunities to make a killing (think ABX) on the other side of the “Fed trade”, which ultimately will lead to a systemic catharsis of unprecedented proportions.
At that point neither gold, nor lead will be in any way useful. Beta and gamma radiation will make sure of that.
How come the Green Shoots bullshit artists never get into the implications of record foreclosures for the Fed’s toxic MBS portfolio? Don’t foreclosures generally erode the value of toxic mortgage pools?
MBA: Delinquency Rate Rises in First Quarter. Foreclosures Running At Record Pace
by Jann Swanson on May 19, 2010
…
Taken together, loans in foreclosure and loans at least one payment late make up 14.01 percent of all loans compared to 15.02 percent last quarter.
Jay Brinkmann, Chief Economist for MBA says, “The issue this quarter is that the seasonally adjusted delinquency rates went up while the unadjusted rates went down. Delinquency rates traditionally peak in the fourth quarter and fall in the first quarter and we saw that first quarter drop in the data. The question is whether the drop represents anything more than a normal seasonal decline or a more fundamental improvement. Most importantly, the normal seasonal drop is coming right at the point where we believe delinquencies could potentially be declining and the problem for the statistical models is determining which is which.”
“The seasonal models say it is not a fundamental improvement and that the seasonal drop should have been larger to represent a true improvement, hence the increase in the seasonally adjusted numbers. Yet there is reason to believe the seasonally adjusted numbers could be too high. Simply put, fundamental market factors may be having a greater influence on the delinquency rates than is normally the case, but mathematical models have difficulty discerning the difference over a short period of time.
“Since discerning what represents a fundamental improvement versus a simply seasonal improvement is probably more of an art than a mathematical science at this point, the seasonally adjusted numbers should be viewed with a degree of caution.”
Loans that were 30+ days delinquent increased from 3.31 percent to 3.45 percent; those 60+ days late increased from 1.54 percent to 1.59 percent, and seriously delinquent loans, those 90+ days in arrears, increased from 4.62 percent to 5.02 percent.
“Overall, we see a continuation of the pattern of declines in short-term delinquency rates, at least on a non-seasonally adjusted basis,” Brinkmann said. “The continued historically high share of delinquencies that are 90 days or more past due, and a leveling off in the pace of foreclosures.
“The economy has begun to generate jobs and layoffs have declined, although new claims for unemployment insurance remained higher in the first quarter than we expected. The percent of loans behind one payment had been declining as first-time claims for unemployment began falling in March 2009. Those new claims stopped falling during the first quarter of this year, which likely halted the decline in the underlying 30-day delinquency rate. If mortgage delinquencies are not yet clearly improving, it also appears they are not getting worse. However, a bad situation that is not getting worse is still bad.
Prime loans overall had a delinquency rate of 7.32 percent (seasonally adjusted) compared to 6.73 percent in the fourth quarter, however Prime ARMs had a rate nearly twice that of Prime fixed-rate loans; 13.52 percent compared to 6.17 percent. These rates were up 142 basis points and 57 basis points respectively from their fourth quarter levels. 27.21 percent of all subprime loans are in some stage of delinquency, up from 25.26 percent. Subprime FRM loans increased from 23.83 percent to 25.69 percent and subprime ARMs jumped from 26.69 percent to 29.09 percent. Delinquencies of FHA loans decreased slightly, from 13.57 percent in the fourth quarter to 13.15 percent while VA loan delinquencies increased from 7.41 percent to 7.96 percent. All types of loans showed declines on a non-seasonally adjusted basis.
Compared on a year-over-year basis, the non-seasonally adjusted delinquency rate increased 151 basis points for prime fixed loans, 172 basis points for prime ARM loans, 343 basis points for subprime fixed loans, and 244 basis points for subprime ARM loans from the first quarter of 2009. The delinquency rate was 48 basis points lower for FHA loans and 12 basis points for VA loans relative to the same quarter a year ago.
The states with the highest overall delinquency rates were Nevada (14.03 percent), Mississippi (12.70 percent), and Georgia (12.10 percent). The highest inventory of foreclosures are in Florida (13.97 percent,) Nevada (10.40 percent,) and New Jersey (6.17 percent); and the highest rates of foreclosure were in Nevada (3.23 percent,) Florida (2.41 percent,) and Arizona (2.24 percent.) Brinkmann noted that Florida, Arizona, Nevada, and California have dominated the national picture for several years and that, while California is improving, Florida is getting worse. Washington, Maryland, Oregon, and Georgia showed the greatest overall increases in foreclosure starts compared to Q4 2009.
The foreclosure starts rate increased for all loan types with the exception of subprime loans. The foreclosure starts rate increased six basis points for prime fixed loans to 0.69 percent, 17 basis points for prime ARM loans to 2.29 percent, 18 basis points for FHA loans to 1.46 percent, and eight basis points for VA loans to 0.89 percent. For subprime fixed loans, the rate decreased nine basis points to 2.64 percent and for subprime ARM loans the rate decreased 39 basis points to 4.32 percent.
The delinquency survey covers about 85 percent of the first-lien mortgages outstanding in the U.S. During the first quarter the survey covered 44.4 million first mortgages on one-to-four family properties, a number that has decreased about 620,000 loans since the first quarter of 2009 and 63,000 loans since the fourth quarter.
Compared on a year-over-year basis, the non-seasonally adjusted delinquency rate increased 151 basis points for prime fixed loans, 172 basis points for prime ARM loans, 343 basis points for subprime fixed loans, and 244 basis points for subprime ARM loans from the first quarter of 2009.
Why would you seasonally adjust year-over-year delinquency rate comparisons? Maybe I missed something.
The clue to when the Fed runs into trouble on this one, will be when they announce that they’re no longer paying interest on Bank reserves.
Since this is presumably where the interest payments they’re receiving on the MBS they own are currently going.
Alt-A Mortgage Disaster in 2010-2011
January 17th, 2010 Written by Jordan
In a phenomenon that couldn’t be more ill-timed, tens of billions in Alternative mortgages are due to be reset in 2010-2011. Though not sub-prime, many of these loans are interest-only, those in which the borrower makes no payments on principle. Once reset, borrowers could have monthly payments 15-20% higher than today.
The Gamechanger
Just a few years ago, when real estate was liquid and homes were selling for more than the asking price, interest-only loans burst on the scene in what clearly demonstrated the market was in a bubble. Interest-only loans are just that, monthly payments purely on interest with the borrower owning 0% of the home whether he or she had been paying on the debt for 6 months or 60 years. These loans were popular with speculators and over-leveraged average borrowers alike, and allowed buyers to buy more than they could truly afford to.
Also, interest only loans were loved by the banking industry due to their frequently high closing costs/fees which generated huge front-end profits. A banker could make the loan, seal a 2-3% profit at closing, then go on to sell the loan to Fannie Mae/Freddie Mac and generate even more quick cash with no risk. Needless to say, the banking industry loved touting these loans to buyers.
How Interest Only Loans Worked
Most interest only loans weren’t to remain interest-only forever. Many were brokered so that the payments would be interest only for 3-5 years before reset to new interest rates as well as new payment terms. Often, at the end of the first term, the mortgage would reset to a conventional 30-year loan that would include some payment on principle. When the shift occurs 5 years after the loan was made, the payments would increase as much as 15-20% due to the fact the borrower was now paying interest plus adding a significant portion towards the principle of the loan.
The Deal with Alt-A Loans
As we already know, mortgage delinquencies are up over 250% from 12 months ago due mostly to domestic job losses and a weakened economy. When these loans are reset, monthly payments are sure to rise, creating more delinquencies and ultimately more foreclosures which many predict will further restrain the climb in housing prices.
“Often, at the end of the first term, the mortgage would reset to a conventional 30-year loan that would include some payment on principle.”
Worse than that….if your interest only period were 5 years, when the loan resets, principle repayment is calculated based on a 25-year schedule, which is the remaining term on the loan. So it’s a double whammy for the borrower, not just paying principle for the first time but paying on a less than 30-year year amortization schedule.
It’s even worse for the 7 or 10 year IO loans, as principle would be on 23 and 20 year repayment plans.