The Housing Bubble

Stocks rally, S&P 500 nearing record high
By Ben Rooney @CNNMoney
Invest February 20, 2014: 4:19 PM ET

NEW YORK (CNNMoney)
Investors are taking the latest batch of weak economic reports with a grain of snow-melting salt.

The Dow Jones industrial average gained more than 100 points. The S&P 500 closed within 10 points of its all-time high. The Nasdaq also gained, resuming a hot streak. The tech-heavy index has closed higher in 9 of the past 10 trading days.

Bad weather in many parts of the country has made it difficult to gauge how the economy is performing. “Weather remains a handy excuse” for investors who want to discount mixed economic data, said Steven Ricchiuto, chief economist at Mizuho Securities

The U.S. government said the consumer price index, the benchmark for inflation, rose 0.1% in January, which was slightly below what economists had predicted. A measure of manufacturing activity in the Philadelphia area fell sharply. On the bright side, initial claims for unemployment benefits fell last week.

Lackluster readings on manufacturing in China and Europe weren’t making investors nervous either.

Some traders said stocks were benefiting from a move out of bonds as investors look for more risky assets. The yield on the 10-year Treasury note rose to 2.77%, up from 2.74% Wednesday. Bond yields rise when prices fall.
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All-time highs are 2 weeks away: BofAML technician
Published: Tuesday, 18 Feb 2014 | 2:56 PM ET
By: Alex Rosenberg | CNBC Producer

MacNeil Curry, the head of global technical strategy at Bank of America Merrill Lynch, says that historic highs in the stock market are just around the corner.

“For all-time highs in the S&P it’s probably not that far away—I’d say probably a couple of weeks on the outside,” Curry said on Tuesday’s episode of “Futures Now.” “Seasonals start to get much more constructive once we get past February and we’re already almost through February, we’ve got a week and a half. So I’d say probably two weeks or so with regard to higher S&P.”
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HOWARD GOLD’S NO-NONSENSE INVESTING
Feb. 21, 2014, 6:15 a.m. EST
Washington won’t tank the markets this year
Opinion: Janet Yellen and Congress may do some good in 2014
By Howard Gold

A couple of big events last week gave a strong signal that investors have little to fear this year from our dysfunctional government in Washington.

That’s remarkable considering how much damage our leaders have done to stock markets over the last three years.

From the loss of Standard & Poor’s AAA sovereign-debt rating in August 2011 through the fiscal-cliff melodrama in late 2012 to last fall’s government shutdown, our elected officials in Washington have undermined investors’ confidence and sent stock markets reeling.

But the testimony of new Federal Reserve Chairwoman Janet Yellen before a House committee last week and the passage of a “clean” debt-limit bill by both houses of Congress clear some big potential roadblocks out of the way for the rest of 2014. They could even mean the end of an era in which Washington moved markets, mostly for the worst.

Investors responded by giving the S&P 500 its best week of the year to date.

The buying picked up steam during Yellen’s testimony. “The S&P 500 rose steadily as Ms. Yellen testified … as markets accustomed themselves to their new overseer,” the Financial Times reported.
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INDICATIONS
Feb. 21, 2014, 6:07 a.m. EST
Stock futures point to firmer open; Groupon slides
By Sara Sjolin, MarketWatch

LONDON (MarketWatch) — U.S. stocks were on track for a weekly gain on Friday, with stock futures indicating a higher open on Wall Street ahead of fresh data on the housing market, which has suffered from the unusually cold winter.

Futures for the Dow Jones Industrial Average gained 39 points, or 0.2%, to 16,139, while those for the S&P 500 index added 4 points, or 0.2%, to 1,840.20. Futures for the Nasdaq 100 index advanced 7 points, or 0.2%, to 3,678.50.
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The economic weather this winter has seemed unusually harsh.

US housing starts plunge 16% as cold weather blankets country
Published: Wednesday, 19 Feb 2014 | 8:39 AM ET

U.S. housing starts recorded their biggest drop in almost three years in January, likely weighed down by harsh weather,
…
The Commerce Department said on Wednesday groundbreaking tumbled 16.0 percent to a seasonally adjusted annual rate of 880,000 units, the lowest level since September. The percentage drop was the largest since February 2011.

Starts for December were revised up to a 1.05 million-unit pace from the previously reported 999,000-unit rate.

Economists polled by Reuters had expected starts to fall to a 950,000-unit rate in January.

Starts in the Midwest tumbled a record 67.7 percent, suggesting unseasonably cold weather could have disrupted activity.
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Frigid temperatures have been blamed for the sharp slowdown in hiring in December and January. They also chilled manufacturing output last month and have been cited for the unexpected drop in retail sales in January.
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Spotlight on economy: More home sales blues?
February 20, 2014, 4:51 PM

Severely cold weather in January stopped many construction projects from breaking ground and slowed work on existing sites. The cold snap probably kept more house hunters indoors instead of making the rounds at open houses.

Economists forecast sales of existing homes likely pulled back in January, dropping to an annual rate of 4.65 million on a seasonally adjusted basis, according to a MarketWatch survey. Sales totaled a preliminary 4.87 million in December.
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Live Coverage: Violence flares as Ukraine politicians weigh deal

Investors shun emerging markets, especially South Africa: BofA poll
BY NATSUKO WAKI
LONDON Tue Feb 18, 2014 11:52am EST
A Bank of America sign is shown on a building in downtown Los Angeles, California January 15, 2014. REUTERS/Mike Blake

(Reuters) - Investors grew even more pessimistic about the developing world in February, with a majority saying the biggest threat to the stability of global financial markets was turmoil in emerging markets, a survey showed on Tuesday.

A monthly fund managers survey by Bank of America Merrill Lynch showed investors’ cash balance jumped to 4.8 percent, the highest since July 2012, as investors remained concerned about over-stretched equity valuations.

A net 29 percent of investors are underweight emerging equities, a record low for the survey, which dates back to 2001. The net reading shows the difference between overweight and underweight positions. Some 175 people, who manage combined assets of $456 billion, were polled.

The main concern is coming from China’s growth outlook. The number of investors expecting a weaker Chinese economy over the next year rose to a net 40 percent from 28 percent in January.

Growth expectations also eased at a global level. A net 56 percent forecast a stronger economy, down from 75 percent.

The possibility of China’s hard landing or a collapse in commodity prices remained investors’ biggest tail risk.

“Investors are moderating their global growth outlook a little bit. Investors are pretty much washing their hands of emerging market risks these days,” said John Bilton, the European investment strategist at BofA-ML.

“You still have this underlying fear over China, specifically credit market conditions. We need to see more decisive action from the People’s Bank of China. I would be looking for loan and money-supply data and commodity demand as a chance for EM to have a bit of catch up.”
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WRAPUP 2-U.S. leads pushback against emerging market angst at G20
Thu Feb 20, 2014 11:41pm EST

* U.S. Treasury chief Lew tells emerging markets to get house in order

* Lew urges efforts to boost domestic demand in China, Japan, Europe

* Talk of hard target for global growth gathers some support

By Wayne Cole

SYDNEY, Feb 21 (Reuters) - The world’s rich nations pushed back against emerging market complaints about the spillover effects of their monetary polices, saying on Friday they had to get their own houses in order and get with the agenda of lifting global growth.

As finance ministers and central bank chiefs from the Group of 20 developed and emerging gather ahead of a weekend meeting in Sydney, many are already talking at cross purposes.

Emerging nations want the U.S. Federal Reserve to calibrate its winding down of stimulus so as to mitigate the impact on their economies. Developed members reply that the troubles in the emerging world are mostly homegrown and domestic interest rates have to be set with domestic recoveries in mind.

“Emerging markets need to take steps of their own to get their fiscal house in order and put structural reforms in place,” U.S. Treasury Secretary Jack Lew said at a financial conference in Sydney ahead of the ministerial meetings.

That was a sentiment very much echoed by the finance ministers of Japan and Britain.

Japan’s Taro Aso said the Fed’s taper was positive as it reflected an improving U.S. economy, even if it raised the risk of sharp capital outflows from some others.

“It is important for emerging economies to correct these things by making their own efforts,” Aso said in Tokyo.
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Emerging markets must do homework, says German minister
FRANKFURT Fri Feb 21, 2014 1:52am EST

(Reuters) - Emerging markets should get their own houses in order before demanding solidarity from other nations, German Finance Minister Wolfgang Schaeuble said.

The troubles in emerging markets would be the main topic discussed by finance ministers and central bank chiefs at the G20 summit in Sydney this weekend, Schaeuble told CNBC in an interview broadcast on Friday.

Stock, bond and currency markets in developing countries have convulsed in recent months, hit by concerns over weaker economic growth and the winding down of stimulus in the United States.

Emerging nations want the U.S. Federal Reserve to calibrate its winding down of stimulus so as to mitigate the impact on their economies, but industrialized nations have responded that the troubles in the emerging world are mostly home-grown.

“In my opinion we must always strive towards an approach of solidarity. Everyone must first of all do their own homework and then countries can demand solidarity from others,” Schaeuble said.
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The Chinese economy is moving on, and so must America’s
Stephen Roach says the days of Sino-US mutual dependency are nearing an end, as China strikes out on its own towards a consumer-led economy. And, if it is to prosper, the US must also find a new growth strategy
PUBLISHED : Friday, 21 February, 2014, 12:05pm
UPDATED : Friday, 21 February, 2014, 5:34pm
Stephen Roach
Photo taken on Nov. 17, 2011 shows US dollars exchanged from Chinese currency Renminbi in Yuncheng City, Shanxi Province. Photo: Xinhua

Once again, all eyes are on China. Emerging markets are being battered early this year, as perceptions of resilience have given way to fears of vulnerability. And hand-wringing over China is one of the major reasons.

Of course, US Federal Reserve tapering has also been a trigger. But the China factor looms equally large. Long-standing concerns about the dreaded hard landing in the Chinese economy have once again intensified. If China falls, goes the argument, reverberations to other emerging markets and the rest of the global economy will be quick to follow.

While generalisations are the norm in the throes of most crises, in the end, differentiation pays. Such has long been the case with China. China was Asia’s most resilient economy during the wrenching pan-regional crisis of the late 1990s and it could turn out to be just as tough today. Yes, the Chinese economy is now slowing, but the growth downshift is not well understood. A slowdown is actually a welcome development.

There continues to be a superficial fixation on top-line Chinese gross domestic product growth - dwelling on a 10 per cent growth machine that has slowed into the 7 to 8 per cent zone. The knee-jerk reaction presumes that this downshift is but a prelude of more growth disappointments to come - especially in light of fears over a long-standing list of China disaster stories, from social unrest and environmental catastrophes to housing bubbles and shadow banking blow-ups.

While none of these concerns should be dismissed out of hand, they’re not the source of the current slowdown. At work, instead, is a long-awaited rebalancing of the Chinese economy - a major shift from export- and investment-led growth to a model much more reliant on consumer spending and services. Indeed, last year, the Chinese services sector actually overtook the combined shares of manufacturing and construction as the largest segment in the economy.

Long dependent on 10 per cent Chinese growth, the US in particular and the world in general is not prepared for the slower growth that will emerge with an increasingly consumer- and services-led China.

China’s export-led growth miracle couldn’t have achieved its extraordinary success without the external demand from the American consumer. China also relied heavily on the US dollar to anchor its undervalued currency to boost export competitiveness.

The US, for its part, drew greatly on cheap goods made in China to boost the purchasing power of consumers; it also relied on surplus Chinese savings to help fill the void of the world’s largest shortfall of domestic saving and took advantage of China’s voracious demand for US Treasury securities to help fund budget deficits and subsidise American interest rates.

In the end, however, this codependency was a marriage of convenience - not love. Frictions have developed over a range of issues. And, just as the psychologist would predict, one of the partners has decided to go its own way. And that, of course, is China.
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PUBLISHED : Thursday, 20 February, 2014, 1:10amUPDATED : Thursday, 20 February, 2014, 8:23am
Fears over a ‘tail risk’ hard landing in China are growing
Any slump in the mainland economy will inevitably cause casualties including Hong Kong because of the banking sector’s exposure
Monitor
Tom Holland
As the writer of the South China Morning Post’s Monitor column, Tom Holland attempts each day to make sense of the latest developments in business, finance and economic affairs in Hong Kong and mainland China.

Yesterday, the South China Morning Post reported how Beijing’s central propaganda department has instructed mainland media organisations not to give air time or column inches to foreign bank economists worried about the dangers posed by China’s ballooning debt levels.

As a crisis prevention measure, that’s like thinking you can eliminate the threat of a fire by disabling your alarm.

Yet while Beijing is keen to play down the risks, private sector analysts are getting increasingly concerned.

Most believe that China’s economic growth rate is likely to stay above 7 per cent over the next couple of years at least. That’s what China’s leaders have decided is the slowest acceptable growth rate, and recent history shows they have the tools to support economic growth as well as the willingness to use them.

But although a painful period of deleveraging which pushes growth below, say, 5 per cent may not be the most probable outcome for the Chinese economy, it remains a possibility. And the effects should China experience such a hard landing would be so severe and so widespread that the scenario, unlikely though it may be, merits careful examination.

Asia’s private sector analysts clearly think so. In a report published yesterday, Tim Condon, the chief economist for Asia at Dutch banking giant ING, argued that just as China’s rapid growth in the 2000s lifted economies across the world, so a Chinese slowdown will inevitably cause casualties.

A 30 per cent deceleration in China’s growth rate could lead to a halving in global export growth, he estimated. “Investors should be prepared for a crisis or two in emerging markets,” he warned.

Also this week, economist Wang Tao and her colleagues at Swiss bank UBS pointed out that Hong Kong is particularly vulnerable to a Chinese slowdown. Mainland visitors account for 30 per cent of the city’s retail sales, they noted, while exposure to China makes up almost 20 per cent of the local banking system’s assets.
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8:00 am
Feb 20, 2014 ECONOMY & BUSINESS
What If China Does Land Hard?

Over the last two weeks, several major investment houses have published reports exploring the idea of a hard economic landing in China. They include “We don’t expect it to happen” caveats.

But what if it did happen? Would the rest of the world tank as well?

A catalyst for this concern has been the end of America’s easy-money policies, which buoyed emerging-market economies. The gradual end of the Fed credit flood has sparked concerns that developing countries with high fiscal and trade deficits, excess credit growth, currency risks and other problems could face a liquidity crisis, leading to a broad loss of confidence.

Among the countries investors worry most about are those hit by political uncertainty, such as Venezuela, Argentina and Turkey. Also on the radar are economies with structural concerns including India, Brazil, Indonesia and South Africa.

China is different, as its leaders are fond of pointing out. It’s got huge foreign currency reserves, still-strong economic growth – GDP slowed slightly to 7.7% on-year in the fourth quarter, from 7.8% in the third — and it posted 10.6% on-year export growth in January.

But that hasn’t stopped some investors from seeing the worst, given the Asian giant’s extensive links with other emerging markets, credit and debt concerns and the possibility of some internal crisis.

“Given that China is the largest emerging economy in the world and has contributed more than 25% to global GDP growth since 2010, a sharp slowdown or deleveraging in China will likely affect everyone and every market,” UBS said in its “How Might a China Hard Landing Affect the World” report.
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Beware the Great Unraveling of The Symbiosis.

“Now that those countries’ markets appear to be tanking, will it have any effect on the US housing market recovery?”

To answer your own question, meditate on how much equity California households were liberating to reinvest it in housing markets further inland leading up to the 2008 meltdown.

Overseas markets tanking may affect coastal high priced areas like silly valley.

Probably won’t do much for Flyover

ECONOMIC CRISIS
Another JP Morgan Banker Leaps to His Death
By yihan
On February 18, 2014
Hong Kong man becomes 7th banker to die under mysterious circumstances

Yet another banker has committed suicide, with a JP Morgan forex trader leaping to his death from the top of the firm’s Chater House headquarters in Hong Kong.

Over the past few weeks at least seven bankers have died under mysterious circumstances, including another JP Morgan senior manager who jumped off the top of a skyscraper in London last month.

Speculation is rife that the series of deaths are connected to some kind of looming financial crisis or a huge legal case targeting bankers for malfeasance, although no definite link has been established.
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Junjie becomes the 7th banker to suddenly die in recent weeks. Questions as to whether the deaths are merely a coincidence or are linked to some as yet unknown factor continue to swirl.

- On January 26, former Deutsche Bank executive Broeksmit was found dead at his South Kensington home after police responded to reports of a man found hanging at a house. According to reports, Broeksmit had “close ties to co-chief executive Anshu Jain.”

- Gabriel Magee, a 39-year-old senior manager at JP Morgan’s European headquarters, jumped 500 ft from the top of the bank’s headquarters in central London on January 27, landing on an adjacent 9 story roof.

- Mike Dueker, the chief economist at Russell Investments, fell down a 50 foot embankment in what police are describing as a suicide. He was reported missing on January 29 by friends, who said he had been “having problems at work.”

- Richard Talley, 57, founder of American Title Services in Centennial, Colorado, was also found dead earlier this month after apparently shooting himself with a nail gun.

- 37-year-old JP Morgan executive director Ryan Henry Crane died last week.

- Tim Dickenson, a U.K.-based communications director at Swiss Re AG, also died last month, although the circumstances surrounding his death are still unknown.

Another view is that fattened calves make for the best eatin’.

Feb. 14, 2014, 9:02 a.m. EST
Political, legal hopes buoy Fannie, Freddie rally
By Ruth Mantell, MarketWatch
Getty Images
A Freddie Mac sign sits in front of its headquarters in 2008.

WASHINGTON (MarketWatch) — Once-flailing mortgage-finance giants Fannie Mae and Freddie Mac will report quarterly financial results in coming weeks, and even though investors will continue to be barred from reaping profits, shares of the mortgage buyers have continued to rocket.

Since a September bottom, common share prices for Fannie (FNMA -3.24%) and Freddie (FMCC -3.59%) have just about tripled. The most heavily traded preferred shares of Fannie (FNMAS +0.29%) and Freddie (FMCKJ -1.32%) have more than doubled since late June.

Some shareholders see hope in lawsuits filed last year over the government changing the terms of a rescue agreement in 2012, directing Fannie and Freddie to send all their profits to Treasury. Some have also been enticed by splashy headlines about big-name investors.

“That has gotten other people interested,” said Jim Millstein, chief executive of Millstein & Co. and the U.S. Treasury Department’s former chief restructuring officer.

In addition, with each successive quarter of profits for Fannie and Freddie, some believe that the chances dim for Congress to approve legislation that winds down the companies. If no bipartisan agreement on housing-finance reform is advanced within the next couple of months, the chances of passage this year plunges, with career-minded U.S. lawmakers turning their attention to winning reelection, the thinking goes.

“It’s easier just to kick it down the road,” said Ralph Nader, a consumer advocate and common shareholder of Fannie and Freddie. “They don’t want to mess with the part of the real estate chain that is represented by Fannie and Freddie. Fannie and Freddie are making money, they are stable.”

One of government’s goals when it became Fannie and Freddie’s conservator in 2008 was to put the companies “in a sound and solvent condition .” A rebounding housing market, boosted by the strengthening economy and stimulative Federal Reserve actions, have helped heal Fannie and Freddie.

Indeed, the companies are doing so well that analysts expect upcoming earnings reports to show that the firms will send more profit to Treasury , on a cumulative basis, than was originally provided in rescue funds. It will be hard to kill a couple of cash cows when the government is lurching from fiscal crisis to fiscal crisis.

“Market participants are now speculating that if the government gets all of its money and a significant profit back, policymakers’ desire to prevent third party shareholders from obtaining any recovery may wane,” Millstein said.
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All the water project’s that brought cheap water to the west only increased the demand guaranteeing shortages in the future?

In economics, the Jevons paradox (/ˈdʒɛvənz/; sometimes Jevons effect) is the proposition that as technology progresses, the increase in efficiency with which a resource is used tends to increase (rather than decrease) the rate of consumption of that resource.[1] In 1865, the English economist William Stanley Jevons observed that technological improvements that increased the efficiency of coal use led to increased consumption of coal in a wide range of industries. He argued that, contrary to common intuition, technological improvements could not be relied upon to reduce fuel consumption.[2]
The issue has been re-examined by modern economists studying consumption rebound effects from improved energy efficiency. In addition to reducing the amount needed for a given use, improved efficiency lowers the relative cost of using a resource, which tends to increase the quantity of the resource demanded, potentially counteracting any savings from increased efficiency. Additionally, increased efficiency accelerates economic growth, further increasing the demand for resources. The Jevons paradox occurs when the effect from increased demand predominates, causing resource use to increase.[2]

3:05 pm Feb 21, 2014
FED
The 2008 FOMC Laugh Track: Gallows Humor at the Federal Reserve
Ben S. Bernanke in December 2008. Bloomberg News

Federal Reserve policy meetings typically feature 19 central bank officials sitting around a table for a day or two, discussing the state of the economy at great length. They’re important gatherings, but they also can be long and dull affairs. So it’s only natural for officials to crack a joke or two.

The Fed’s transcripts include a convenient [Laughter] tag to mark when central bank officials acted amused by a colleague’s comment — whether it was intended as a joke or not. We’ve been compiling them for years in our coverage of Federal Open Market Committee transcripts (read last year’s edition off the 2007 transcripts). Here are some of the best – and worst – jokes from the 2008 Fed meetings as officials moved out of and then back into a crisis mentality.

(Note: FOMC meetings can run on for days, and except for these jokes they’re almost entirely serious. Read our comprehensive coverage of the serious discussions here on Real Time Economics.)

- Compiled by Eric Morath, Sarah Portlock, Sudeep Reddy and Jeffrey Sparshott
* * *
January 2008

St. Louis Fed President William Poole, at his final committee meeting (his 81st, according to Chairman Ben Bernanke), referenced the fact that his term spanned from the solid economic growth of the late 1990s to early 2008 when the economy was sluggish:

Mr. Poole: I came here 10 years ago with a boom. I’m going out with a pause. [Laughter]

During a discussion about the economy, Philadelphia Fed President Charles Plosser said it was “hard to put a good face” on recent readings.

Mr. Plosser: You know, listening to the staff discussion I have certainly come to understand why everyone continues to believe that economics is a dismal science. [Laughter] It is quite a dismal picture.

Fed Governor Frederic Mishkin pointed to housing as one of the most significant downside risks that worried him – and that he was “stupidly” in the midst of buying a house.

Mr. Mishkin: As somebody who stupidly is just going to contract on a new house because I have to please my wife, I actually thought exactly along these lines and was thinking about pulling out but then decided that my marriage was more important.

Minneapolis Fed President Gary Stern: It was close. [Laughter]

Mr. Mishkin: By the way, if you know my wife, no it wasn’t close.
* * *
March 2008

Dallas Fed President Richard Fisher, in a soliloquy about the philosophy of central banking, offered this metaphor: “I liken the fed funds rate to a good single malt whiskey—it takes time to have its ameliorative or stimulative effect.” [Laughter]

Officials were discussing the merits of various programs they’d initiated, including the Term Auction Facility, Term Securities Lending Facility and Primary Dealer Credit Facility.

Philadelphia Fed President Charles Plosser: I am very concerned about the developments in the financial markets. I’ve been supportive of the steps we’ve taken to enhance liquidity in the markets through the TAF, the TSLF, the PDCF, or whatever.

Mr. Bernanke: AEIOU.

New York Fed President Tim Geithner: Don’t say IOU. [Laughter]

The day marked Richard Fisher’s 59th birthday, which gave officials a chance to reference a classic Fed metaphor: the punch bowl.

Mr. Fisher: I can’t think of a better group of people to spend it with—or a less happy time to do it.

Fed Governor Randall Kroszner: We sure know how to take the punch bowl away from this party. [Laughter]

Mr. Fisher: Well, listen, I know we are suffering because our Deputy Secretary here sitting to your right, Mr. Chairman, just gave me a candle and had me blow it out with no cake attached. [Laughter]

San Francisco Fed President Janet Yellen offers a rather dire rundown of her economic outlook:

As a final anecdote, a banker in my District who lends to wineries noted that high-end boutique producers face a distinctly softening market for their products, although sales of cheap wine are soaring. [Laughter]
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