The Housing Bubble

‘China’s official Purchasing Managers’ Index (PMI) dropped to a five-month low in October, missing market estimates and showing that the economy still faces pressure, analysts said over the weekend. It’s the first time in three years that China’s official manufacturing PMI has fallen in October, which has traditionally been regarded as a high season for sales.’

‘Other economic data released in the past month has also pointed to weakening growth, including a slowdown in the growth of fixed-assets investment and a decline in the real estate market, Zhang Liqun, a macroeconomics researcher with the Development Research Center of the State Council, told the Global Times on Sunday.’

‘The growth of investment in real estate slowed down to 12.5 percent year-on-year in the first nine months, down from 19.7 percent in the same period last year.’

‘Besides, due to the decline in external demand, small businesses are focusing more on how to survive, rather than how to develop, Zhou Dewen, president of the Wenzhou Council for the Promotion of Small and Medium-sized Enterprises, told the Global Times on Sunday.’

‘The profit margin for these firms has fallen to 1-3 percent from a range of 8-12 percent before the global financial crisis, Zhou said.’

‘Soured loans in India’s banking system are at a three-year high, global credit rating agency Moody’s said, as it warned that a muted economic recovery means the sector’s outlook could stay bleak. “High leverage in the corporate sector could prevent any meaningful recovery in (loan) asset quality” even with “a moderate rebound in economic growth”, Moody’s said.’

‘Standard and Poor’s forecast in a separate report that gross non-performing loans would climb to 4.5 percent by the end of this financial year in March 2015. India’s four-percent non-performing-loan ratio compares with just under one percent in China.’

‘Some banking experts attribute China’s healthy bad-debt levels to a tendency by the nation’s banks to renegotiate loan terms rather than concede debts have gone bad and write them off.’

‘Regarding the performance of regional property markets this year, Robert Collins, Minor International Plc’s vice president mentioned that it has been subdued mainly because of the capital controls in Hong Kong and Singapore, which are working and pushing the volume down.’

‘The picture is a bit mixed in Thailand with some sectors having done well, particularly the premium end because ultra-high-net-worth investors who buy premium properties around the world are continuing to do so at an unabated pace irrespective of whatever else is going on.’

‘Collins pointed to both Pattaya and Hua Hin as being much slower now mainly because of an oversupply of properties and it would take time for the two resort towns to absorb the sheer volume of new supply. Looking ahead to the New Year, Collins foresees that there would be less froth or irrational exuberance than was visible two years ago.’

“It’s not a case where anything will sell, it has got to be well-received, well-located and supported by reputable developers,” he said.’

‘Bank of Japan Governor Haruhiko Kuroda’s shock-and-awe stimulus move on Oct. 31 delighted markets and won him plaudits as a monetary virtuoso. Japan, the conventional wisdom tells us, has finally gotten serious about ending deflation, and isn’t it wonderful. But what happens when a central bank buys up an entire bond market? We’re about to find out as Kuroda, like some feverish hedge fund manager, corners Japan’s. Neglected in all the celebrating: To reach a 2 percent inflation goal that’s both arbitrary and meaningless, the BOJ is destroying Japan’s standing as a market economy.’

‘In announcing that it will boost purchases of government bonds to a record annual pace of $709 billion, the central bank has just added further fuel to the most obvious bond bubble in modern history — and helped create a fresh one on stocks. Once the laws of finance, and gravity, reassert themselves, Japan’s debt market could crash in ways that make the 2008 collapse of Lehman Brothers look like a warm-up. Worse, because Japan’s interest-rate environment is so warped, investors won’t have the usual warning signs of market distress. Even before Friday’s bond-buying move, Japan had lost its last honest tool of price discovery. When a nation that needs 16 digits in yen terms to express its national debt (it reached 1,000,000,000,000,000 yen in August 2013) sees benchmark yields falling, you’ve entered the financial Twilight Zone. Good luck fairly pricing corporate, asset-backed or mortgage-backed securities.’

‘The US dollar has surged to a four-year high against a basket of currencies and has punched through key technical resistance, marking a crucial turning point for the global financial system. The index - a mix of six major currencies – hit 87.4 on Monday, rising above the key level of 87. This reflects the plunge in the Japanese yen since the Bank of Japan launched a fresh round of quantitative easing last week.’

‘The dollar revival could prove painful for companies in Asia that have borrowed heavily in the US currency during the Fed’s QE phase, betting it would continue to fall. Data from the Bank for International Settlements show that the dollar “carry-trade” from Hong Kong into China may have reached $1.2 trillion. Corporate debt in dollars across Asia has jumped from $300bn to $2.5 trillion since 2005.’

‘More than two-thirds of the total $11 trillion of cross-border bank loans worldwide are denominated in dollars. A chunk is unhedged in currency terms and is therefore vulnerable to a dollar “short squeeze”.

‘The International Monetary Fund said $650bn of capital has flowed into emerging markets as a result of QE that would not otherwise have gone there. This is often fickle “low-quality” money that came late to the party. Many of these countries have picked the low-hanging fruit of catch-up growth and are suffering from credit exhaustion. They have deep structural problems and a falling rate of return on investment. The worry is that a tsunami of money could rotate back out again as investors seek higher yields in the US, possibly through crowded exits.’

‘European Union slashed its economic growth forecasts for the bloc on Tuesday, indicating the recovery will remain sluggish amid problems for the biggest economies, particularly France. “The economic and employment situation is not improving fast enough” in the wake of the financial crisis that has hit the continent for the past half-decade, said EU Vice President Jyrki Katainen.’

‘The EU Commission sees growth this year “coming to a stop in Germany after a very strong first quarter, protracted stagnation in France, and contraction in Italy.”

“The smog has come again,” Li Zhong, a resident of Xingtai, Hebei Province, posted to WeChat on October 24. That day, Xingtai’s air quality index measure of PM2.5 was a hazardous 500, officially “off the charts.” Li said that he has almost forgotten what blue skies look like.’

‘It was the third time that month that Xingtai had a day with hazardous levels of pollution. For a long time, Xingtai has been called “the dirtiest city in China.” Over the last few decades, the city has heavily relied on burning coal to support its massive steel industry and it is now paying the environmental price. Due to their proximity to Beijing, many cities in Hebei have started to try and clear away their smog by shutting down factories.’

‘However, shutting down factories has caused unemployment and a reduction in taxes paid to the Xingtai local government, which is already in debt. Furthermore, the air quality problems cannot be solved simply through short-term measures and the government doesn’t seem to have a long-term plan yet.’

‘Because the city, like the rest of China, was in a hurry to develop quickly, many enterprises didn’t have legitimate paperwork when they operated, Wang Dayong, secretary general of the Hebei Metallurgy Industry Association, told the Oriental Morning Post.’

‘As the city expanded rapidly, industrial areas became enveloped by housing. According to data from the Xingtai Environmental Protection Bureau, within 25 kilometers of the city center, there are three power plants, four steel mills, two coking plants and more than 40 glass-manufacturing plants.’

‘Cheng used to own a small lime powder plant in northwest Xingtai, which made him about 1 million yuan ($160,000) of profit per year. A week after the mayor’s meeting, Cheng and other small factory owners received a notice from the government telling them to terminate production. “There’s no call for improvement measures […] the government just won’t let you operate any more because it needs to clean up the air pollution,” he told the Nandu Weekly.’

‘At the same time, another Xingtai resident who ran an oil mill for 20 years, was told to shut down his business as well. He says that he can’t make a living now. “When it gets warmer, I’ll find a part-time work outside Xingtai. There’s nothing wrong with the government wanting to clean up the air, but they should let the people eat,” he said.’

‘Saudi Arabian Oil Co. lowered the cost of its crude to the U.S., where production is the highest in three decades, deepening a selloff that sent prices to the lowest in more two years.’

“The market is reacting as though Saudi Arabia is going to flood the Gulf and is going to compete with shale production,” Michael Hiley, head of energy OTC at LPS Partners Inc. in New York, said yesterday.’

‘Iraq’s Oil Minister Adel Abdul Mahdi said Oct. 31 that members of the Organization of Petroleum Exporting Countries are engaged in a “price war” as surplus supplies spur them to offer discounts.’

Cuz everyone wants to live in Istanbul…

‘A Republican takeover of the U.S. Senate on Election Day would promise increased political turbulence for the Federal Reserve. Financial executives say a GOP-led Senate would ratchet up congressional scrutiny of the central bank’s interest- rate policies as well as its regulatory duties as overseer of the nation’s largest financial firms. “If the Republicans take control of the Senate and thus have control of both the House and the Senate–two words for the Federal Reserve: Watch out,” said Camden Fine, president of the Independent Community Bankers of America.’

‘Leading the GOP wish list in dealing with the Fed would be legislation to open the central bank to more scrutiny of its interest-rate decisions, using congressional audits of monetary-policy matters that Fed officials strongly oppose. Many Republicans oppose the unconventional efforts the central bank has taken to bolster the U.S. economy over the past several years. The Fed last week announced the end of its long-running bond-buying stimulus program, known as quantitative easing. But that won’t quell GOP criticism, since many Republicans want Fed officials to move quickly now to raise interest rates from near zero and shrink the central bank’s balance sheet, which has climbed to near $4.5 trillion.’

‘ To be sure, analysts say President Barack Obama would veto anything Fed officials worry would hinder their abilities. But a slate of hostile congressional hearings questioning the Fed’s every move and movement of legislation would nonetheless force the Fed to play more defense.’

“It still alters the dynamic in some very important ways…and frightening ways from the Fed’s perspective,” said Karen Petrou of Federal Financial Analytics, which advises banks on policy matters.’

‘While many Democrats oppose meddling with the Fed’s monetary-policy powers, efforts to probe the Fed’s substantial regulatory powers might find more sympathy on the left. Democrats and Republicans alike regularly question whether the Fed has done enough to rein in the nation’s largest financial firms since the 2008 crisis.’

‘Sen. Sherrod Brown (D., Ohio) recently said the Senate Banking Subcommittee on Financial Institutions and Consumer Protection will hold a hearing to investigate allegations that Fed supervisors are too cozy with the banks they oversee following a report by nonprofit news organization ProPublica and the public-radio program “This American Life.” Sen. Elizabeth Warren (D., Mass.) was among those who had called for such a hearing.’

‘Another measure that could get more traction with Republicans in charge is Sen. Rand Paul’s “Audit the Fed” legislation. The bill by the Kentucky Republican, a tea-party favorite, would open up the Fed’s core monetary-policy deliberations to congressional scrutiny.’

‘A federal judge on Monday threw out a housing regulation issued by President Barack Obama’s administration that said racial bias claims can be based on seemingly neutral practices that may have a discriminatory effect.’

‘U.S. District Judge Richard Leon said the Fair Housing Act allows for only direct discrimination claims and not those based on so-called disparate impact allegations. Leon wrote that the administration’s view that the language of the Fair Housing Act assumes that disparate impact claims are permitted “appears to be nothing more than wishful thinking on steroids.”

‘As an example of such a claim, the National Fair Housing Alliance sued Allstate Corp in 2012 for refusing to insure flat-roofed houses in Delaware, claiming the practice had a discriminatory effect on poor minorities most likely to live in such buildings.’

‘China recorded $1.56 of exports to Hong Kong last month for every $1 in imports Hong Kong registered, leading to a $13.5 billion difference, according to government data compiled by Bloomberg. Hong Kong’s imports from China climbed 5.5 percent from a year earlier to $24.1 billion, figures showed yesterday; China’s exports to Hong Kong surged 34 percent to $37.6 billion, according to mainland data on Oct. 13.’

“This is definitely another important piece of evidence of over-invoicing exports to Hong Kong to facilitate money inflow into China,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “So we shouldn’t be too optimistic about recent export data from China.”

‘Chinese bank deposits dropped following a crackdown on lenders manipulating their numbers and “illicit” means of attracting money, threatening to weigh on credit growth and hinder efforts to reignite the economy.’

‘Four of the five biggest banks, led by Industrial & Commercial Bank of China Ltd., posted a drop in deposits as they reported third-quarter earnings this week. Central bank data showed it was the first quarterly decline for the nation’s banking industry since at least 1999.’

‘As a housing-market slump drags on the nation’s growth, bad loans are piling up. Beijing-based ICBC reported its biggest jump in soured credit since at least 2006 in the third quarter. Smaller rival Bank of China more than doubled its provisions for bad loans, while the combined profit growth of the five biggest banks slowed to 6 percent from 10 percent a year earlier.’

“It’s funny the things a journalist can learn travelling the world with eyes wide open. I’m just back from trips to Tahiti, London, Los Angeles and Sydney. In every instance I was shocked by the skyrocketing cost of real estate, all driven by rich Chinese investors. However, no one I’ve met has bothered to investigate how this amazing accumulation of wealth has occurred. Maybe it’s time someone did.”
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As long as the right people are getting rich, our leaders at this point in time don’t care to know. We are living in an era of truly epic political and leadership failure.

‘…we see it [Istanbul] is half that of other major cities so Istanbul has room to move regarding prices.’

Really Mr Ozdemir? I thought prices ultimately (but not entirely especially in today’s easy money era) depended on people’s income - which I suspect is not quite as high overall in Istanbul compared to other major cities. I suspect there is also a safety premium people are willing to pay for places like LA, Vancouver, London, Paris etc etc that Istanbul just doesn’t or isn’t ever likely to have. Istanbul is a powder keg that will blow at some point. No one with any semblance of sanity should choose to invest in RE there compared to much more favourable locales. No Mr Ozdemir, Istanbul RE does not have room to move significantly upwards.

Hold onto your dollars. Prices are falling. You’re going to need every penny you’ve got.

Housing is out, stocks is in.

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=A103600001&f=M

Gasoline usage is way down over 50% from a few years ago. No wonder they want to tax cars on mile driven