In Short Janet, It’s Too Late!
It’s Friday desk clearing time for this blogger. “The Federal Reserve, under Janet Yellen, waited too long to raise rates if she wanted to avoid another meltdown in the global financial system, Societe Generale strategist Albert Edwards said. In a research report entitled Fed negligence … again!, Edwards said the current Fed chief was cut from the same ‘over-confident’ cloth as her two immediante predecessors, Alan Greenspan and then Ben Bernanke. ‘Similarly I think the Yellen Fed will go down in infamy as deliberately stoking up yet another massive financial bubble,’ the strategist wrote to clients. He emphasised that credit growth had already reached peak historical rates. ‘In short Janet, its too late!’”
“The Hong Kong Monetary Authority raised its base rate for the first time in nine years, following the U.S. Federal Reserve’s lead overnight, and flagged the risk of rising capital outflows from the city. The monetary authority had held its rate at a record low since 2008, tracking the Fed as the U.S. brought its benchmark down to near zero to combat the financial crisis. Rising borrowing costs are set to weigh on the city’s real estate market, said Trinh Nguyen, senior economist for emerging Asia at Natixis.”
“‘Hong Kong interest rates will gradually rise, in line with the Fed’s,’ she said. ‘Obviously, the housing market will feel a pinch from this, not a good trend considering there’s already a downturn of retail sales in the city.’”
“The Norwegian central bank is facing a monetary policy dilemma as concerns about a possible housing bubble are conflicting with economic weakness in response to the continuing decline of oil prices, analysts said. Norges Bank said last week it expects the economy to remain stagnant for the next six months after the economy recorded a zero percent growth rate in the period from August to October. While central bankers seem a long way from considering a hike in interest rates, fears are rising that the current monetary conditions are fueling bubbles elsewhere in the economy.”
“‘The Norwegians are right in the middle of this pack of countries where you’ve got these globally low interest rates and they are frightened of raising interest rates because of what it’ll do to the exchange rate,’ said Bill White, a former economic advisor at the Bank for International Settlements. ‘But then they look at the housing sector and they realise debts are at unprecedented levels and people are talking about mortgages left and right because they are so cheap.’”
“With its million-dollar suburbs (59 at the last count), and record housing prices, Auckland’s property market is still sizzling hot. And encouraged by record-low interest rates and ever-increasing valuations, it’s ‘keeping up with the Joneses’ on steroids, as banks happily furnish those on large incomes with the mega-mortgages needed to fulfil their big dreams. Jane lives in a spacious Pt Chevalier property that is valued at $1.5 million. She has a well-paid job but daily life is a constant struggle. ‘I worry about money all the time,’ she says. ‘But the house is a great investment so I want to keep hold of it.’”
“Jane, who did not want her full name used, has separated from the father of her child, but has financial assistance from him and flatmates to help with the household costs. But it’s not an easy road. ‘The money invested in this place is my child’s inheritance. I could downscale but I feel it’s much more secure for us to have the money invested in property. So I hope I find a job that pays more than what I currently earn.’”
“If you live in Melbourne or Sydney you probably feel you are being swept up in a massive property tornado that is pushing prices into the stratosphere. There are a number of factors at play which will change the housing equation, including investors deserting the market following moves by regulators to frighten them off by forcing banks to charge higher interest rates. Sally Tindall, from comparison site Ratecity.com.au, said the continued drop in investor lending over the past three months provided unequivocal evidence that differential pricing for home loans was having an impact on the market. ‘What started as a small drop (after the regulatory changes), has turned into a downpour,’ Ms Tindall said.”
“The tightening of regulations restricting foreign nationals buying established properties is also likely to be affecting prices, said Research house BIS Shrapnel’s residential property director Angie Zigomanis. The two measures combined mean ‘the last bidder might be taken out of the market,’ he said.”
“The spectre of oversupply has emerged, driven by a massive wave of apartment projects hitting the market. In 2014/15 a record 210,000 new dwellings were completed, easily bettering the previous record of about 180,000. In 2015/16 another 200,000 properties will be completed. The effect of this is amplified by a cut in migration. Apartment rents are under pressure with vacancy rates at three per cent and expected to climb in Melbourne. Brisbane is also feeling the pressure with a ‘huge number of apartments being built in the inner city,’ Mr Zigomanis said.”
“Red flags are being thrown up across Alberta. Already, unemployment has spiked and the housing market has tanked. Prospects for the latter have actually grown bleaker, with fears that Calgary and Edmonton could become collateral damage in Ottawa’s attempts to hold down property values in Vancouver and Toronto. And now, the Bank of Canada is warning that there are uncomfortably high numbers of Albertans juggling oversized debts.”
“Ottawa is raising the minimum down payment to 10 per cent from 5 per cent on new government-insured mortgages for the portion of a property’s value between $500,000 and $1-million. ‘These price categories represent fairly big chunks of activity in both markets,’ RBC senior economist Robert Hogue said, referring to Toronto and Vancouver. ‘Unfortunately, these price categories also represent a substantial share of Calgary’s market,’ he added.”
“Construction workers in downtown Los Angeles are racing to finish Metropolis, the biggest mixed-use development on the West Coast, but some of the buyers probably won’t be spending much time living there. ‘They have been very successful at selling to Chinese buyers,’ said Pin Tai, President of Cathay Bank.”
“Less attractive is Chinese buyers’ tendency to be absentee owners. The same National Association of Realtors survey showed only 39 percent of Chinese homebuyers plan to use their U.S. property as their primary residence. That means there are a lot of part-timers and investors looking for a place to park their assets, something increasingly common in Manhattan and London, which some have called safety deposit boxes in the sky. Empty condos can bring property values down, said Dominic Ng, the CEO of East-West Bank. ‘I always advise my bank clients to make sure 80 percent of the residents are going to stay there full-time, because what you don’t want to do is create a ghost town,’ said Ng.”
“The percentage of cash transactions in the Miami residential realty market has trickled down over the past three years. Ben Moss, a broker with ONE Sotheby’s International Realty warned, when it comes to the number of financed homes, there’s more than meets the eye. Luxury buyers often choose to pay cash to receive the most favorable price tag. ‘Sellers will always prefer cash,’ Mr. Moss said. However, after putting down the cash, buyers will often wait six months and then go after a loan. ‘I would bet that a great majority of people are paying cash but going ahead and refinancing after the purchase,’ Mr. Moss continued. A majority of his clients are doing so, he said.”
“In the new condo market, buyers are doing something similar. Although the 50% deposit structure requires cash up front, many buyers will finance the remainder of the deal, said Carlos Melo, principal of the Melo Group. ‘Sometimes they have the money to pay cash, but at the end of the day they prefer to take a loan and buy something else,’ he said.”
‘I would bet that a great majority of people are paying cash but going ahead and refinancing after the purchase,’ Mr. Moss continued. A majority of his clients are doing so, he said.’
‘In the new condo market, buyers are doing something similar. Although the 50% deposit structure requires cash up front, many buyers will finance the remainder of the deal, said Carlos Melo, principal of the Melo Group. ‘Sometimes they have the money to pay cash, but at the end of the day they prefer to take a loan and buy something else’
Instead of being all cash buyers, it appears they are more likely leveraged to the eyeballs and on multiple properties. So much for the new-improved Miami condo market.
Paying cash and then refinancing and taking the cash out after the purchase. Right. Nothing suspicious about that, is there Mr. Moss?
‘and buy something else’
‘Other developers have tried for decades to raise enough financing to turn the six-acre Metropolis site into something other than parking lots. The only one to pull it off has been Greenland Holding Group, a Chinese state-owned real estate behemoth. Bankers and real estate lawyers say a big reason why it has succeeded where so many others have failed is because Greenland has a big advantage: a direct line to millions of potential buyers in mainland China.’
“It’s relatively easy for them to bring to their Chinese customers’ attention that they have this exciting project in Los Angeles,” said Mike Margolis, a partner’
‘Chinese buyers are attractive because about 70 percent of them pay all-cash, according to a 2015 National Association of Realtors survey. Tai says it’s especially important to lock in those buyers first, because after the financial crisis, most banks require up to half a building to be under contract before they’ll approve a mortgage.’
“It’s like building the foundation first,” said Tai. “It’s low hanging fruit.”
Wait, wait, wait, what’s this talk of banks and mortgages? I thought these Chinese had loads of cash?
‘Pin Tai, president of Cathay Bank, said though a significant portion will be from China. “Their target customer is probably 30 percent Chinese investors,” said Tai. He said he was told that figure by Greenland because his bank is writing the mortgages for some Metropolis buyers who can’t do all-cash.’
He was told? Wow, nobody ever lies in real estate or banking.
You are confusing the developer’s Project Construction Loan with condo buyers’ Permanent Home Loans.
Construction lenders often require 50% pre-sales before funding construction of the whole project.
You think I don’t know the difference? I know the developer isn’t going to be hurt. Heck, Related sold Miami condos that went bankrupt, collapsed the shell company, then bought the same project and sold it AGAIN! What I’m saying is you are going to have slivers of ownership on hundreds of units; 10% cash to Fang Nu, 40 % to Pin Tai, 50% to Bank of America. What what the do if it all falls apart?
Ben - Thanks for mentioning DTLA (Los Angeles) this morning. I can contest to the metamorphosis. Single career minded young’ins are everywhere, and nightlife is booming, but long term, I question the success of DTLA. Absentee buyers of the condos is really bad news. The workforce alone can’t sustain all the new retail and restaurants.
East-West Bank and Cathay Bank have a big presence in DTLA, and you’ve educated me on why. Non-Profit Trusts are even addressing the homeless crisis with long term solutions. So Korea and China, along with a few homegrown investors, are at the core of the metamorphosis. If you get to see it, you’ll be wowed.(97 new building projects -last account in my reading).
The problem with these things is construction costs. It’s too expensive to work for regular families. So what’s driving it? Tada! Safe deposit boxes in the sky! Which is just silly. If these buyers didn’t think they were going to profit mightily, it would never be built. But everybody will busy themselves pretending it’s gonna work, adding bars and pirate shops.
Isn’t it interesting that it’s a Chinese STATE OWNED entity doing this while seeming to have no problem selling to mainland Chinese who are supposedly under capital controls? It is also interesting that they have run out of ghost cities to build there so why not step in and build in a place like LA that is starving for units but the locals can’t figure out how to build anything anymore. We live in interesting times.
William McChesney Martin … where art thou?
Wiki …
“The job of the Federal Reserve, he famously said, is ‘to take away the punch bowl just as the party gets going,’ that is, raise interest rates just when economy reaches peak activity after a recession.”
My impression is that the Yellen Fed is following that blueprint, albeit after one of the slowest recoveries from one of the deepest recessions on record. Do you have evidence to the contrary?
Do you really think that Greenspan, Bernanke, or Janet - any of these guys (or a gal) took away the punch bowl after the party got started?
After these guys (and a gal) finished up the “punch bowl” WAS the party.
“In short Janet, its too late!”
“And it’s too late, baby now, it’s too late,
Though we really did try to make it.
Somethin’ inside has died, and I can’t hide,
And I just can’t fake it, oh, no, no.”
(a wee bit of an apology goes out to Carole King)
one n done
Time will tell.
It doesn’t seem like a single hike will do much to curtail rampant malinvestment fueled by easy money loans.
Did your junk fund capsize?
Marketwatch dot com
Bond investors abandoned ship this past week
By Barbara Kollmeyer
Published: Dec 18, 2015 8:19 a.m. ET
Biggest bond-funds outflow since June 2013 seen as ‘carnage’
Time to look for another vessel.
Ahead of the first interest-rate hike in nearly a decade by the Federal Reserve, fixed-income investors abandoned ship by the billions — of dollars that is.
The week ended Wednesday saw the biggest outflow from bond funds since June 2013, to the tune of $13.1 billion, said Bank of America Merrill Lynch in its weekly Flow Show report. Not surprisingly, investors pulled the most cash out of illiquid and low-quality assets, such as junk bonds. “Bond carnage” is how the bank titled the report.
BAML data showed high-yield bond funds suffered outflows of $5.3 billion, the biggest in 12 months in the latest weekly period. But junk bonds (JNK, -1.11%) finally got a break more recently after that interest-rate hike by the Fed. Thursday marked a second day of recovery for the sector (HYG, -1.11%) that’s been beset by fears after the closure of a bond fund and weak oil prices.
…
‘the current Fed chief was cut from the same ‘over-confident’ cloth as her two immediante predecessors’
‘The world’s central banks are scrambling to assess the risk a slowing China poses to their economies and appear to be no closer than most other observers to working out what is going on in the world’s second largest economy. By raising interest rates on Wednesday the Fed removed one major source of uncertainty, leaving developments in China at the top of investors’ and policymakers’ watch lists, alongside the Fed’s next steps.’
‘China accounts for more than 10 percent of global trade and remains the single biggest contributor to global growth. A financial market selloff in China sent ripples around the world and caused the Fed to stay its hand when it considered a rate hike in September.’
‘If anything, China’s influence is growing. If Beijing allows the yuan to weaken further and re-pegs it to a basket of currencies instead of just the dollar, it could end up exporting deflation that might delay or reverse rate hikes globally.’
“We try to get the best information we have… and we talk to everybody. But I don’t think we have any better information than anybody else,” James Bullard, President of the Federal Reserve Bank of St Louis told Reuters.’
‘Economists have questioned China’s economic statistics for years and turned to measures such as concrete, steel or electricity production to get a handle on an economy that has grown almost 10 percent a year for 30 years. Now such gauges are less useful as China shifts to a harder-to-measure services economy from an export-driven manufacturing giant.
“I don’t think the Chinese government has that good information,” said Bullard.’
‘Former and current Fed officials say there is no official hotline with China, although there is formal interaction. “Almost uniformly, from central banks and international organizations, what I hear is that the Chinese side is reluctant to engage,” said Michael Spencer, Deutsche Bank’s Asia-focused economist.’
‘An examination by Reuters shows the Fed relies on the same publicly available China data that other economists do, and U.S. central bankers acknowledge both publicly and privately that they cannot say they have any firmer handle on how shifts in the Chinese economy affect the United States than anyone else.’
‘Even Chinese officials acknowledge their statistics raise questions. Premier Li Keqiang said in 2007 that the country’s data were “man made”.
Now we know where Dan is. With his keen knowledge of everything China, he has been working inside the Fed, advising Yellen on rate policy with regard to China. And oil prices.
“I don’t think the Chinese government has that good information,” said Bullard.’
Bingo! It’s great to know at least one Fed official has his eyes wide open.
‘China Beige Book Shows ‘Disturbing’ Economic Deterioration’
‘The Beige Book’s profit reading is “particularly disturbing,” with the share of firms reporting earnings gains slipping to the lowest level recorded, CBB President Leland Miller wrote in the release. While retail and real estate held up reasonably well, manufacturing and services performed poorly, with revenues, employment, capital expenditure and profits weakening.’
‘The survey shows “pervasive weakness,” Miller wrote in the report. “The popular rush to find a successful manufacturing-to-services transition will have to be put on hold for a bit. Only the part about struggling manufacturing held true.”
Notice how this popular rush gets thrown around, even though it’s never happened in history?
‘a successful manufacturing-to-services transition’
‘a successful manufacturing-to-services transition’
Centrally planned. What could go wrong?
Regarding central planning …
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” - Mark Twain
Think about it. Such a transition has occurred, but it took many years. Does anyone believe China has many years before it falls into recession or worse?
Dallas, TX Housing Craters; Prices Free Fall 25% YoY As Housing Correction Gains Traction
http://www.zillow.com/north-dallas-dallas-tx/home-values/
zillow predicts +6% as soon as the cold spell is over
wow, 20% over 06 peak prices
That was an excellent article from the New Zealand paper, although it makes no reference to the role Chinese money has had. Some other tidbits:
“In a raging property market, it’s possible to have a million-dollar home and no cash.”
“Meet the new ‘wealthy hand to mouth’. They may inhabit luxuriant surrounds, but their disposable income after mortgage isn’t dissimilar to that of those struggling on a minimum wage.
Appearing to sit on top of the world, they are, in fact, uniquely vulnerable to the tides of the economy, fluctuating interest rates and unexpected life events.
The wealthy hand-to-mouthers (or WHTM) have little to no liquid wealth but often millions tied up in property. Their combined incomes may be well into the six figures, but there is nothing left for the piggy bank at the end of the week.”
Sacramento, CA Housing Craters; Prices Dive 6% YoY
http://www.zillow.com/market-report/12-15/268126/east-sacramento-sacramento-ca.xls?rt=14
From the Alberta piece: “And now, the Bank of Canada is warning that there are uncomfortably high numbers of Albertans juggling oversized debts.”
Hehe… six months ago those debts were top-shelf assets whose value was climbing like a homesick angel. Good thing the bourgeois are ready to backstop their country’s banks.
“Indeed, Alberta saw the biggest jump among the provinces in that highly-indebted category in 2012-14 compared to 2005-07, to almost 11 per cent of families with debts, from just about 4 per cent. And to put that in perspective, highly indebted means a debt-to-income ratio above 350 per cent.”
Like many of the stars in the night sky… you can still see ‘em twinkle, but they’re already dead.
“Like many of the stars in the night sky… you can still see ‘em twinkle, but they’re already dead.”
+ 1. That’s very good (and worth stealing).
Lastly, from the comments: “Newfoundland is broke with massive debt and so is Quebec and Ontario and eventually Alberta. Many Canadians are in debt up to their ears. The Bank of Canada is making cheap money available for people to buy houses they can’t afford. The banks love it because they take no risk, because it’s on the the taxpayer. Nobody seems to see we are heading for a financial crisis in the near future sparked by low oil and resource prices and massive amount of debts by governments and Canadians.”
No rose colored Ray-Bans in this guy’s shirt pocket.
“In short Janet, its too late!”
Paul Krugman says it’s too soon, “all the complaints that the Fed is artificially keeping rates low are nonsense; rates are low because that’s what the real economy wants.” He cites a research paper written by two Fed insiders that the “natural interest rate,” as determined by the free market, wants the rates to be as low as they are.
They have a point. Since Yellen raised the 10-year yield hasn’t gone up. The market action, and low rates at auction, supports Bernanke’s “global savings glut” explanation. Which might suggest that all of the liquidity that the central banks have pumped into the system has caused the Fed to lose whatever power they had to set interest rates.
‘Bernanke’s “global savings glut” explanation’
Why not sell the QE balance sheet into that glut? What would happen to interest rates if that was announced this morning? QE isn’t the free market. I heard a kool-aid drinker say, if ZIRP was the emergency measure, QE was economic triage.
I agree, the Fed could easily sell some of the bonds they own. Not dump them all at once, but at a measured pace. Bond auctions are oversubscibed so there’s enough buyer interest to absorb the bonds without significantly moving the market. I just looked it up, the last 30-year Treas bond auction (three days ago) had $31 bill in bids for only $13 bill of bonds available. The Fed could sell off some of its holdings quietly, just enough to nudge up market rates to where they want them to be. It’s market operations in reverse, opposite of what they did when they were buying mortgages a few years ago.
‘The Fed could sell off some of its holdings quietly’
Not only are they not selling, they are buying to replace the treasuries that mature. I wonder why? And Bernanke and others are saying they can make the QE balance sheet almost permanent.
You can’t even call what the Fed has done a baby step. Meanwhile, QE and ZIRP has set off the bubbles I present above.
The Fed has been in maintenance mode, holding steady at $2.4T worth of treasuries since Oct. 2014:
https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=2WGB
“I wonder why?”
Yield suppression?
It would be very expensive to let market forces determine yields, given the current debt burden.
‘all the complaints that the Fed is artificially keeping rates low are nonsense; rates are low because that’s what the real economy wants’
It’s comedy.
It’s the space alien savings glut that’s keeping yields in the basement.
why don’t congressmen even ask her to sell 10 billion of the sluge as a test?
demand it !
Does the Fed really believe that, if markets set the interest rate, the rate would be this low? I’ve got an idea, let’s try that one out.
‘…“all the complaints that the Fed is artificially keeping rates low are nonsense; rates are low because that’s what the real economy wants.” He cites a research paper written by two Fed insiders…’
A fair and balanced look at interest rate theory?
“Sell The Bonds, Sell The Stocks, Sell The House”
http://davidstockmanscontracorner.com/sell-the-bonds-sell-the-stocks-sell-the-house-dread-the-fed/
*Going forward it’s all falling prices to dramatically lower and more affordable levels accelerating the economy like you’ve never seen before.
It’s gonna be the “yard sale of the century”. Winners hold cash, losers hold bags…
Apple Heads for Biggest Monthly Decline Since Jan. 2014
by Bloomberg Video
Stockman writes: “They can’t generate more credit no matter how hard they try because most of the world is at what I call “peak debt.””
Pretty rich coming from the clown who advocated and pushed the Trickle Down theory under Reagan, laying down the template that GWB followed. If we are at “peak debt” Stockman helped create it!
The truth will continued to be posted irrespective of your gyrations and pleading.
30yr mort lower than last week- that big, historic move by the fed was big
Are you enjoying the
Santa Claus rallyGrinch selloff?Marketwatch dot com
Dow sets mark for most volatile December since 2008
By Mark DeCambre
Published: Dec 18, 2015 4:17 p.m. ET
This Santa rally feels more like a Grinch grind!
It has been a roller-coaster ride for investors.
Cratering crude-oil prices are wreaking havoc on the stock market. But how rough has this whipsawing stretch of trading been for the Dow Jones Industrial Average (DJIA, -2.10%)? It is shaping up to be the most volatile December since 2008, according to Dow Jones data.
The Dow industrials finished about 370 points lower Friday to close out a historic week in which the Federal Reserve raised interest rates for the first time in nearly 10 years.
Although the move was meant to represent a vote of confidence by the central bank in the U.S. economy, the attempt to get the monetary policy back on normal footing and tanking oil prices (CLF6, -1.14%) have combined to rattle investors.
So far in December, the Dow has registered 12 days with moves of 100 points or more between one day’s closing bell and the next. That’s the most days with moves of that magnitude in December since 2008, according to Dow Jones data, as the following table illustrates…
Prediction that liftoff would result in a stock market rally = FAIL.
Next up:
A U.S. housing correction that NOBODY COULD HAVE SEEN COMING!
We are told that social security will go negative in ten years. Is this assessment based on the current value of the portfolio, consideration of interest income projected, projected cash flow from workers, and demands for retirement benefits by retirees?
If interest rates advance motivated by fear of debt default won’t the social security portfolio “mark to market” drastically reducing the assumed value of the portfolio and pushing the date the program goes negative to the present verses some time in the future?