While the citizenry of America remains transfixed by the ever-changing color of some Scottish wedding dress; this weekend saw an even more massively viral social media phenomenon as tens of millions of Chinese watched, gripped and outraged, a 104-minute video entitled "Under The Dome" exposing the ugly truth about Chinese air pollution. What is perhaps most stunning - aside from the fact that something so 'important' can go viral without Kim Kardashian's ass all over it - is that the Chinese government, so far, has not shut off the documentary, and recently appointed minister of environmental protection, Chen Jining, even praised the video; suggesting a growing conflict between Beijing and the Chinese industrial complex.
Full documentary here - with English subtitles (with over 35 million views since its release yesterday on YouKu)
As The NY Times reports, the documentary, funded and narrated by a former Chinese TV reporter, recounts her journey of discovery, hunting for the sources of China’s bad air and inquiring why repeated government promises have done so little to clear it up, while coping with a daughter born with a tumor...
[In 2013], she did not pay much attention to the smog engulfing much of China and affecting 600 million people, even as she traveled for work from place to place where the air was acrid with fumes and dust.
“But,” Ms. Chai says with a pause, “when I returned to Beijing, I learned that I was pregnant.”
Since its online debut on Saturday, Ms. Chai’s documentary, “Under the Dome,” has inspired an unusually passionate eruption of public and mass media discussion. Many messages were from Chinese parents identifying with Ms. Chai’s fears that pollution has imperiled their children’s health.
“When I heard her heart beating, the only thing I wished for her was good health,” Ms. Chai explains of her then-unborn daughter in the documentary.
“But she was diagnosed with a benign tumor and had to have surgery after birth,” she adds. “I’d never felt afraid of pollution before, and never wore a mask no matter where. But when you carry a life in you, what she breathes, eats and drinks are all your responsibility, and then you feel the fear.”
On Youku, a popular Chinese video-sharing site, “Under the Dome” had been played more than 14 million times by Sunday afternoon. The Paper, a Chinese news website, estimated that by Saturday night, the documentary had been opened more than 35 million times across various websites.
Many Chinese viewers praised Ms. Chai for forthrightly condemning the skein of industrial interests, energy conglomerates and bureaucratic hurdles that she says have obstructed stronger action against pollution.
* * *
While the documentary has gripped almost 40 million Chinese so far, what is perhaps more intriguing is that the Chinese government has not shut it down yet...
So far at least, the government has not shut off the documentary, and some officials may welcome the chance to build greater support for cutting pollution. The website of People’s Daily, the ruling Communist Party’s main newspaper, was one of the first to post “Under the Dome.” And the recently appointed minister of environmental protection, Chen Jining, praised the video. He told Sina.com, a Chinese website, that he had watched it and sent a message to Ms. Chai.
“Chai Jing’s documentary calls for public environmental consciousness from the standpoint of public health,” Mr. Chen said. “It deserves admiration.”
Does this suggest there is a growing conflict between Beijing and the Chinese Industrial Complex (as the corruption probe grows and impacts multiple industries). Further, this of course, means even more Chinese growth slowdown if and when there is a crackdown on pollution/rampant industrialization.
We predicted this 18 months ago, when we warned that “the slightest gust of wind, or rather volatility, threatens to shut down the secondary corporate bond market, which already is running on fumes.”
Of course the last thing you would want to see in this type of environment is a scenario wherein non-human actors are all programmed to move in exactly the same direction at exactly the same time, thus exacerbating the already amplified (thanks to the illiquidity issue) impact of a market-moving event. Thanks to the rise of the machines (a fifth of electronically executed Treasury trades will be executed by robots this year), we have precisely that, as even the zen masters at Bridgewater are starting an artificial intelligence unit. As we noted previously, “it seems that everyone has forgotten [what happens] when all the machines chase down the same rabbit holes?”
Over the last few months, Yellen repeatedly stated that lower oil prices were “positive” for the US economy. This is simply astounding because the Fed has repeatedly told us time and again that it was IN-flation NOT DE-flation that was great for the economy.
And yet, repeatedly, the head of the Fed admitted, in public, that deflation can in fact be positive.
How can deflation be both positive for the economy at the same time that the economy needs MORE inflation?
The answer is easy… Yellen doesn’t care about the economy. She cares about the US’s massive debt load AKA the BOND BUBBLE.
Yellen knows deflation is actually very good for consumers. Who doesn’t want cheaper housing or cheaper goods and services? In fact, deflation is actually the general order of things for the world: human innovation and creativity naturally works to increase productivity, which makes goods and services cheaper.
However, DEBT DEFLATION is a nightmare for the Fed because it would almost immediately bankrupt both the US and the Too Big To Fail Wall Street Banks. With the US sporting a Debt to GDP ratio of over 100%... and the Wall Street banks sitting on over $191 TRILLION worth of derivatives trades based on interest rates (bonds), the very last thing the Fed wants is even a WHIFF of debt deflation to hit the bond markets.
This is why the Fed is so obsessed with creating inflation: because it renders these gargantuan debt loads more serviceable. In simplest terms, the Fed must “inflate or die.” It will willingly sacrifice the economy, and Americans’ quality of life in order to stop the bond bubble from popping.
This is also why the Fed happily talks about stocks all the time; it’s a great distraction from the real story: the fact that the bond bubble is the single largest bubble in history and that when it bursts entire countries will go bust.
This is why the Fed NEEDS interest rates to be as low as possible… any slight jump in rates means that the US will rapidly spiral towards bankruptcy. Indeed, every 1% increase in interest rates means between $150-$175 billion more in interest payments on US debt per year.
If you’ve ever wondered how the Fed can claim inflation is a good thing… now you know. Inflation is bad for all of us… but it allows the US Government to spend money it doesn’t have without going bankrupt… YET.
However, this won’t last. All bubbles end. And when the global bond bubble bursts (currently standing at $100 trillion and counting) the entire system will implode.
If you’ve yet to take action to prepare for the second round of the financial crisis, we offer a FREE investment report Financial Crisis "Round Two" Survival Guide that outlines easy, simple to follow strategies you can use to not only protect your portfolio from a market downturn, but actually produce profits.
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While it will hardly come as a surprise to many, especially those who have followed the historic collapse of the Baltic Dry index to levels which, all else equal, signify a global depression of epic proportions...
... and which led South Korea’s Hyundai Heavy Industries, the world’s largest shipbuilder, to report a $3 billion loss in 2014, the recent comments of the CEO of the world's largest container-shipping group, Maersk Line, should put things into perspective, especially for those who say that the Baltic Dry is no longer indicative of anything but massively dry-bulk ship overbuilding and excess supply (some 8 years after the past cyclical peak).
Unfortunately, as Søren Skou, Maerk's CEO, admitted when he warned that global trade growth could slow this year from recent 4% growth ratnes, as Chinese, Brazilian and Russian economies disappoint, the Baltic Dry is still not only relevant and accurate but telling the real story of global growth, or lack thereof.
As the FT reports, container demand rose by about 4% in both 2013 and 2014 and Maersk Line, the Danish group that ships about 15% of the world’s seaborne freight, expects it to increase 3 to 5% this year. Actually make it 3%. Or lower.
“I’m personally more towards the low end of that,” Søren Skou, Maersk Line’s chief executive, told the Financial Times. “Growth from a historical perspective is quite sluggish. It has a huge impact for us as an industry.”
Furthermore, in the ongoing debate whether the collapse in crude prices is due to excess supply or a global contraction, this is what the world's biggest shipper thinks: Mr Skou called the halving of oil prices in the past year “a net positive for container growth” but nonetheless said the opposing forces were potentially greater.
In other words, yes supply isn't helping, but it is the lack of global demand that is pushing equilibrium levels lower, aka global deflation.
“The economies in Europe are still very sluggish. Brazil, Russia and China: those three economies used to drive a lot of growth, and right now we are not really seeing that to the same extent. The only real bright spot is the US, and even the US is good but not great,” he added.
Well, yes, because as even economists finally figured out, it is once again snowing in the winter.
February Chicago PMI plunges to 45.8, its lowest reading since July 2009. Bad weather and West Coast labor strife are cited.
— Joseph A. LaVorgna (@Lavorgnanomics) February 27, 2015
Back to the Maersk CEO whose comments are seen as a good indicator of global trade as it carries goods and products between Asia, Europe, the US, Africa and Latin America: we learn that following what was supposedly the "hottest year on record" it snowed pretty much everywhere too, and what we, and Goldman, both said about the world being in contraction now is validated when looking at trade volumes:
He said that it was always hard to interpret the first quarter because of the Chinese new year but added: “To my mind volumes were sluggish. There is nothing in container volume numbers that suggest that the global economy is just on the verge of starting a new growth trend.”
Why is 4% growth (and certainly lower) important? Because just like 7% is roughly the growth number that China needs to hit every year to avoid social "disturbance", anything below this and suddenly you are talking mass corporate bankrutpcies due to oversupply, and a race to the pricing bottom by companies all of which are massively levered (in fact, as we have shown on numerous occasions, corporate leverage is the highest in history once more):
"Before if you acquired too much capacity you could kind of work your way out of it. In a 4 per cent environment capacity decisions take on a different perspective if you get it wrong. The good old days aren’t coming back,” he added.
And yet the biggest paradox, or perhaps most logical outcome, of all this is that just as margins are about to be squeezed across the entire global supply chain, the healthier companies are now rushing to do what the oil driller are doing, and overproduce, in the process pushing prices even lower in hopes of putting marginal companies, and those which don't have access to cheap and easy funds, out of business. Call it the Amazon effect, only here one is dealing with net debt leverage of 3x, 4x or higher. To wit:
Despite the warning, Maersk is about to order new ships for the first time since 2011 when it bought 20 Triple Es, then the world’s largest vessels capable of transporting the equivalent of 18,000 20-foot containers.
Mr Skou said a decision would be made between April and June with the likelihood that more Triple Es would be ordered, possibly slightly modified to take up to 20,000 containers. Maersk has said it needs the new ships to help it maintain its market leadership up until the end of the decade.
So with global demand lower as a result of slowing trade, and with Maersk about to boost ship supply even more, the result will be an even more aggressive drop in cargo and haulage prices as the deflationary wave hits yet another industry, in the process forcing seaborne transportation to be the latest to succumb to deflation, which for the highly levered sector means even more defaults are imminent now that China no longer is pumping nearly $4 trilion in total new credit every year.
Yes, we were in London, taking care of business. Now, we’re back in Buenos Aires. We’ve tried medication. We’ve tried prayer. We’ve tried heavy drinking – all in an effort to understand how our crazy money system works. And where it leads.
You’d think it would be easy. It’s just Central Banking 101, no? Well, no. It is squirrelly… and diabolically subtle. We doubt anyone understands it – especially those who are supposed to control it.
The basic unit for the system is a kind of money the world has never had before: the post-1971 fiat dollar. It’s paper money – worth as much as people think it is worth … and managed by people who think it should be worth less as time goes by.
Photo via Pixabay
What a Business!
Who are these people? Who do they work for? You might say they are “public servants.” But that implies they are working on the public’s behalf. Nooooo sireee…
They are employees of a banking cartel that is owned by private banks. These banks have a license to lend money into existence, earning interest on their loans.
It is no surprise that their share of US corporate profits has risen fourfold since President Nixon ended the quasi-gold standard Bretton Woods system. What a business! Their cost of goods sold is next to nothing. A few strokes on a keyboard and millions… billions… heck, trillions… of dollars are created.
As our friend and economist Richard Duncan points out in his book The New Depression, the amount of liquid reserves banks have to hold against their loans is now so small they provide “next to no constraint” on the amount of credit the system can create.
Banks just have to maintain a certain “capital adequacy ratio.” This restricts their lending to a multiple of their equity capital (money provided by their shareholders). Of course, money is valuable only as long as there is not too much of it. The market can absorb a little counterfeited money. But there’s a limit. And that limit has been greatly increased, thanks to:
Without these unique circumstances, central banks’ irresponsible policies – ZIRP and QE – would probably have caused inflation to rise to the double-digit range already … maybe higher.
Proof of Richard Duncan’s contention: prior to the crisis, a negligible amount of bank reserves “supported” trillions of dollars in outstanding bank credit. QED, reserves actually don’t matter anymore in the “fractionally reserved” system. However, it is still necessary to understand the money multiplier theory in order to fully grasp how the system works – click to enlarge.
Free Money for Governments
The authorities must feel like a college student who has found his professor’s exam questions. He knows he’s going to get away with something…
And since there are about 1 billion people who live on $1 or less per day, central bankers expect to get away with a lot more. Not only that, but also they’re lauded as heroes for it.
And now there’s no further need to worry about how much governments borrow. Central banks buy governments’ bonds… hold them on their balance sheets… return the interest payments… and the whole thing will be forgotten. And when those bonds expire, central banks can use the repaid principal to buy more government debt!
In effect, today’s raft of central bankers is doing something previous central bankers could only dream of doing: printing money without causing inflation. Politicians, too, are enjoying this once-in-a-lifetime opportunity for recklessness. They will be able to do what none could do before: borrow money without paying it back. We have not seen it in the press yet, but it should be coming soon. Commentators and kibitzers are bound to urge Germany to lighten up:
“Why should Greece have to repay those loans, anyway? Where did the money come from? It didn’t come from German taxpayers. It came from nowhere, like all the rest of the world’s money. And so what if it isn’t repaid? What difference will it make? None.”
Unfortunately, it will make a difference: Even though most of the money was created ex nihilo, Greece’s liabilities are offset by assets someone owns. That “someone”, quite involuntarily, are the taxpayers in other euro nations. The above cartoon illustrates quite nicely how “helpful” money printing is to the economy.
Nirvana for Public Finance
Duncan, whose analysis of liquidity levels at Macro Watch helps us understand the effects of QE, believes central banks should – and will – buy 100% of government bond issuance… and then simply set fire to them. Too much government debt? Problem solved…
Hallelujah! Hallelujah! Nirvana for public finance has arrived. Heaven has come for politicians. Who says there is no such thing as a free lunch? We doubt that either the public or Congress has fully come to terms with this. We’ve just realized it ourselves. But eventually they’ll start lining up.
Budget restraint will be yesterday’s worry. Government debt will be written off and forgotten. The feds will be eating breakfast, lunch and dinner on money that never existed… and never will be paid back. But wait? Is that too good to be true?
Yes, it is too good to be true. If central banks really were to set fire to all government debt, this would happen. The illusion that money is “backed” by something with value, however ephemeral, would be irrevocably shattered.
Just when things seemingly couldn't get any stranger in Europe, we open a whole-new bizarro chapter.
Back on February 1, when the negotiations, or rather posturing, surrounding the Greek bailout extension was at its peak, we reported something peculiar: of all the countries in Europe, it was none other than France, seemingly tired of walking in Germany's shadow, that announced it was "prepared to support Greece" in its debt negotiations. "France is more than prepared to support Greece," French finmin Sapin said, adding that Greece’s efforts to renegotiate were "legitimate." Sapin urged a "new contract between Greece and its partners."
Of course, this quickly led nowhere because as everyone knows, France is irrelevant in Europe and only Germany's opinion matters: Germany, which only agreed to a Greek bailout extension, when all of Syriza's demands were crushed, and the Tsipras government is not merely a shell of its pre-election promises, and in many ways, just a continuation of the previous Samaras regime. As such, the Frencsh support of a Greek debt writedown, understandable since it is none other than France whose socialists will one day sooner or later require a comparable debt negotiation, was duly noted... and promptly ignored:
However, what was even more peculiar is that it was the financial peers of Greece, the other insolvent PIIGS, particularly Spain and Portugal, who exist only thanks to the goodwill of the ECB buying up their bonds (or else watch as their economies implodes overnight once the "sex and drugs"-boosting facade of their GDP is stripped away) that took a far more hard-line approach toward Greece, and in fact were just as harsh on the Greek debt renegotiation proposal as Germany itself.
Yesterday Tsipras made clear his displeasure with the betrayal of what were formerly his socio-economic insolvent equals quite well-known, when he accused Spain and Portugal on Saturday of "leading a conservative conspiracy to topple his anti-austerity government, saying they feared their own radical forces before elections this year."
As Reuters reports, in a speech to his Syriza party, Tsipras turned on Madrid and Lisbon, accusing them of taking a hard line in negotiations which led to the euro zone extending the bailout programme last week for four months.
"We found opposing us an axis of powers ... led by the governments of Spain and Portugal which for obvious political reasons attempted to lead the entire negotiations to the brink," said Tsipras, who won an election on Jan. 25.
"Their plan was and is to wear down, topple or bring our government to unconditional surrender before our work begins to bear fruit and before the Greek example affects other countries," he said, adding: "And mainly before the elections in Spain."
This is not surprising: after all as previously reported, Spain's new anti-establishment Podemos movement has topped some opinion polls, making it a serious threat to the conservative People's Party of Prime Minister Mariano Rajoy in an election which must be held by the end of this year.
Rajoy went to Athens less than a fortnight before the Greek election to warn voters against believing the "impossible" promises of Syriza. His appeal fell on deaf ears and voters swept the previous conservative premier from power.
Portugal will also have elections after the summer but no anti-austerity force as potent as Syriza or Podemos has so far emerged there. In an interview published before Tsipras made his speech, Prime Minister Pedro Passos Coelho denied that Portugal had taken a hard line in negotiations on the Greek deal at the Eurogroup of euro zone finance ministers.
"There may have been a political intention to create this idea, but it is not true," he told the Expresso weekly newspaper.
Passos Coelho aligned himself with euro zone governments which have called for policies to promote economic growth but without trying to walk away from austerity as in Greece. "We were on the same side as the French government, with the Italian and Irish governments. I think it's bad to stigmatize southern European countries," he said.
It's bad, but the very next day both Spain and Portugal rushed to cry in Brussels, when both nations demanded that the EU "arbitrate" and respond to Tsipras' allegations, in the process essentially validating his accusations. The same EU which orchestrated the entire farce to begin with.
As Bloomberg reports, "Pedro Passos Coelho and Mariano Rajoy request response from EU after Greek premier Alexis Tsipras said that the two southern European countries were trying to cause the downfall of his government during recent talks, a spokesperson for Rajoy, who asked not to be named citing govt policy, says by phone." Portugal, Spain sent a letter on the matter to the European Council and the European Commission
To be sure, none of this will result in either government retracting its statements (especially since Greece now only has rhetorical "conquests" to fall back on having given up all leverage to German by admitting it is unable to quit the Eurozone, i.e., the biggest trump card, and bluff, it may have had), but it will lead to even more animosity, only no longer between the European "North" and "South", but among the Peripheral nations themselves, as the political bickering redirects anger from Merkel and the ECB, and toward other Mediterranean countries. Perhaps just as Merkel wanted from the beginning.
"The Fed is out of control," exclaims David Stockman - perhaps best known for architecting Reagan's economic turnaround known as 'Morning in America' - adding that "people don't want to hear the reality and the truth that we're facing." The following discussion, with Harry Dent, outlines their perspectives on the looming collapse of free market prosperity and the desctruction of American wealth as policymakers "take our economy in a direction that is dangerous, that is not sustainable, and is likely to fully undermine everything that's been built up and created by the American people over decades and decades." The Fed, Stockman concludes, "is a rogue institution," and their actions have led us to "one of the scariest moments in our history... it's a festering time-bomb and we're not sure when it will explode."
Key Excerpts from the detailed interview:
David Stockman: People don't want to hear the reality and the truth that we're facing. But I think there is an enormous appetite out in the country to get a different perspective than what you have from the media day in and day out, so I say the fed is out of control. Its balance sheet is exploded. It's printing money like never before.
Zero interest rates for 70 months have basically destroyed the pricing function in the financial markets. I said that as a result of this, Wall Street has become a huge casino which basically rewards gamblers, but it is not functioning as a capital raising, capital allocating instrument, which really is what the financial markets should do in a free market system. I warned about the size of the federal debt. I'm an old budget director from the Reagan days. We had a trillion dollar national debt, a 3 trillion economy when I started. Today, it's 18 trillion. Eighteen fold gain in the last 35 years versus maybe a fourfold gain in the economy. So all of these trends are taking our economy in a direction that is dangerous, that is not sustainable, and is likely to fully undermine everything that's been built up and created by the American people over decades and decades.
So people don't want to hear the warning. They don't want to hear the truth in the establishment, in Wall Street, in Washington, but I think out in the country they must.
* * *
David Stockman: Well it's obvious that Wall Street is addicted to cheap money and unlimited flow of new liquidity into the markets. Traders can then borrow money on an overnight basis for five basis points, which is nothing. Buy anything with a yield like a ten-year or five-year bond or speculate in stocks that they think might be going up or even get fancier and go into derivatives or commodity futures or whatever. And then capture the profit or the spread between the cheap money that the fed is putting into the overnight market and the yield or profit they're making on the asset, and they're leveraging way up.
You know, 90 percent, 95 percent in many cases. So obviously, the whole financial market is dependent on this, but it comes at a cost. It is destroying savers in America. If you worked a lifetime and saved $100,000.00, you're making $400.00 a year in interest from a lifetime of savings. I think there will be a revolt sooner or later of the American public against this disastrous crushing of the saver in order to essentially accommodate Wall Street's appetite for liquidity.
* * *
David Stockman: Well you know, the problem is the fed, I've described, is a rogue institution. It's operating beyond any of the legislative intent or statutory authority that's been given to them over the years. They have essentially become a national monetary planning agency that has decided they can drive the daily, weekly, monthly movement of the economy by manipulating interest rates and the yield curve by putting a put under the stock prices by essentially trying to drive the entire 18 trillion or 17 trillion US economy from Wall Street. That is fundamentally at variance with the requisites of a healthy capitalist economy. You need an honest financial market. Not a manipulated one.
You need price discovery by people that have their money at risk, not the central bank.
Harry Dent: Actually, it's a centrally planned economy, isn't it?
David Stockman: Right, exactly.
* * *
So David, do you think the republican congress can save us from this economic sundown that we've been discussing today?
David Stockman: Well I would like to think so, and they talk a good game, but unfortunately when push comes to shove, they're in the consensus with everyone else in the beltway in Washington and are unwilling to take on the hard issues. We are borrowing still $600 billion in the last year, six years after allegedly the great recession ended, and we are setting ourselves up for trillion dollar deficits again, the next time the economy stumbles or we have a recession or some other dislocation. The fact is the fed is not abolished the business cycle. The fed has not made the world completely safe from these kinds of dislocations. So therefore, we need to look at what's driving this huge deficit, and the answer is big entitlements and big defense spending, and the republicans are unwilling to take on the Pentagon. They want more, and they're afraid to take on Social Security and the entitlements because they believe that is going to be problematic politically.
So therefore, nothing is being done about the structure of this deficit problem, and we're just basically stumbling our way into another huge crisis in ballooning national debt.
* * *
David Stockman: Well, it's one of the scariest moments I think in our history, but also we need to recognize we're in uncharted waters. No central bank has ever printed this much money this long, kept interest rates at zero, fueled so much speculation. Not just here, but worldwide. Not just in the normal stocks and bonds, but the whole shale boom, for instance, in the United States was massively funded by cheap debt based on oil prices that weren't sustainable, and now that's all coming unwound. We have never had deficits of ten percent of GDP back to back, or even still four or five percent four or five years into a recovery.
We have a runaway budget where the population is getting older and older, 10,000 people are retiring every day. Nothing is being done about Social Security. It's a festering time bomb, and we're not sure how it will explode, but we know it isn't sustainable. We have a Wall Street that is more addicted to pure overnight gambling and trading and speculation for the ultra short run that is driven by robo traders, the so-called HFT money, like never before. It's unstable. That's why we see things happen like the overnight 40 percent gain with the Swiss Franc when the Swiss National Bank pulled the pay.
Forty percent overnight – not overnight, but in a couple of minutes or seconds when there were hundreds of billions of short positions in the Swiss Franc. All of these things have never existed simultaneously, not only in the United States, but worldwide. All the central banks are doing it. We're reaching the point where it's unsustainable, things are going to give and break, but the good thing is it's going to be more a disaster in the financial markets in my view, less some kind of Great Depression impact on Main Street. It will be difficult on Main Street, but Wall Street is in the gun sites of this disaster coming.
* * *
David Stockman: I agree. In the long run, we have to get off this debt addiction. We need to get back to sound finance both in government and households, but beginning between here and there is going to cause enormous pain for millions of households who have been herded into risky investments, junk bond funds, stock market funds, high flying biotech stocks and on and on because they were told it's the only place to be. If you put your money in a CD, you get no return. If you put your money in a safe bond, you get almost no return. Now when the big reset, as Harry calls it, happens, and the stock market drops by large magnitudes, 50 percent, more, those people who were herded into these risky investments late in life – Because remember, we have the baby boom, you know, heading towards their retirement homes, are going to be badly hurt at a time that they can't recover, and it will be a massive injustice that is being done by Washington and the fed to this current generation of middle class Americans. That will produce, in my view, a political reaction, a political revolt that will begin to say, "What's wrong here? Who believed that printing money out of thin air can make a society wealthier? Why did we do that? Who believed that we can actually create jobs and new economic output on Main Street simply by having the fed press a button and create another billion dollars?"
* * *
David Stockman: Yeah, I agree with that, and the point to remember is that massive money printing by central banks on a worldwide basis is inherently deflationary for two reasons. One, it fuels massive financial speculation. When we talk about speculation, we're talking about professional gamblers who borrow 95 cents and use that borrowed money that they pay practically nothing for to buy stocks or bonds or commodities or derivatives or biotech stocks and so forth as I indicated. All of that buying power is artificial. That is not coming from production today, real effort in the economy. That's coming from newly minted credit.
So it takes asset prices to unreasonable, unsustainable levels. They crash, and that creates a negative economic cycle. Secondly, massive money printing makes capital and debt too cheap to the real sector of the economy. So therefore, massive capital investments are made on the basis of cheap cost of capital, not on the basis of the likely return or sustainable return over time.
* * *
David Stockman: Yeah, a famous American economist once said anything that's unsustainable tends to stop. My argument is that we're at the stop point. The fed has been printing money like there's no tomorrow really for 25 years since Greenspan took over in 1987. They are now at the point where their balance sheet has become so bloated, so enormous that even the people running the fed are confused about what to do. They've painted themselves into a corner, and they're playing it by the day, and they're going to make a huge mistake. So the money printing thing is near an end.
Secondly, our political system has become totally non-functional. We have a lame duck president who can accomplish nothing, a congress that is totally paralyzed, meaning that before 2017 at the earliest, nothing will be done about our fiscal and entitlement explosion. Finally, the American people have believed falsely that all of this is going to work out. It's not going to. When they find out that the adults so called in Washington had no clue what they were doing, there is going to be a collapse of confidence, and that will flow into the system as well.
* * *
So it seems like this bubble bursting is inevitable. How much time do we have? Is it years, months? How will we know? Are there some clues we can look into to make sure that we're prepared?
David Stockman: There's really no magic numbers here, but it's remarkable that these central bank driven bubbles tend to peak after about six years. The dot com bubble started really in mid-1994 with the famous Netscape IPO. It crashed in March 2000, six years. The housing bubble roughly started in 2002. It totally crashed in 2008. Six years. The meltdown on Wall Street bottomed in March 2009. Add six years. 2015. I think we're at the end of this bubble simply based on the fact that they can't expand forever. They reach an asymptotic peak, and then confidence is lost, a catalyst occurs, a black swan appears, the selling begins, and there's nothing under this market. There is no safety net under this market.
* * *
Is there anything that can save us?
David Stockman: Yes, there are, and in the short run, that will be painful. There will be great dislocations, both in the financial markets and the real economy. But in the long run, that's a good thing. We have become so dependent on government, we have come to believe that the Federal Reserve drives the economy hour by hour, day by day. None of that is historically true. Real wealth, real prosperity comes from the sweat and from the enterprise and from the invention of people on Main Street, not the politicians on Wall Street who are on the central bank. So I think the big inflection point that we're facing is when the big crash comes, on the other side, maybe we can get back to the private enterprise system and the kind of family self-reliance and thrift and prudence that our prosperity was built on 40 years ago.
* * *
David Stockman: Well in The Great Deformation, I said, "We're heading towards a day of reckoning. This isn't sustainable." It's happening in real time, and in the updates, what I try to do is focus on the catalyst events, the catalyzing forces that will warn us when we're really getting to the edge of the cliff.
That is the central banks. Japan's central bank is out of control. I watch that. It's important to know what happens there because if the great money printing debt experience in Japan finally fails, it's going to be noted in markets all around the world. I watch the ECB, European Central Bank. It is divided between Germans who want to try to maintain some semblance of some money and the rest of Europe that would like to print and drown themselves in debt as far as the eye can see. It's important to watch China, which is a giant house of cards, that's on the verge of collapse, and that will ricochet around the world in terms of the countries that supply it. Australia, Korea, the so-called emerging markets, and what it'll do to the theory, which I think is false that China is the engine of growth in the world, it is not. It is the biggest speculative disaster in human history.
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David Stockman: Well, the crisis is unfolding by the day. It is not too late to start preparing right noW. Now is the time to begin to save if you can and minimize your outlays for unnecessary luxuries. This is going to be a devastating crisis, and people will be happy down the road if they take the steps to prepare today.
I’m Bedazzled by the Bewilderment Surrounding the Fed’s Behaviour... So I’ve De-engineered to the Bare Basics... and Oh Boy!
According to former Fed Chair Ben Bernanke in an excerpt from a Nov. 3, 2009 Bloomberg article, the Fed strategy is that “..large-scale asset purchases should boost economic growth through lower borrowing costs and higher stock prices…”. Now as depicted in the following chart (by Gallup) we see that the top 5% own almost 75% of financial wealth (i.e. stocks) while the bottom 80% own less than 5% (these are 2010 figures and certainly things have gotten significantly worse over the past 4 years).
Rather than boosting economic growth through incentivizing capital expenditures as has been the way of monetary policies gone by, this new Fed strategy, to explicitly target higher stock prices, is meant to create enough excess wealth to those on top by way of stocks such that some of that wealth would then trickle down to the rest of America. The Fed has made this clear both verbally and by way of action, that is, by ensuring (manipulating) higher stock prices. The result is that low cost debt is being used to invest into a risk free stock market. To get an idea of how this works look at the following table which I pulled from a December 2014 report from Factset.com,
So during 2014, these 10 companies spent roughly $150B on share buybacks and paid out $55B in dividends, leading to an average market cap increase of around 25% across the 10 firms. It appears then that firms have been taking advantage of the low cost debt to borrow and buy back shares to increase market capital and pay out dividends which are typically reinvested directly back into the market.
For instance, IBM has borrowed $33B since 2012 and has repurchased $37B worth of stock. Apple spent circa 9x the amount on share buybacks as they did on capital expenditures in 2014. The point here is that the Fed’s policy strategy, as expressed by Bernanke above, of lowering borrowing costs and targeting higher stock prices to create wealth at the top was extremely successful. In fact, I doubt Bernanke ever dreamed how effective his wealth creation strategy would be.
However, the second part of the Fed’s policy strategy was to have some of that extraordinary wealth trickle down to the 90%ers. Unfortunately this part of the strategy has failed miserably. Now as we’ve discussed many time here on First Rebuttal, the second part of the strategy was inherently flawed in such a way so as to actually necessitate its failure. That is, by targeting (guaranteeing) higher stock prices you force CEO’s and all other investors to push available capital that would otherwise have been reinvested back into the company and other economic investments to simply allocate directly into the market. Meaning no need or money left for hiring, and in fact, the layoffs continue along with the share buybacks.
Just how many layoffs are continuing is becoming difficult to ascertain. Ironically I found the following notice from the BLS in its last Layoff Report…
But suffice it to say looking at the U6 figure we know hiring for real breadwinner jobs has been sparse at best (we’ll take a detailed look shortly). So the result of not only targeting but guaranteeing an upward moving market, which the Fed has been very explicit about doing, has literally prevented the trickle down part of the trickle down strategy meaning all we’ve attained is extreme wealth creation to those on top. And this seems to be recognized by essentially everyone.
What becomes obvious in researching the topic of ‘trickle down economics’ is that this is one subject that appears to have almost unanimous agreement amongst everyone outside of the political class. Left, Right, Gay, Straight, Religious, Atheist, you name it they agree on the subject unless they hold a political office. In fact, the resounding agreement is that this latest experiment has been a tremendous failure. That said, here we are in year 6 of the now completely failed experiment with no signs of changing course. Rather than allocating efforts to reshaping our economic growth strategy, all efforts seem to be focused on selling a false story of success to the American people.
So this brings us to the debate around whether the parabolic move in equity valuations is the same as last time, meaning the asset bubble the eventually burst in 2008. The ‘secular bulls’ are screaming “It is different this time!”. And well I agree, things are very different this time around. But is that a good thing or a bad thing? Well let’s take a stroll past all of the bullshit nonsense from both sides of the bull bear coin and just look at the very parameters that are time tested indications of growth and valuation.
So just on pure price level we see about a 25% increase between 2007 and today on the S&P 500. That would suggest we have had material improvement today relative to 2007. Now let’s have a look at some multiples to see how we feel about our growth prospects relative to 2007.
The chart depicts price to sales of S&P 500 companies and the Adjusted Buffet Indicator. We are using price to sales because it is a much better long term gauge than price to earnings as earnings, especially given all of the share buybacks and reallocation of funds from capex to income, is easily manipulated in the short term. What we find in price to sales is that today’s multiple is 30% higher than in 2007 (according to multpl.com). This suggests the market is pricing in some pretty heavy growth relative to the expected growth in 2007.
The Adjusted Buffet indicator is a gauge I developed to adjust out reported economic gains that are solely a function of consumption from debt rather than income. The idea being that debt consumption is actually a net negative to economic growth and therefore is nonsensical to include in growth measures. What we see is that apples to apples the Adjusted Buffet indicator has grown by 150% since 2007, suggesting that either the economy needs to accelerate significantly or market pricing needs to come down.
And really this is the crux of the whole debate. Is the economy poised to accelerate or will the market revert back to historic norms through price collapse, as it did in 2008. So let’s have a look at our growth prospects. ‘Secular bulls’ are obviously claiming this time is very different from last time arguing that there will be no repricing as fundamentals actually do signal growth acceleration. Now that’s what they’re claiming but as we always do here at First Rebuttal, let’s have our own look to validate or discredit those claims. Specifically, we are looking for signals of economic acceleration that would support the implied expectation of relatively higher future corporate cash flows.
The above chart is the official real average GDP growth over a 5 yr period ending in the subject year. The idea is to see if generally throughout the economy we see signals of stronger growth than we had in 2007. What we find is that economic growth is 24% lower than it was is 2007. So this does not support today’s higher multiples. But let’s keep going. The market is certainly pricing higher multiples today than 2007 and so surely we should find the growth source for these higher multiples if we just keep digging.
In the above chart, sourced from the Federal Reserve, we see a 10% reduction in cash inflows for the American consumer and we see a whopping 40% decline in net worth to the bottom 90% since 2007. Historically, 70% of economic growth has come directly by way of expenditures from the American consumer. One has to ask oneself, does a consumer with less cash inflow and significantly lower wealth, as absolutely evidenced in the above chart i.e. this is not arguable, lead to sustained higher expected expenditures and thus future corporate cash flows?? The market apparently thinks so, unless we can find another source for the market’s growth expectations. So let’s carry on…
Well consumer cash flows can increase via a rise in income or reduction in costs. Above is the income side which failed to show any rational expectation for signs of consumer expenditures growth but what about the cost side? Well let’s take a look at consumers’ cost of goods and debt service relative to 2007 to see if we have freed up some cash on the consumer’s cost side.
The deflator is a better measure of the bare necessities as these are generally domestic goods and services as opposed to imported e.g. food, rent, public transport, etc. And so we see that cost of goods and services on just the staples have moved up about 2% per year despite the CPI measurement of closer to 1% per year. And so it is clear from the above chart that we had no price relief since 2007 and as such still no logical expectation for increased consumer expenditures. But what about debt service? Interest rates are lower so perhaps the American consumer has freed up some cash flow due to lower rates?
Despite the decline in prime interest rates, average consumer credit rates saw only a 6% decline (from 14.5% to 13.7%, sourced from St. Louis Fed) vs an increase in consumer credit levels of around 30%, as depicted in the above chart. The implication is that the American consumer has increased their total debt service relative to 2007 meaning expected consumer expenditures should be lower than in 2007. This means that both the income and cost side of the American consumes’ cash flows provide an expectation of lowered consumer expenditures relative to 2007. Thus current market multiples should actually be lower not higher based on the American consumer’s financial position. But the search must go on… we are nothing if not perseverant here at F.R. so let’s keep on truck’n.
Ok, so what if consumer cash flows are down and have no signals of improving relative to 2007. This doesn’t necessitate that multiples need actually be lower than in 2007. If each dollar is being used more effectively than in 2007 we could actually generate higher ultimate corporate cash flow growth than in 2007 and this could support higher market valuations. Let’s take a look…
The above chart depicts how effectively we are using both money supply and debt to generate economic growth relative to 2007. And we find that our effectiveness at using money supply has declined by about 25% while our ability to generate output growth from debt has plummeted by 75% since 2007. This actually tells us that even if cash flows were the same as in 2007 our overall growth would still be slower. Given the American consumer actually has less cash flow our reduced effectiveness will result in much lower expected growth than in 2007 and, as such, should result in lower market multiples based on the consumer and economic efficiency.
This is not looking promising for validating the higher market multiples but there could be one saving grace to all of this. Jobs are the key to every economy. The tighter the job market the greater the income distribution. The greater the income distribution the greater all of the above become. And so let’s take a look at jobs today relative to 2007 to look for signs of a tighter job market.
Disappointingly we find that the job market is much looser than it was in 2007 with unemployed and underemployed 26% higher today. And so the likelihood of higher cash flows stemming from a tighter job market is essentially zero, especially given the continuing trend to trade away employees for share buybacks.
And so what we have done by way of the above analysis is provide the proof for the market’s mispricing. Thing of it is, we already knew the market is mispriced. As discussed at the beginning of the article The Fed has told us several times that their mandate for the past 6 years has been to manipulate the market higher so that it creates wealth for those at the top in hopes that this wealth will trickle down onto the rest of America. Based on that declaration of price manipulation, we know the market is mispriced. There is nothing grey or convoluted about that. None of this has been done in secret. So why is it that these TV pundits and politicians spend so much time pitching that the market is fairly valued?? And how is it that those deemed market ‘pros’ are buying into it??
Well perhaps it is not so much that these market pros are buying into it as they are trying to convince us that nothing needs to change. You see while the Fed’s manipulation has not been done covertly the fact that it has failed to create any benefit to the bottom 90% of Americans is very much being kept a secret. Those on top for which the current Fed manipulation is creating extraordinary wealth absolutely do not want a change of policies. And why would they? They are earning incredible wealth while taking no risk.
This completely perverts the basis of capitalism which results in huge misallocations of resources. It is this very misallocation of resources that not only created the economic destruction we saw in the above charts but will continue to deepen the grave we are digging ourselves. What no one can say for certain is how long the Fed manipulation will last because we’ve never been in a situation where the open mandate has been explicitly to push stock prices higher.
The hope was that the wealth would trickle down and improve the fundamentals enough to support the market valuation so that the Fed could quietly hand the market back over to fundamentals as the main pricing mechanism. Unfortunately what they’ve now realized is that the fundamentals are not going to catch up to the market valuation. And so the Fed will have to either continue to manipulate the market or allow it to reprice materially downward.
I expect the Fed has no idea what the next move will be. As I’ve mentioned in the past the Fed can theoretically continue as long as USD strength holds up. If USD devalues significantly the Fed will have to step back and the market will reprice at that point. That said, there doesn’t seem to be a near term concern for USD weakness. But you can see what an incredibly difficult conundrum the Fed has created for itself and for the nation.
By implementing the wrong policies and then refusing to acknowledge it early on, the Fed has undoubtedly created irreparable destruction for all but the very top of the food chain. The destruction is already slowly playing out and that is clear when looking at income, net worth and consumer debt levels. And at some point, as we saw in 2008, an unimaginable amount of pain is going to hit home almost overnight. What more can anyone say about this.
The market is way out of whack and that will continue until it doesn’t. In the meantime 90% of America will slowly degrade. How can any of this be considered a success as we hear so often from the market pros? The one thing that is clear in all of this mess is that our policymakers have failed miserably and so too then have our legislators for allowing this nonsense to continue. But worse is that we the people are failing as Americans. We have an obligation to those who came before us and did their job as Americans and to those who will come after deserving as many rights as were passed onto us.
But we are failing to deliver on our obligations as Americans, that is undeniable. We are allowing the political class to plunder our wealth, negate our freedoms and desecrate our Constitution. Sadly we have become the immoral populace our founding fathers warned all future generations not to become. As the ‘Founding Father of Scholarship and Education’, Noah Webster, put it in 1832,
“if the citizens neglect their duty and place unprincipled men in office, the government will soon be corrupted; laws will be made, not for the public good, so much as for selfish or local purposes; corrupt or incompetent men will be appointed to execute; the public revenues will be squandered on unworthy men; and the rights of the citizens will be violated or disregarded. If a republican government fails to secure public prosperity and happiness, it must be because the citizens neglect the Divine commands and elect bad men to make and administer the laws”
The duty and obligation is ours and so too then are the failures and successes of our society. Unfortunately ours will be the first generation to have failed at being American. Yet regrettably more unfortunate is that it will be the innocent generations yet to come that will bear the full costs of our failures. We are 15 years in to what is absolute denial regarding the competence of our nation’s policymakers. Their failures in taking us to a false war in Iraq, in making a mockery of our rights as Americans and in destroying our economic opportunities are our failures. Yet here we sit, silent and indifferent to our own demise; so completely antithetical to the character of a true American.
Slowly, all the lies of the "recovery", all the skeletons in the closet, and all the bodies swept under the rug are emerging.
Moments ago, Austrian ORF reported that there have been "spectacular developments" in the case of the Hypo Alpe Adria bad bank, also known as the Heta Asset Resolution, where an outside audit of Heta's balance sheet exposed a capital hole of up to 7.6 billion euros ($8.51 billion) which the government was not prepared to fill, the Austrian Financial Market Authority said.
As a result, according to Reuters, the bad bank that was created in the aftermath of the Hypo collapse, is itself about to be unwound, as the bad bank itself goes bad!
"Austria's Financial Market Authority stepped in on Sunday to wind down "bad bank" Heta Asset Resolution and imposed a moratorium on debt repayments by the vehicle set up last year from the remnants of defunct lender Hypo Alpe Adria."
In short: Austria just cut off state support of what was until this moment a state-backed, wind-down vehicle and a key pillar of trust in what was already a shaky financial system.
Not surprisingly, today's shock announcement comes a week after Austria's Standard reported that up to a five billion euro impairment at Heta would take place, a report which the Finance Ministry called "pure speculation" and noted that the Bank was in good health. According to Standard, among the reasons for the massive capital shortfall was the plunge in collateral as a result of the continuing crisis in South East Europe which meant that the value of "real estate in South East Europe, shopping centers and tourism projects, deteriorated massively" driven largely by the appreciation of the Swiss Franc. "As a result, the volume of bad loans has increased significantly."
Everyone was wondering who the first big casualty of the SNB's currency peg failure would be. We now know the answer.
Further from Reuters, the finance ministry confirmed this in a statement, adding Heta was not insolvent and that debt guarantees by Hypo's home province of Carinthia and the federal government were unaffected by the move.
The problem is that going forward that nobody knows who insures what, what various other state and quasi-state guarantors suddenly unclear as to who is responsible for what: the province of Carinthia guarantees back €10.7 billion worth of Heta debt. The federal government backs a 1 billion euro bond issued in 2012 that the ministry said would be honored in full.
As a result of the "sudden" capital deficiency, there will be a moratorium on repayment of principal and capital lasts until May 31, 2016, giving the FMA time to work out a detailed plan to ensure equal treatment of all creditors, the FMA said in a decree published on its website.
Perhaps a badder bank to rescue the bad bank?
According to Reuters calculations, More than 9.8 billion euros worth of debt is affected, including senior notes worth 450 million due on March 6 and 500 million on March 20.
But the punchline, is that while the world was waiting for Greece to announce capital controls, or a bail-in over the past week, it was none other than one of the Europe's most pristeen credits (one which until recently was rated AAA/Aaa) that informed creditors a bail-in is imminent: "The finance ministry noted that creditors can be forced to contribute to the costs of winding down Heta - or "bailed in" - under new European legislation that Austria adopted this year so that taxpayers do not have to shoulder the entire burden."
Bloomberg confirms that the ministry announced that under new EU rules means creditors can be forced to share losses.
Of course, this being Austria, and the Creditanstalt, aka the bank which failed in 1931 under almost identical circumstances and set off the dominos that led to a global financial crisis which in turn bank fanned the flames of the Great Depression, also being Austrian, suddenly everyone is asking: "what just happened and what happens next?"
Having discovered this week what Americans are spending their "gas savings" on, and noted that nationwide gas prices are rising at the fastest pace in over a decade; as AP reports, for Californians, it's considerably worse as gas prices have soared 60c to $3.23 per gallon in the last few weeks. Between refinery shutdowns (due to strikes and explosions) removing 17% of California's production, and the seasonal shift to the less-polluting summer blend of gas mandated in California, supply remains drastically short spiking prices 20-30c on Thursday alone as one gas station owner exclaimed, in 48 years "I've never seen anything like this kind of [price spike]."
Nationwide, gas prices are rising at the fastest pace in over a decade...
But California is the hardest hit for now. (photo taken Friday in LA)
As AP reports, gas prices are soaring in California in a classic example of supply and demand after an explosion stopped gasoline production at an Exxon Mobil refinery while another remains offline due to labor unrest...
Average retail gas prices in the state have surged 25 cents a gallon in less than a week, from $2.98 per gallon for regular on Monday to $3.23 per gallon on Friday. That caps a run that saw the price of regular unleaded go up 60 cents per gallon since Jan. 30 as refineries prepare to shift to a summer blend of fuels.
In some areas of Southern California, gas station owners were forced to pass price hikes of 24 cents per gallon along to consumers on Thursday after seeing wholesale prices shoot up. Prices in Northern California lagged a day, but by Friday were also rising; an independent operator with a chain of gas stations around the San Francisco Bay area boosted prices 20 cents a gallon for regular on Friday, to $3.19.
The situation underscores the frustrating complexity of the gasoline market in California, where state environmental regulations mandate a specialized blend of fuel that isn't used anywhere else in the U.S.
Because of that, California is economically isolated and can't easily or quickly purchase fuel from outside the state in a crisis.
Between the strike at the Martinez Tesoro refinery and the explosion at Exxon's Torrance refinery, the two facilities combined make up 17 percent of the state's crude oil processing capacity, said Gordon Schremp, a senior fuels specialist with the California Energy Commission.
"It takes a while to get some significant supplies from outside," Schremp said. "It's very normal that we'd see a significant price spike."
Gas station owners, meanwhile, chafed at having to pass the costs on to consumers. The profit margin for station owners was 18.5 cents per gallon in California on Friday, a break-even or money-losing proposition for many independent retailers, said Jeff Lenard, a spokesman for the National Association of Convenience Stores.
In Torrance, station owner Frank Scotto was forced to increase his prices by 24 cents per gallon on Thursday. He hasn't seen such a spike since he went into the gas station business in 1967, he said.
"I printed out the price change and I'm framing this thing because I've never seen this kind of thing in all my years," said Scotto, who owns a Mobil and Exxon station.
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As GasBuddy shows - the California differential is extreme...
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However, while the extreme price moves are hitting California for now, given RBOB's recent rise, nationwide gas prices look set to top $2.60 within a week...
Or as CNBC's Larry Kudlow would say: "Unambiguously ungood" for everyone.
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There are any number of colloquialisms for monetary repression, “reach for yield” and serial asset bubbles being a few. In the vernacular of monetary policy itself, such color is disdained in favor of technocratic banality – “portfolio effects.” The idea is simple, which is to say that by repressing the returns on “safe” investments financial agents will be forced, not of their own volition, into “riskier” assets and asset classes. The prices of those risky assets rise, and that is supposed to contribute to economy-wide good feelings which loosen purse strings, in the equally prosaic terminology of the “wealth effect.”
There is, yet again, an unearned sense of precision about the task and the linkages to actual economic function that belies the chaos and mess of a real economic foundation. Removing organic profitability as a mechanism for resource distribution also obliterates constraints on methodical behavior. We may not think of such discipline as useful during periods of economic malaise, where “risk” seems to be lacking, but true discipline leads to the very processes which create sustainable economic advance. The allure of monetary-driven “risk” is an illusion of artificial bursts of at best short-term activity.
It seems we have come to a sort of crossroads state whereby past attempts at fostering economic advance through “reach for yield”, portfolio effects, directly interfere with current commanding efforts. Without admitting guilt, central banks and political regulators have combined to “make banks safer” largely through more complex banking regulation conspicuously free of free thought and common sense; especially Basel III. One component, which was “learned” of the Panic of 2008, was that banks “need” a liquidity buffer to withstand “market” funding withdrawal. There are, of course, formulas that determine these.
Banks especially in Europe were found wanting of such a buffer and have been “encouraged” to build their own around sovereign debt – which is believed, still, to be the most highly negotiable of all asset classes despite relatively close experience. That last problem was “dealt with” via Mario Draghi and the ECB’s implicit promises to “do whatever it takes.” That apparently includes undertaking QE.
The problem of QE is that it removes those same bonds in question from circulation, sequestered securely within the confines of the central bank (regardless of whether that central bank has made provisions for addressing the direct short-comings of just such an effort). The trade-off is one of bonds for “cash”, but more of modern liquidity concepts than cash, that will on balance lead to “portfolio effects.”
In one sense, the ECB in particular is saying that banks have become “too safe” and the European economy needs “more risk.” It intends not just to force just such an outcome but also to finance it. Banks, for their part, are not quite ready to “comply”:
Weeks before the European Central Bank begins a program to buy about 1 trillion euros ofeuro zone government bonds, banks, pension funds and insurers across the continent are hoarding them for regulatory or accounting reasons.
That may complicate implementation of the quantitative easing program, aimed at reviving growth and inflation in the euro zone. The ECB might have to pay way above market prices, or take additional measures to encourage investors to sell.
“We prefer to hold on to them,” said Antoine Lissowski, deputy CEO at French insurer CNP Assurances. “The ECB’s policy … is reaching its limits now.”
I especially like the phrase “take additional measures to encourage investors to sell”, as you can almost envision some Hollywood Mafioso-type threatening a poor, expensively-suited bank executive not over blood money but on behalf of “monetary” authorities to take their cash. There is an element of comedy here that is un-writable as fiction; nobody could dream just such a scene.
In that respect, perhaps monetary depredations have reached their inevitable logical limitations. The banks “must” be made safe because of the last panic, but banks must be made risky because of the economy.
Of course, the central bankers under this paradigm don’t think in such broad terms, as they see no incompatibility at all. Again, they think there is some precision or mathematics of regressions that can “find” harmony between two largely and seemingly contrary or even irreconcilable forces – as if banks can be made “just safe enough” while also “just risky enough.” That is because an actual economy does so, where organic profit governs that relationship – why can’t central banks simply do it instead by dual-mandate? This is the reason for the facileness and technocracy of jargon, as this is all supposedly objective mathematics rather than anything emotionally explosive like bubbles.
While there are any number of reasons commandment of this kind will fail, it really comes down to the market itself, namely that such forces of “safety” and “risk” are not really homogenous and harmonized unto themselves. It takes all sorts of agents and actions to produce stability from chaos, whereby many people “take the other side.” The relative movement of prices, free from directive interference, acts as ultimate arbiter of what constitutes “risk”; safety results from that. Central banks take no sides at all and simply decree based upon poorly constructed mathematics that are stale by the time they are implemented.
And with such opposing policy intentions, is it any wonder how bubbles are formed? Which “side” wins out in the end? The amount of repression taken by monetary authorities will overwhelm any sense of propriety about even mathematically-drawn “prudence.” That is the case in every bubble, but in this one instance, especially in Europe, the tug-of-war is in the very instrument of both policies – government bonds. The ECB is demanding, reduced to constituent cases, that banks buy government bonds for every government bond they sell to the ECB. Banks are rightfully balking as “why bother?” It’s not just the naked convolution to the whole scheme, it is entirely emblematic and demonstrative as to why bank “capital” is so relatively expensive under monetary repression.
Since, however, the “risk” side always wins in these things, the ECB mafia will show up with the heaviest repression possible.
And yet, somehow, monetary policy is still believed neutral in the long run and that bubbles are market events. Central banks have shown why they cannot command economic performance, but that doesn’t mean they can’t give one hell of a comedic performance. We have taken a monetary ride now into the theater of the absurd.
March is said to come in like a lion and leave like a lamb. It does indeed appear to be coming in like a lion for investors. There are four major central bank meetings and the US employment report. Although Yellen did not convince many that the Fed is set to hike rates in June, yields in the eurozone continue to fall in anticipation of the bond buying scheme that will start later this month. The resulting widening of the interest rate differentials lent the dollar support.
Two emerging market central banks are in play as well. Brazil is one of the few central banks engaged in a tightening cycle. It is set to continue. The Selic rate bottomed in 2012-2013 at 7.25%. It stands at 12.25% now. The consensus expects another 50 bp rate hike. A 25 bp rate hike would be seen as a potential signal that a pause and possibly the end of the tightening cycle is at hand.
Poland is expected to cut the base rate by 25 bp to 1.75%. It had cut the base rate 50 bp last September. The main issue is not growth. Fourth quarter GDP expanded 3% year-over-year. Rather Poland, like so many countries in Europe, is experiencing deflation. In January, consumer prices were 1.3% below year ago levels.
There were three developments over the weekend that may help shape the investment climate. First and most likely to impact trading on Monday is the rate cut by the People's Bank of China on Saturday. The 25 bp cut in the key one-year lending and deposit rates (to 5.35% and 2.50% respectively). The fact that the PBOC cut rates is not very surprising, but the precise timing is nearly always unpredictable. Most of the speculation has focused possible yuan depreciation, and some analysts have been playing up the risk that the 2% dollar-yuan band would be widened. The rate cut overshadows the official PMI readings that were also reported over the weekend. The manufacturing PMI ticked up to 49.9 from 49.8 while non-manufacturing PMI firmed to 53.9 from 53.7.
The PBOC explained the rate cut in terms of a decline in inflation, which results in an increase in real rates. Consumer prices were 0.8% higher year-over-year in January while producer prices have been falling for three years. Also on Saturday, China reported that housing prices in the 100 major cities fell by 3.84% in the year through February. The rate cuts are not expected to reverse the slowing of the economy, arrest the deflation, or lift house prices. They will, though, help large businesses and state-owned enterprises to cope with the more challenging economic conditions. The rates cuts will help facilitate the rolling over of existing debt.
The second important development over the weekend was the Sunday election in Estonia (the results are not know at pixel time). The latest polls showed that a party with formal ties with Putin's United Russia Party is ahead of both of the governing coalition parties. The government is pro-EU and pro-NATO. However, a third of the population (~1.3 mln) comprises ethnic Russians.
As it has with several countries, Russia has made incursions into Estonian airspace. In recent years Russia has developed a hybrid warfare in Moldova, Georgia, and Ukraine, Although Russia's economy is being squeezed through sanctions; its tactics have seemingly succeeded. It continues to occupy part of Georgia. It supports a separatist region in Moldova. Its annexation of Crimea stands and Ukraine's dismemberment is a fait accompli at Minsk, where the cease fire was agreed before the insurgents made one more strategic thrust.
Estonia could be a target of Russia's ambitions should Putin chose to challenge NATO itself, which up until now Russia has shied away from doing. Narva is town in Estonia near the Russian border. Half the people do not have Estonian passports, and 90% are native Russian speakers, according to press reports. Given Putin's view of the world, and the apparent success of his tactics, Narva (or a town like it) would seem to be a potential target as the next theater of Russian ambitions.
The third development takes us from Russian foreign policy to domestic. One of the leading opposition critics of the Russian government, Boris Nemtsov was assassinated early Saturday morning in Moscow. Putin called it a "provocation" which opposition leaders took as an indication the President was going to blame the opposition itself. A large opposition rally to be held Sunday, protesting the economic crisis and Russia's involvement in Ukraine turned to more of a memorial for Nemstov.
Four major central banks meet in the week ahead. The least interesting is the Bank of England's meeting. It is still seen to be at least a few quarters away from hiking rates, and despite the low inflation, and possible deflation, the bar is high for an easier policy. More important for sterling and UK assets than the MPC meeting are the PMI reports. They will likely confirm that the UK's economic recovery remains on track after slowing in H2 14.
The ECB meeting on the same day will command more attention. However, it is most unlikely to do anything, having announced a larger and more aggressive effort to expand its balance sheet through asset purchases at its last meeting; no new measures are likely to be announced. Still, it can provide more operational color to its bond purchase program. The ECB's staff will produce new macro-economic forecasts. Growth may be revised higher, but inflation forecasts may be shaved.
The ECB, through the Eurosystem, will launch its bond buying program later this month. It still appears to be some legal and technical, operational issues that need to be sorted out before the purchases can begin. Many participants are skeptical that it will lift price pressures for consumers (CPI) which is its declared objective. The BOJ, which is many times more aggressively expanding its balance sheet, has seen consumer prices pressures fall steadily for several months and could slip back into deflation in Q2.
Many participants also are wary potential operational difficulties. In the US, foreign holders of Treasuries were more willing to sell them to the central bank than domestic investors. In Europe, banks and pension funds appear to be among the largest holders of government bonds. There are many reasons why they may not be so eager to part with their securities. What can replace them and the yields they generate (remember the yields are locked in at the purchase of the fixed income instrument)? Selling them is a tax event that some investors will not want to incur. Some of the demand for sovereign bonds by banks stems from the regulatory considerations.
Another significant group of investors are foreign central banks. They could pare holdings by selling to the ECB. This could be reflected in a reduction of the euro's share of reserves, but it might not be clear until the COFER report at the end of the year. Nevertheless, the investors will be sensitive to market talk along these lines.
The central banks in Australia and Canada meet. These meetings are live in the sense that rate cuts are possible. Both central banks have cut interest rates already this year. The derivative markets show a high degree of confidence that both central banks will cut rates again. The issue here is timing, and it effects short-term traders more than medium and longer term investors.
In the past week, the pendulum of expectations for next week's meetings shifted away from cuts now. A weak capex survey from Australia at the end of last week encouraged the doves to stick with their views. It is a close call, and our impression is that officials had framed the issue as February or March last month. Back-to-back cuts may be more aggressive than is warranted by the data.
With some verbal guidance by Bank of Canada officials, investors had been convinced that another rate cut would be delivered at the March meeting. However, last week Governor Poloz was understood to mean that a cut is not imminent. In our reading, Poloz simply restated the official policy--that the January rate cut was an insurance policy meant to buy time for the economy to adjust to the fall in oil prices.
We suspect that there is a greater risk of a Bank of Canada rate hike than an RBA rate cut in the week ahead. That said, the failure to cut rates might not spur a strong rally as the lack of action now will simply raise the conviction for a later move.
It is a hellacious week for US economic reports, culminating with the employment report at the end of the week. There an economic report every day. The economic data will provide insight into the pace of growth in the first quarter, but the key is the impact on Fed policy. High frequency data may help create the price action that short-term participants like, but no one wants policy to be based on such noisy time series. The general picture of the economy, namely one that has returned to what appears to be trend growth after a period of acceleration in April-September period last year.
Headline inflation has been pulled down by the drop in oil prices, but the core rate, which is the aim of policy, is steadier. Weakness in the parts of the country most linked to oil production will also likely be born out by the Beige Book prepared the mid-March FOMC meeting. However, most businesses have lower input costs, and households have more disposable income. The data is expected to confirm consumers are not necessarily increasing their consumption, though household consumption did rise 4.2% in Q414. Rather, at least at the start of the 2015, it appears households bumped up their savings.
The core PCE deflator is not expected to have changed in January from the 1.3% pace in December. The Federal Reserve would feel better if this measure ticked up in the coming months. It would make the June rate decision easier. Fed Chair Yellen was clear on the matter, however. The core rate has also likely been knocked down by the drop in oil prices. This is transitory, and the base effect wanes late this year and early next. At the January FOMC meeting, the statement indicated that the Fed continued to expect that after some near-term softness, it continued to expect inflation will approach the 2% reference rate.
It is that expectation coupled with continued improvement in the labor market that underpins our expectation for a June hike. There has been a clear acceleration in jobs growth. The three-month average is 336k while the six-month average is 282k. Growth growth in February is expected to have slowed considerably. The consensus expectation of 235k would be the slowest since last August. Hourly earnings, which had fallen 0.2% in December rose 0.5% in January and are expected to have risen 0.2% in February. This would cause the year-over-year pace to slip to 2.1% from 2.2%.
On balance, the Federal Reserve will likely see the employment report as consistent with continued improvement. There is no compelling new piece of evidence that would shake their confidence that the 2% inflation target will be achieved in the medium term. Yellen argued that the international factors are mixed, and net-net are in neutral. We think the most likely scenario is that the Fed drops "patience" in March, and true enough, it will not signal an immediate rate hike, which would be April. Instead, it really is still patient and waits for June.
In case the world needed any more geopolitical risk "hotspots", overnight Venezuela's flailing president Nicolas Maduro, faced with an unprecedented economic crisis at home, decided to do what most authoritarian rulers do when faced with imminent civil unrest: point the finger abroad, and in this case, at Washington, as a distraction. With crude oil plunging, with opposition leaders being arrested, and with the economy generally in shambles, Venezuela has in recent weeks accused the United States of being behind an alleged coup plot. Then overnight, Maduro switched from broad generalizations to specifics when, as CNN reports, Maduro said Saturday an unspecified number of Americans were arrested "a few days ago" for engaging in espionage and recruitment activities.
More from CNN:
The President said they included an American pilot of Latin American origin, arrested in the southwest border state of Táchira.
He said the pilot was found in possession of "all kinds of documents" and was being interrogated by the authorities, though he did not identify him. The Venezuelan government has made many similar claims in recent years, without ever substantiating them.
Maduro also announced Saturday a series of measures, including visa requirements for U.S. citizens and the downsizing of the U.S. Embassy in Caracas, to counteract what he called U.S. "interference" in his country.
Considering the US has not replied officially (yet), there are two possibilities: Maduro made up the whole thing, which is far more likely, or the US did indeed engage in some covert ops in Venezuela. Considering the CIA's recent track record around Africa and Eastern Europe, that possibility certainly can not be discounted.
Speaking at an "anti-imperialist" rally in the capital, Maduro - who is surely feeling slighted following recent US overtures toward former socialist peer Cuba - said visas would now be required for all U.S. visitors and that the U.S. Embassy in Caracas would now need foreign ministry approval for any meetings. The Embassy, which he said had more than 100 staff, is to be reduced to a number closer to the 17 Venezuelan diplomats based in Washington.
Additionally, a group of prominent U.S. officials, current and retired, will be banned from entering Venezuela because of what Maduro said was their involvement in "bombing Iraq, Syria and Vietnam" and other "terrorist" actions. The officials include George W. Bush, former U.S. Vice President Dick Cheney, former CIA Director George Tenet and several current members of Congress, including Ileana Ros-Lehtinen, Bob Menendez and Mario Diaz-Balart.
Following the Maduro's announcement Diaz-Balart reacted via Twitter, saying he has "always wanted to travel to a corrupt country that is not a free democracy. And now Castro's lap dog won't let me!"
The move comes after the U.S. government last month approved a law under which Venezuelan officials allegedly involved in human rights violations are to have their visas revoked and their U.S. assets frozen.
A relatively small, but noisy crowd, dressed mostly in revolutionary red, applauded and cheered the measures announced by the President from a platform outside the presidential palace in downtown Caracas.
Meanwhile, away from the arrest announcement, CNN also reported that "gour missionaries from Bethel Evangelical Free Church in Devils Lake, North Dakota were released by Venezuelan authorities on Saturday, a church official said."
Pastor Bruce Dick said the missionaries arrived in Venezuela on February 20 and were detained a few days ago.
"We love the Venezuelan people and have served alongside them for over 12 years," Dick said. "We have been praying along with hundreds or thousands of others for their release and for those in Venezuela who also have been affected by this."
It is unclear if the detention and release of these Americans is connected to Maduro's charges of espionage.
Should the price of Brent resume its downward trend, or even remain around $60 where it is a loss-maker fro Venezuela, expect even more amusing antics from Maduro, whose regime may be falling apart before his eyes, however if anything, that only makes him more unpredictable and irrational.
Submitted by Jeff Thomas of International Man
Which New World Order Are We Talking About?
Those of us who are libertarians have a tendency to speak frequently of “the New World Order.” When doing so, we tend to be a bit unclear as to what the New World Order is. Is it a cabal of the heads of the world’s governments, or just the heads of Western governments? Certainly bankers are included somewhere in the mix, but is it just the heads of the Federal Reserve and the IMF, or does it also include the heads of JPMorgan, Goldman Sachs, etc.? And how about the Rothschilds? And the Bundesbank—surely, they’re in there, too?
And the list goes on, without apparent end.
Certainly, all of the above entities have objectives to increase their own power and profit in the world, but to what degree do they act in concert? Although many prominent individuals, world leaders included, have proclaimed that a New World Order is their ultimate objective, the details of who’s in and who’s out are fuzzy. Just as fuzzy is a list of details as to the collective objectives of these disparate individuals and groups.
So, whilst most libertarians acknowledge “the New World Order,” it’s rare that any two libertarians can agree on exactly what it is or who it’s comprised of. We allow ourselves the luxury of referring to it without being certain of its details, because, “It’s a secret society,” as evidenced by the Bilderberg Group, which meets annually but has no formal agenda and publishes no minutes. We excuse ourselves for having only a vague perception of it, although we readily accept that it’s the most powerful group in the world.
This is particularly true of Americans, as Americans often imagine that the New World Order is an American construct, created by a fascist elite of US bankers and political leaders. The New World Order may be better understood by Europeans, as, actually, it’s very much a European concept—one that’s been around for quite a long time.
It may be said to have had its beginnings in ancient Rome. As Rome became an empire, its various emperors found that conquered lands did not automatically remain conquered. They needed to be managed—a costly and tedious undertaking. Management was far from uniform, as the Gauls could not be managed in the same manner as the Egyptians, who in turn, could not be managed like the Mesopotamians.
After the fall of Rome, Europe was in many ways a shambles for centuries, but the idea of “managing” Europe was revived with the Peace of Westphalia in 1648. The peace brought an end to the Thirty Years’ War (1618-1648) in the Holy Roman Empire and the Eighty Years’ War (1568-1648) between Spain and the Dutch Republic. It brought together the Holy Roman Empire, The House of Habsburg, the Kingdoms of Spain and France, the Dutch Republic, and the Swedish Empire.
Boundaries were set, treaties were signed, and a general set of assumptions as to the autonomy within one’s borders were agreed, to the partial satisfaction of all and to the complete satisfaction of no one… Sound familiar?
Later, Mayer Rothschild made his name (and his fortune) by becoming the financier to the military adventures of the German Government. He then sent his sons out to England, Austria, France, and Italy to do the same—to create a New World Order of sorts, under the control of his family through national debt to his banks. (Deep Throat was right when he said, “Follow the Money.”)
So, the concept of a New World Order has long existed in Europe in various guises, but what does this tell us about the present and, more important, the future?
In our own time, we have seen presidents and prime ministers come and go, whilst their most prominent advisors, such as Henry Kissinger and Zbigniew Brzezinski, continue from one administration to the next, remaining advisors for decades. Such men are often seen as the voices of reason that may be the guiding force that brings about a New World Order once and for all.
Mister Brzezinski has written in his books that order in Europe depends upon a balance with Russia, which must be created through the control of Ukraine by the West. He has stated repeatedly that it’s critical for this to be done through diplomacy, that warfare would be a disaster. Yet, he has also supported the US in creating a coup in Ukraine. When Russia became angered at the takeover, he openly supported American aggression in Ukraine, whilst warning that Russian retaliation must not be tolerated.
Henry Kissinger, who has literally written volumes on his “pursuit of world peace” has, when down in the trenches, also displayed a far more aggressive personality, such as his angry recommendation to US President Gerald Ford to “smash Cuba” when Fidel Castro’s military aid to Angola threatened to ruin Mr. Kissinger’s plans to control Africa.
Whilst the most “enlightened” New World Order advisors may believe that they are working on the “Big Picture,” when it comes down to brass tacks, they clearly demonstrate the same tendency as the more aggressive world leaders, and reveal that, ultimately, they seek to dominate. They may initially recommend diplomacy but resort to force if the other side does not cave to “reason” quickly.
If we stand back and observe this drama from a distance, what we see is a theory of balance between the nations of Europe (and, by extension, the whole world)—a balance based upon intergovernmental agreements, allowing for centralised power and control.
This theory might actually be possible if all the countries of the world were identical in every way, and the goals of all concerned were also identical. But this never has been and can never be the case. Every world leader and every country will differ in its needs and objectives. Therefore, each may tentatively agree to common conditions, as they have going back to the Peace of Westphalia, yet, even before the ink has dried, each state will already be planning to gain an edge on the others.
In 1914, Europe had (once again) become a tangle of aspirations of the various powers—a time bomb, awaiting only a minor incident to set it off. That minor incident occurred when a Serbian national assassinated an Austrian crown prince. Within a month, Europe exploded into World War. As Kissinger himself has observed in his writings, “[T]hey all contributed to it, oblivious to the fact that they were dismantling an international order.”
Since 1648, for every Richelieu that has sought to create a New World Order through diplomacy, there has been a Napoleon who has taken a militaristic approach, assuring that the New World Order applecart will repeatedly be upset by those who are prone to aggression. Further, even those who seek to operate through diplomacy ultimately will seek aggressive means when diplomatic means are not succeeding.
A true world order is unlikely. What may occur in its stead would be repeated attempts by sovereign states to form alliances for their mutual benefit, followed by treachery, one- upmanship, and ultimately, aggression. And very possibly a new World War.
But of one thing we can be certain: Tension at present is as great as it was in 1914. We are awaiting only a minor incident to set off dramatically increased international aggression. With all the talk that’s presently about as to a New World Order, what I believe will occur instead will be a repeat of history.
If this belief is correct, much of the world will decline into not only external warfare, but internal control. Those nations that are now ramping up into police states are most at risk, as the intent is already clearly present. All that’s needed is a greater excuse to increase internal controls. Each of us, unless we favour being engulfed by such controls, might be advised to internationalise ourselves—to diversify ourselves so that, if push comes to shove, we’re able to get ourselves and our families out of harm’s way.
If there was supposed to be any crackdown on opposition voices in Russia following the shocking death of Boris Nemtsov, it wasn't evident today during a rally in which tens of thousands converged in central Moscow this monring to mourn the veteran liberal politician Boris Nemtsov, whose killing on the streets of the capital has, according to AP, shaken Russia's beleaguered opposition.
As AP reports, and as the photos below show, the mourners marched to the bridge near the Kremlin where Nemtsov was gunned down shortly before midnight Friday. "The march could serve to energize the opposition or it could prove to be a brief outpouring of emotions that once again dissipates in a climate of fear."
Russia's federal investigative agency said it was looking into several possible motives for his killing.
The first possibility, the Investigative Committee said, was that the murder was aimed at destabilizing the political situation in Russia and Nemtsov was a "sacrificial victim for those who do not shun any method for achieving their political goals."
This suggestion echoed comments by Putin's spokesman and other Russian politicians that the attack was a "provocation" against the state.
Opposition activists had planned a protest rally on Sunday, which the city demanded they hold in a suburban neighborhood. After Nemtsov's death, they called instead for a demonstration to mourn him in central Moscow. The city gave its quick approval.
Below are various snapshots from the rally:
— Boris Zilberman (@rolltidebmz) March 1, 2015
— Dmitry Vostok (@DmitryVostok) March 1, 2015
— Dmitry Vostok (@DmitryVostok) March 1, 2015
— ??? ??? (@riafanru) March 1, 2015
Nemtsov's memorial looks like the biggest protest in Russia since Bolotnaya. Organizers claiming 50,000-100,000. pic.twitter.com/HQjFzl3fQc
— max seddon (@maxseddon) March 1, 2015
— RT (@RT_com) March 1, 2015
— Anissa Naouai (@ANOWRT) March 1, 2015
Police lined up on march route next to bridge where nemtsov killed pic.twitter.com/aanZgpMXXk
— tom balmforth (@BalmforthTom) March 1, 2015
— Dmitry Vostok (@DmitryVostok) March 1, 2015
— RT (@RT_com) March 1, 2015
— Sarah Rainsford (@sarahrainsford) March 1, 2015
— Ryskeldi Satke (@RyskeldiSatke) March 1, 2015
— Mark Sleboda (@MarkSleboda1) March 1, 2015
— Anissa Naouai (@ANOWRT) March 1, 2015
Stephen Schwarzman, CEO and co-founder of Blackstone Group, the world’s largest private-equity firm with $290 billion in assets under management, made $690 million for 2014 via a mix of dividends, compensation, and fund payouts, according to a regulatory filing. A 50% raise from last year.
The PE firm’s subsidiary Invitation Homes, doped with nearly free money the Fed’s policies have made available to Wall Street, has become America’s number one mega-landlord in the span of three years by buying up 46,000 vacant single-family homes in 14 metro areas, initially at a rate of $100 million per week, now reduced to $35 million per week.
As of September 30, Invitation Homes had $8.7 billion worth of homes on its balance sheet, followed by American Homes 4 Rent ($5.5 billion), Colony Financial ($3.4 billion), and Waypoint ($2.6 billion). Those are the top four. Countless smaller investors also jumped into the fray. Together they scooped up several hundred thousand single-family houses.
A “bet on America,” is what Schwarzman called the splurge two years ago.
The bet was to buy vacant homes out of foreclosure, outbidding potential homeowners who’d actually live in them, but who were hobbled by their need for mortgages in cash-only auctions. The PE firms were initially focused only on a handful of cities. Each wave of these concentrated purchases ratcheted up the prices of all other homes through the multiplier effect.
Homeowners at the time loved it as the price of their home re-soared. The effect rippled across the country and added about $7 trillion to homeowners’ wealth since 2011, doubling equity to $14 trillion.
But it pulled the rug out from under first-time buyers. Now, only the ludicrously low Fed-engineered interest rates allow regular people – the lucky ones – to buy a home at all. The rest are renting, in a world where rents are ballooning and wages are stagnating.
Thanks to the ratchet effect, whereby each PE firm helped drive up prices for the others, the top four landlords booked a 23% gain on equity so far, with Invitation Homes alone showing $523 million in gains, according to RealtyTrac. The “bet on America” has been an awesome ride.
But now what? PE firms need to exit their investments. It’s their business model. With home prices in certain markets exceeding the crazy bubble prices of 2006, it’s a great time to cash out. RealtyTrac VP Daren Blomquist told American Banker that small batches of investor-owned properties have already started to show up in the listings, and some investors might be preparing for larger liquidations.
“It is a very big concern for real estate professionals,” he said. “They are asking what the impact will be if investors liquidate directly onto the market.”
But larger firms might not dump these houses on the market unless they have to. American Banker reported that Blackstone will likely cash out of Invitation Homes by spinning it off to the public, according to “bankers close to the Industry.”
After less than two years in this business, Ellington Management Group exited by selling its portfolio of 900 houses to American Homes 4 Rent for a 26% premium over cost, after giving up on its earlier idea of an IPO. In July, Beazer Pre-Owned Rental Homes had exited the business by selling its 1,300 houses to American Homes 4 Rent, at the time still flush with cash from its IPO a year earlier.
Such portfolio sales maintain the homes as rentals. But smaller firms are more likely to cash out by putting their houses on the market, Blomquist said. And they have already started the process.
Now the industry is fretting that liquidations by investors could unravel the easy Fed-engineered gains of the last few years. Sure, it would help first-time buyers and perhaps put a halt to the plunging homeownership rates in the US [The American Dream Dissipates at Record Pace].
But the industry wants prices to rise. Period.
When large landlords start putting thousands of homes up for sale, it could get messy. It would leave tenants scrambling to find alternatives, and some might get stranded. A forest of for-sale signs would re-pop up in the very neighborhoods that these landlords had targeted during the buying binge. Each wave of selling would have the reverse ratchet effect. And the industry’s dream of forever rising prices would be threatened.
“What kind of impact will these large investors have on our communities?” wondered Rep. Mark Takano, D-California, in an email to American Banker. He represents Riverside in the Inland Empire, east of Los Angeles. During the housing bust, home prices in the area plunged. But recently, they have re-soared to where Fitch now considers Riverside the third-most overvalued metropolitan area in the US. So Takano fretted that “large sell-offs by investors will weaken our housing recovery in the very same communities, like mine, that were decimated by the subprime mortgage crisis.”
PE firms have tried to exit via IPOs – which kept these houses in the rental market.
Silver Bay Realty Trust went public in December 2012 at $18.50 a share. On Friday, shares closed at $16.16, down 12.6% from their IPO price.
American Residential Properties went public in May 2013 at $21 a share, a price not seen since. “Although people look at this as a new industry, there’s really nothing new about renting single-family homes,” CEO Stephen Schmitz told Bloomberg at the time. “What’s new is that it’s being aggregated, we’re introducing professional management and we’re raising institutional capital.” Shares closed at $17.34 on Friday, down 17.4% from their IPO price.
American Homes 4 Rent went public in August 2013 at $16 a share. On Friday, shares closed at $16.69, barely above their IPO price. These performances occurred during a euphoric stock market!
So exiting this “bet on America,” as Schwarzman had put it so eloquently, by selling overpriced shares to the public is getting complicated. No doubt, Blackstone, as omnipotent as it is, will be able to pull off the IPO of Invitation Homes, regardless of what kind of bath investors end up taking on it.
Lesser firms might not be so lucky. If they can’t find a buyer like American Homes 4 Rent that is publicly traded and doesn’t mind overpaying, they’ll have to exit by selling their houses into the market.
But there’s a difference between homeowners who live in their homes and investors: when homeowners sell, they usually buy another home to live in. Investors cash out of the market. This is what the industry dreads. Investors were quick to jump in and inflated prices. But if they liquidate their holdings at these high prices, regular folks might not materialize in large enough numbers to buy tens of thousands of perhaps run-down single-family homes. And then, getting out of the “bet on America” would turn into a real mess.
And getting out of the bet on China? China has long frustrated the hard-landing watchers. But maybe not much longer. Read… Housing Crash in China Steeper than in Pre-Lehman America
The outrage that a man as public and politically linked at Boris Nemtsov could be killed on the busiest bridge in Moscow is resonating throughout Russia. We haven’t seen an assassination like this in a decade and it says now that even formerly unspoken rules are all out the window.
From the Moscow Times (click link below)
The Moscow Times