After Seven Lean Years, Part 1: US Residential Real Estate: The Present Position And Future ProspectsSubmitted by Tyler Durden on 01/13/2014 10:24 -0400
In the last 8+ years, housing has proceeded through a cycle of bubble-bust-echo-bubble: now the echo bubble is crumbling, for all the same reasons the 2006-7 bubble burst: a prosperity based on asset bubbles and low interest rates is a phantom prosperity that cannot last.
- J.P. Morgan to Pay Over $1 Billion to Settle U.S. Criminal Probe Related to Madoff (WSJ)
- Ford board aims to pin down CEO Mulally's plans (Reuters)
- Raising Minimum Wage Is a Bad Way to Help People (BBG)
- Japan Lawmakers Demand Speedy Pension Reform (WSJ)
- EU reaches landmark deal on failed banks (FT)
- In which Hilsenrath repeats what we said in August: Fed Moves Toward New Tool for Setting Rates (WSJ)
- Senators Vow to Add to Iran Economic Sanctions in 2014 (BBG)
- Centerbridge in $3.3bn LightSquared bid (FT)
- Banks, Agencies Draw Battle Lines Over 'Volcker Rule' (WSJ)
- Glass-Steagall Fans Plan New Assault If Volcker Rule Deemed Weak (BBG) ... "if"? The banks control the legislators and regulators...
- Cellphone data spying: It's not just the NSA (USA Today)
- Major tech companies push for limits on government surveillance (Reuters)
- Shanghai Warns Kids to Stay Indoors for Seventh Day on Smog (BBG)
- Protesters fell Lenin statue, tell Ukraine's president 'you're next' (Reuters)
- Everyone must be flying private these days: EADS to cut 5000-6000 jobs, close Paris HQ in restructuring (FT)
- Big Players Trade 'Upstairs' (WSJ)
- There’s no way to tell how many people who think they’ve signed up for health insurance through the U.S. exchange actually have (BBG)
- Slower China inflation reduces worries of tighter policy (Reuters)
Quick: which BRIC nation has the highest consumer loan default rate?
If you said China, India or Russia, you are wrong. Actually, if you said China you are probably right, but since absolutely all economic "data" in China is worthless, manipulated propaganda, only a retrospective post-mortem after the Chinese credit, housing, commodity, consumption bubbles have all burst will we know the answer. So excluding China, which country's consumers after a multi-year shopping spree funded entirely on credit, are suddenly suffering the epic hangover of soaring non-performing loans as they suddenly find themselves unable to even pay the interest on the debt? Just ask former billionaire Eike Batista whose OGX oil corporation is days away from filing bankruptcy. The answer, with 5.6% of all loans in default, above Russia, South Africa, Mexico, Turkey and India, is Brazil.
In the latest month of data, April, the Fed just disclosed that of the $11.1 billion in crease in total consumer credit, only 6% was in revolving credit. The balance, or $10.4 billion, was non-revolving, and thus was used to pay for that new Chevy Impala and/or "Keynesian Shamanomics 101 for Dummies." And of course, all was funded by the US government.
Over the past few months we have explained in detail just how 'frothy' the credit market has become. Probably the most egregious example of this exuberance is the resurgence in covenant-lite loans to record levels. It seems lenders are so desperate to get some yield that they are willing to give up any and all protections just to be 'allowed' to invest in the riskiest of risky credits. With credit having enjoyed an almost uninterrupted one-way compression since the crisis, momentum and flow has taken over any sense of risk management - but perhaps, just perhaps, Sallie-Mae's corporate restructuring this week will remind investors that high-yield credit has a high-yield for a reason. The lender's decision to create a 'good-student-lender / bad-student-lender' and saddle the $17.9bn bondholders with the unit to be wound-down, while as Bloomberg notes, the earnings, cash flow, and equity of the newly formed SLM Bank will be moved out of bondholders’ reach. Bonds have dropped 10-15% on this news - considerably more than any reach-for-yield advantage would benefit and we wonder if these kind of restructurings will slow the inexorable rise in protection-free credit.
One of the hallmarks of the ongoing European economic depression has been the complete implosion in the continent's automotive sales (here and here) and as Reuters summarized last week, there is little hope of a rebound for a long, long time. Curiously, where Europe has seen complete devastation, the US has been surprisingly resilient, and even when factoring in for such traditional gimmicks as channel stuffing, performed most notoriously by GM, which in March had the second highest amount of cars parked on dealer lots in its post-bankruptcy history, car sales have been rather brisk which in turn has allowed the US to report manufacturing numbers which, until the recent PMI and ISM data, were better than expected. One does, wonder, however, how much of a factor for this has been the forward demand-pull impact of Hurricane Sandy in late 2012, when as a result of tens of thousands of cars being totaled in tri-state area flooding, consumers scrambled to car lots to buy new autos. Well, we may have found the reason for the recent disappointing performance in both the Chicago PMI and the Manufacturing ISM - the positive effect from Sandy is finally fading, as today's domestic car sales show, which posted a surprising decline in March, especially in non-Trucks which dipped to the lowest since October 2013, and the first miss in total light vehicle sales SAAR since October.
Why has the Fed paid some $6 billion in interest to foreign banks, in the process subsidizing and keeping insolvent European and other foreign banks, in business and explicitly to the detriment of countless US-based banks who have to compete with Fed-funded foreign banks and who have to fire countless workers courtesy of this Fed subsidy to foreign workers? And, perhaps more importantly, why will the Fed pay about $5 billion or much more in interest to foreign banks each year starting in 2014?
Back in 2007, at the peak of the credit and housing bubble, Wall Street knew very well the securitization (and every other) party was ending, which is why the internal names used for most of the Collateralized Debt Obligations - securitized products designed to provide a last dash trace of yield in a market in which all the upside had already been taken out - sold to less sophisticated, primarily European, investors were as follows: "Subprime Meltdown," "Hitman," "Nuclear Holocaust," "Mike Tyson's Punchout," and, naturally, "Shitbag." Yet even in the last days of the bubble, Wall Street had a certain integrity - it sold securitized products collateralized by houses, which as S&P, and certainly Moody's, will attest were expected to never drop in price again. But one thing that was hardly ever sold even in the peak days of the 2007 credit bubble were securitizations based on personal-loans, the reason being even back then everyone's memory was still fresh with the recollection that it was precisely personal-loan securitization that was at the core of the previous, and in some ways worse, credit bubble - that of the late 1990s, which resulted with the bankruptcy of Conseco Finance. Well, in a few short days, those stalwarts of suicidal financial innovation Fortress and AIG, are about to unleash on the market (or at least those who invest other people's money in the absolutely worst possible trash to preserve their Wall Street careers while chasing a few basis points of yield) the second coming of the very worst of the last two credit bubbles.
We have long been pounding the table on what in our view is the biggest detriment to any future growth for not only corporate America, but the entire US (where, sadly, government investment IRRs just happen to be negative - a fact that most won't understand until it is too late, especially not self-anointed economic wisemen whose only solution to everything is "do more of the same" yet who thought the utility of the Internet would be eclipsed by that of the fax machine): the complete lack of capital expenditures at the corporate level, and lack of (re)investment spending. It turns out that, however, that there is more to the story, and as the following chart from SocGen's Albert Edwards shows, not only are companies using up what actual free cash flows they have for such stupid stock boosting gimmicks such as harebrained M&A (just look at the recent fiasco between HP and Autonomy to see how rushed M&A always ends), and of course buybacks, but they are now levering to the hilt to do even more of this. The last time they did this? The golden days of the credit bubble.
So now that Vikram Pandit has exited stage right from the CEO position at Citigroup, a number of people have asked me about the Zombie Dance Queen.
- German central bank warns country’s financial health not a given (WaPo)
- Secret Libor Committee Clings to Anonymity After Rigging Scandal (Bloomberg)
- Peru Declares State of Emergency to Quell Violent Mining Protests (Dow Jones)
- Euro-Area Economic Adjustment Only Half Complete, Moody’s Says (Bloomberg)
- Wall Street Leaderless in Rules Fight as Dimon Diminished (Bloomberg)
- China Swaps Drop From Three-Month High as PBOC Adds Record Cash (Bloomberg)
- China invest $1 billion in U.S. Cheniere's LNG plant, Blackstone to act as intermediary buffer (FT, Reuters)
- Romney Offers Lukewarm Support for Fed Audit - Hilsenrath (WSJ)
- U.K. Unexpectedly Posts Deficit as Corporation Taxes Plunge (Bloomberg)
- Obama issues military threat to Syria (FT)
- Merkel Allies Signal Concessions on Greece Before Samaras Visit (Bloomberg)
- Chinese banks warned of foreign exchange risks (China Daily)
We are just about 16 hours away from Jamie Dimon's sworn testimony before the Senate Banking Committee, which even has the theatrical name: "A Breakdown in Risk Management: What Went Wrong at JPMorgan Chase?" Will anyone learn anything? Of course not: Jamie Dimon has been well-schooled in not disclosing critical trading information, and will certainly use the "proprietary position" and "more shareholder losses" excuse for any directed question asking how big the JPM CIO loss has become. Because while the hearing could have been productive, if indeed its purpose was to seek to prevent future massive losses of scale such as the suffered by the JPM prop trading unit and its hundreds of billions in CDS notional position, the last thing anyone will care about tomorrow is market efficiency and actual regulation. First and foremost: grandstanding and posturing, in the case of the politicians, and not disclosing anything, without saying too many "I don't recall"s in the case of Dimon. Which is why we have little hope to get anything out of tomorrow's formulaic 2 hours of largely meaningless droning. That said, considering we have already covered the topic of the JPM loss from a mechanistic standpoint more than any other media outlet, there is one more chart we would like to share with readers.
The Fed Chairman, who is too busy to tweet at the moment, has just released his pre-recorded speech on Community Banking. In its we find the following pearl: "Despite some recent signs of improvement, the recovery has been frustratingly slow, constraining opportunities for profitable lending." Wait, hold on, yesterday the same Chairman told an eager headline scanning robotic world that economic growth was upgraded from "modest" to "moderate" - so which is it? Or will the Fed merely feed the HFT robots whatever cherry picked keywords are needed to nudge the market in the appropriate direction as required? Oh wait, we forgot... Election year. Carry on.