Housing Market

Most investors are nervous now and need to hold things together to include the Fed meeting announcement Wednesday. If bulls are lucky they’ll get their Turnaround Tuesday.  

Until this weekend's Cyprus black swan, the biggest red flag facing the market was the threat of persistent Chinese inflation, manifesting itself in very sticky and upward rising home (and many other) prices. In fact, quite recently the new Chinese leadership encouraged "bold" and aggressive steps to tame real estate inflation and instituting fresh curbs on house appreciation "speculation", which is a natural byproduct in a nation that has an underdeveloped and untrusted capital market - unlike in the US where the S&P absorbs all the Fed's reserves (with no money multiplier impact) keeping inflation elsewhere largely tame. It is this inflation that has kept the PBOC not only on the global "reflation" sidelines, but forced it to withdraw liquidity with several record repos in the days following the Chinese new year. It is also the downstream effects of this inflation that has pushed the Chinese stock market red for the year. So just how much of an issue is the soaring Chinese real estate market as global liquidity makes its way to triplexes in Shanghai? The chart below explains it all.

An update on Cyprus and what else the week has in store.

Why are citizens of the developed world looking a gift horse in the mouth? The Dow Jones Industrial Average rallied beyond 14,300 points this week, passing the highs it reached in 2007 just as the world economy was starting to wobble. And yet, this week, investors and pundits warned us not to read too much into it. They have a point. In the half-decade since the western financial system almost collapsed, the relationship between stock markets and the “real” economy has seemed more tenuous. Part of the reason people get less giddy about the Dow than they did five years ago is because they have learnt a bit about inequality. What looks like a recovery, a rally or an increase in consumer confidence may just be the effect of elites passing money among themselves.  The US Federal Reserve has added more than $2tn to its balance sheet since 2007. In general, that tide of liquidity ought to lift all boats in the harbour. But when the harbour is an equity market, you won’t find your yacht lifted unless you own one.

Following yesterday's Beige Book extravaganza of mediocrity, ConvergEx's Nick Colas decided to do what the kids today call a “Mashup” – mixing different sources to create a new experience. Instead of mixing popular songs, he compared the Beige Book with Google “Trend” analysis for a variety of search phrases.  Take, for example, the message from the Fed that the housing market is recovering. Google searches for “Get a mortgage” are, in fact, very near record highs and over 100% higher than 2007.  On the Fed’s claim that leisure travel is picking up, the Google data is less supportive. On auto demand – an important factor in this recovery – the Google “Buy a car” trend data does look solidly higher.  Finally, the job picture is still mixed.  Google says that if you are unemployed in Chicago, drive to Dallas.  The Fed’s Beige Book seems to concur. The question is not whether the Fed could engineer this nascent recovery.  The question is “Can it last?”  For that, we’ll need some new songs.  And some fresh data in the coming months.

Checkmate, Fed. You’re spending over $100 million per day to create a grand illusion. Stocks are hitting new all time highs, but none of us are any richer for it.

• French unemployment rises again to highest since 1999 (Reuters)
• BoJ rejects call for monetary easing (FT)
• North Korea threatens pre-emptive nuclear strike against US (Guardian)
• Firms Race to Raise Cash (WSJ)
• Time Warner Will Split From Magazine Unit in Third Spinoff (BBG) - slideshows, kittens, "all you need to knows" coming to Time
• U.S. economy, world's engine, remains in "neutral": Fed's Fisher (Reuters)
• BOE Keeps QE on Hold as Officials Weigh More Radical Measures (BBG)
• Jobs start to go as US sequestration cuts in (FT)
• BofA Times an Options Trade Well  (WSJ)
• Congress Budget Cuts Damage U.S. Economy Without Aiding Outlook (BBG)
• Dell’s Crafted LBO Pitch Gets Messy as Investors Circle (BBG)
• Dell says Icahn opposes go-private deal (Reuters)
• Portugal Rating Outlook Raised to Stable by S&P on Budget Plan (BBG)
• China’s Richer-Than-Romney Lawmakers Reveal Reform Challenge (BBG)

The following five charts reflect the hollowing out of the private-sector employment. This has profound implications for education, taxes, housing and inequality. What no one dares admit is that the U.S. economy is burdened by overcapacity (too many malls, restaurants, MRI machines, etc.) and too much debt, much of which was taken on to fund mal-investments. We suffer from a systemic failure of imagination. The financial and political Aristocracy that rules the neofeudal, financialized economy have no other model other than debt-based misallocation of capital and endless growth of debt-based consumption. That this model is broken and cannot possibly get us where we need to go does not matter; they will continue to do more of what's failed because they have no alternative model that leaves their power and wealth intact.

• As ZH has been saying for months... Draghi Will Need to Push the Euro Down Some More (WSJ) ... but careful with "redenomination risk"
• Senate Report Said to Fault JPMorgan (NYT)
• EU Opens Way for Easier Budgets After Backlash (BBG)
• China Moves to Temper Growth - Property Bubble Is a Key Concern (WSJ)
• China bets on consumer-led growth to cure social ills (Reuters)
• Italian president mulls new technocrat government (Reuters)
• Grillo says MPS won't back technocrats (ANSA)
• The Russians will be angry: Euro Chiefs Won’t Rule Out Cyprus Depositor Losses (BBG)
• China Bankers Earn Less Than New York Peers as Pay Dives (BBG)
• Investors click out of Apple into Google (FT)
• Community colleges' cash crunch threatens Obama's retraining plan (Reuters)
• Alwaleed challenges Forbes over his billions - Calculation of $20bn net worth is flawed, says Saudi prince (FT)
• Guy Hands Dips Into Own Pockets to Fund Bonuses at Terra Firma (BBG)
• North Korea to scrap armistice if South and U.S. continue drills (Reuters)

Here is my take on the drivers of the foreign exchange market today and some implications.

• Must defend against Chinese colonial expansion and get the Nigerian oil: U. S. Boosts War Role in Africa (WSJ)
• BOJ nominee Kuroda sets out aggressive policy ideas (Reuters)
• China becomes world’s top oil importer (FT)
• Baby Cured of HIV for the First Time, Researchers Say (WSJ)
• Obama to nominate Walmart's Burwell as White House budget chief (Reuters)
• Wal-Mart Anxious to Combat Amazon’s Lead in Web Vendors (BBG)
• Nasdaq executing trades at a loss (FT)
• Spending cut debate casts pall over Obama's second-term agenda (Reuters)
• Russell Indexes to Reclassify Greece as Emerging Market (BBG)
• Bond Bears Collide With Swaps Showing Low Rates (BBG)
• Buffett Deputies Leaving Billionaire in the Dust Get More Funds (BBG)
• Brazil's leftist president fights to win back business (Reuters)
• U.S. Special Forces train Syrian Rebels in Jordan (Le Figaro)
• Carlos Slim Risks Losing World’s Richest Person Title as Troubles Mount (BBG)

Those who listened to Bernanke's three hour oratory before the House Committee today noticed something different: the Chairman's tone was far more resigned, and as noted previously, on occasion devolved into incoherent, illogical ramblings that may be satisfactory for an introductory economics class at Clown College (aka Princeton), but certainly are inappropriate for the man who runs the world's most important printer. And while as expected the bulk of the Q&A session focused on the sequester, there were enough pearls one could shake a GDP hockeystick at. We have extracted the best of these exchanges below. However, the definitive five minutes comes from this fiery confrontation between Sean Duffy and the Chairman, in which the republican has obviously had enough with the monetary policy chief coming in Congress and telling Congress how to conduct fiscal policy, when it is Bernanke's deficit-monetizing actions that allow zero-cost borrowing and thus profligate, indiscriminate spending to result in such lunacy as total US debt just hitting a record 16,618,701,810,927.77.  From the negative jobs impact resulting from cutting Moroccan Pottery Classes, no longer handing out Obamaphones, stopping the payment of travel expenses for the watermelon queen in Alabama, and most importantly preventing shrimp from running on a treadmill, to Bernanke explaining how a 2% cut in the budget would result in mass mayhem, in the context of a 1% interest rise resulting in $100 billion in additional interest expense, and much, much more, the Chairman ties it all together.

I really need to stop being so pessimistic. I’m getting richer by the day. My home value is rising at a rate of 1% per month according to the National Association of Realtors. At that rate, my house will be worth $1 million in less than 10 years. Every mainstream media newspaper, magazine, and news channel is telling me the “strong” housing recovery is propelling the economy and creating millions of new jobs. Keynesian economists, Wall Street bankers, government apparatchiks and housing trade organizations are all in agreement that the wealth effect from rising home prices will be the jumpstart our economy needs to get back to the glory days of 2005. Who am I to argue with such honorable men with degrees from Ivy League schools and a track record of unquestioned accuracy as we can see in the chart below? These are the facts. But why trust facts when you can believe Baghdad Ben and the NAR? It’s always the best time to buy.

• Risk of instability hangs over Italy poll (FT), Protest votes add to uncertainty in close Italy election (Reuters), and... Risk On
• Czech inspectors find horsemeat in IKEA meatballs (Reuters)
• China’s Slower Manufacturing Casts Shadow Over Recovery (Bloomberg)
• So much for reform: China Prepares for Government Shuffle as Zhou Stays at PBOC (Bloomberg)
• France to pause austerity, cut spending next year instead: Hollande (Reuters)
• Sinopec to buy stake in Chesapeake assets for $1.02 billion (Reuters)
• White House warns states of looming pain from March 1 budget cuts (Reuters)
• China Quietly Invests Reserves in U.K. Properties (WSJ)
• Osborne Keeps Austerity as Investors See Downgrade as Late (BBG)
• South Korea's new president demands North drop nuclear ambitions (Reuters)
• Russia accuses U.S. of double standards over Syria (Reuters)

This week's events show that the Chinese government realises that its stimulus efforts have got out of hand and its economy is in trouble.