Real estate

Meanwhile, Big Investors Quietly Slip Out The Back Door On Housing As "Stupid Money" Jumps In

Today, another one of the original "big boys" has called it curtains on the landlord business: "We just don’t see the returns there that are adequate to incentivize us to continue to invest", according to the CEO Bruce Rose of Carrington, one of the first investors to use deep institutional pockets (in this case a $450 million investment from OakTree) and BTFHousingD. Rose's assessment of the market? "There’s a lot of -- bluntly -- stupid money that jumped into the trade without any infrastructure, without any real capabilities and a kind of build-it-as-you-go mentality that we think is somewhat irresponsible.... We’ll sit back in the weeds for a while and wait for a couple of blowups,” he said. “There’ll be a point in time when we’ll be happy to get back into the market at levels that make more sense.”

Frontrunning: May 29

  • South China Sea tension mounts near Filipino shipwreck (Reuters)
  • OECD cuts economic forecasts as eurozone drags on growth (FT)
  • Switzerland frees banks to settle U.S. tax evasion cases (Reuters)
  • U.S. Says Firm Laundered Billions (WSJ)... no, it's not HSBC, also: Free Corzine!
  • Ardent conservative Bachmann to not seek re-election to Congress (Reuters)
  • Russia faults U.S. over 'odious' Syria rights resolution (Reuters)

"Awash In Self-Delusional Cornucopianism"

For most people, the collapse of civilizations is a subject much more appetizingly viewed in the rear-view mirror than straight ahead down whatever path or roadway we are on. Jared Diamond wrote about the collapse of earlier civilizations to great acclaim and brisk sales, in a nimbus of unimpeachable respectability. The stories he told about bygone cultures gone to seed were, above all, dramatic. No reviewers or other intellectual auditors dissed him for suggesting that empires inevitably run aground on the shoals of resource depletion, population overshoot, changes in the weather, and the diminishing returns of complexity. Yet these are exactly the same problems that industrial-technocratic societies face today, and those of us who venture to discuss them are consigned to a tin-foil-hat brigade, along with the UFO abductees and Bigfoot trackers.

Traders Taunted By "20 Out Of 20" Turbo Tuesday (With POMO)

First, the important news: in a few hours the Fed will inject between $1.25-$1.75 billion into the stock market. More importantly, it is a Tuesday, which means that in order to not disturb a very technical pattern that will have held for 20 out of 20 Tuesdays in a row, the Dow Jones will close higher. Judging by the futures, this has been telegraphed far and wide: it is a Ben Bernanke risk-managed market, and everyone is a momentum monkey in it. In less relevant news, the underlying catalyst for the overnight rip higher in risk was the surge in the USDJPY, which left the gate at precisely Japan open time, and after languishing at the round number 101 support for several days, did not look back facilitated by what rumors said was a direct BOJ intervention via a Price Keeping Operation in which banks bought ETFs directly. This was catalyzed by the usual barrage of BOJ and FinMin individuals engaging in post-crash damage control and chattering from the usual script.

Quiet Overnight Action On America's Day Off

With US markets taking a day off today for Memorial Day, liquidity will be even more sporadic than usual, and any sharp moves will be that much more accentuated, although such a likelihood is minimal with all US traders still in the Hamptons. In an otherwise very quiet overnight session, perhaps the most notable move was that of the USDJPY, which continues to be "strangely attracted" to the 101 line although selling pressure is certainly to the downside, with a downside breakout quite possible, however that would lead to an early and very unpleasant end to Abe's latest 'experiment' (to quote Weidmann). The Nikkei225 already closed down 470 points, or 3.22%, as Mrs. Watanabe's faith in the market, seems to be fading with every passing day.

Japanese Stocks Open -3%, JPY Under 101.00, JGBs -2bps

UPDATE 1: S&P 500 futures now red (-5.5 points from open); TOPIX -3%, Japanese banks and real estate leading the slide (-16% from highs).

UPDATE 2: JPY has broken back under 101.00

It seems the sell-the-f$$king-bounce crowd are back in Japan once again. Minutes from the last BoJ meeting are providing some ammo for the fall as doubts appear among the members of the committee...

*ONE BOJ MEMBER: DOWNSIDE RISKS FOR PRICES ARE LARGER
*A FEW MEMBERS: SEEMS HARD TO REACH 2% IN LATTER HALF OF PERIOD; KEEP MULLING STEPS TO AVOID DECLINING LIQUIDITY

For now, JPY has strengthened notably from its gap-weaker open and is trading around unchanged from Friday's close. JGBs opened modestly stronger. But it is the equity market that is fading fast with TOPIX now down 28 points (2.5%) from Friday's close - pressuring the lows once again (and the 10% correction) as the realization that 'Abe can't have his equity euphoria and eat his low interest rate cake too' increases...

Guest Post: Asset Valuation And Fed Policy: We've Seen This Movie Before

Everyone seems to have an opinion on asset valuation these days, even commentators who are normally quiet about such matters.  Some are seeing asset price bubbles, others are just on the lookout for bubbles, and still others wonder what all the fuss is about. Simply put, our financial markets weren’t (and still aren’t) structured to be efficient, and consistently rational behavior is a pipe dream, history shows over and over that the idea of a stable equilibrium is deeply flawed. Policies focused on the short-term tend to exacerbate that cycle, as we saw when decades of stabilization policies and moral hazard exploded in the Global Financial Crisis. Maybe if macroeconomics were rooted in the reality of a perpetual cycle - where expansions eventually lead to recessions (stability breeds instability) and then back to expansions - we would see more economists and policymakers balancing near-term benefits against long-term costs. Or, another way of saying the same thing is that mainstream economists should pay more attention to Austrians and others who’ve long rejected core assumptions that are consistently proven wrong.

Europe's Quantitative Easing

Most people do not think that Europe engages in Quantitative Easing. They know that the United States engages in it, that Britain engages in it and now that Japan engages in it but they think that Europe has so far refused to be involved. They think this because this is what they have been told. Unfortunately this is inaccurate. The European Quantitative Easing takes place every day just not in the manner utilized by America and others. However, it takes place all the same and it is done in a manner to circumvent the rules of the European Union. This is also why the ECB has such a massive balance sheet. What Europe has done is gotten around their own regulations which forbid the ECB from lending money directly to nations.

What Has Happened So Far

Once again: The FOMC minutes had nothing to do with overnight's events, especially since both Ben Bernanke and Bill Dudley made it very clear previously that for any tapering to occur (and which is supposedly bullish according to David Tepper, who may finally be done selling to momentum chasers) if ever, the economy would have to be be stronger (which is of course a paradox because it is the Fed's QE that is making the economy weaker). If anything, the minutes reminded us that there is a mutiny in the FOMC with finally someone having the guts to say on the record that Bernanke is blowing a bubble - something never seen before on the official FOMC record. And after all, the Nikkei opened way up, not down. It was only after the realization of what soaring bond yields mean for, wait for it, stocks (despite central planner promises that it is soaring bond yields that are a good thing - turns out, they aren't) that the sell-off really started. That, and of course copper, and the end of the Chinese Copper Financing Deals arrangement that has been China's illicit cross-asset rehypothecation scheme for years (more shortly). So in a nutshell, here is what has transpired so far, courtesy of Bloomberg.

Frontrunning: May 22

  • Apple Bonds Stick Buyers With $280.6 Million Loss as Rates Climb (BBG)
  • Iceland Freezes EU Plans as New Government Shuns Euro Crisis (BBG)
  • "Transparent Fed" - Ben Bernanke meets privately with Darrell Issa (Politico)
  • Bank of Japan vows market steps to curb bond turbulence (Reuters) holds policy (FT)
  • Stockholm riots spread in third night of unrest (FT)
  • Dudley Says Decision on Taper Will Require 3-4 Months (BBG)
  • Senate panel passes immigration bill; Obama praises move (Reuters)
  • Italy to outline youth jobs plan as government struggles (Reuters)
  • Apple CEO Tim Cook, Lawmakers Square Off Over Taxes (WSJ)
  • Google Joins Apple Avoiding Taxes With Stateless Income (BBG)
  • Sony Board Discussing Loeb’s Entertainment IPO Proposal (BBG)
  • Vote Strengthens Dimon's Grip (WSJ), Dimon performance well choreographed (FT)

BoJ Ignores Worst April Trade Deficit Ever - Suggests "Economy Has Started Picking Up"

Surging nominal imports and a miss for exports just about sums up perfectly just how the reality of Abenomics is crushing the real economy as the market goes from strength to strength on the hope that recovery is just around the corner. For the 28th month in a row Japan trade deficit has dropped YoY and its 12-month average is now at its worst ever. Energy costs are driving up imports (and adjusted for the devaluation in the JPY, the data is simply horrendous. Of course, there are green shoots - CPI is not deflating as fast as it was... and 'some' inflation expectations are rising (though as we noted here that is simply due to the tax expectations). Contrary to expectations held by some in the bond market, the BOJ did not comment on the sharp fluctuation in JGB yields since April as a result of monetary relaxation - on the basis, we assume, that if they don't mention it, it never happened. The result post a nothing-burger of 'more uncertainty' from the BoJ, the Nikkei keeps screaming higher, JPY rallied then fell back, and JGBs are sliding higher in yield.

"The Approximate Present Does Not Approximately Determine The Future"

Chaos Theory turns 50 years old this year, celebrating half a century of flapping butterfly wings in Brazil creating tornadoes in Texas.  That most famous example is especially appropriate, since it was a meteorologist named Edward Lorenz who first outlined why seemingly consistent and knowable systems can still go wildly wrong.  As it turns out, as ConvergEx's Nick Colas reminds us, small errors in measurement or observation at the start of a time series can significantly change how things look at the end.  In the current low volatility, one-variable central bank driven global equity markets, Chaos Theory may seem a quaint relic of past crises.  However, its central lesson – that complex interrelated systems create unexpected outcomes from seemingly benign inputs – is still relevant.  Students of economics like to think of their discipline as scientific, just like physics or other hard sciences.  They would do well to embrace the intellectual honesty neatly encapsulated by the central lessons of Chaos Theory. The problem is that current market price action - that slow steady grind higher - indicates marginal buyers don’t fret very much about the future.  No matter how little we really know about it.

Dudley Terrified By "Over-Reaction" To QE End, Says Fed Could Do "More Or Less" QE

Up until today, the narrative was one trying to explain how a soaring dollar was bullish for stocks. Until moments ago, when Bill Dudley spoke and managed to send not only the dollar lower, but the Dow Jones to a new high of 15,400 with the following soundbites.

  • DUDLEY: FED MAY NEED TO RETHINK BALANCE SHEET PATH, COMPOSITION
  • DUDLEY SAYS FISCAL DRAG TO U.S. ECONOMY IS `SIGNIFICANT'
  • DUDLEY: FED MAY AVOID SELLING MBS IN EARLY STAGE OF EXIT
  • DUDLEY: IMPORTANT TO SEE HOW WELL ECONOMY WEATHERS FISCAL DRAG
  • DUDLEY SAYS HE CAN'T BE SURE IF NEXT QE MOVE WILL BE UP OR DOWN

And the punchline:

  • DUDLEY SEES RISK INVESTORS COULD OVER-REACT TO 'NORMALIZATION'

Translated: the Fed will never do anything that could send stocks lower - like end QE - ever again, but for those confused here is a simpler translation: Moar.