Real estate

Could housing prices be stabilizing?

Earlier today, we reported that Germans are increasingly concerned that their gold, at over 3,400 tons a majority of which is likely stored in the vault 80 feet below street level of 33 Liberty (recently purchased by the Fed with freshly printed money at far higher than prevailing commercial real estate rates for the Downtown NY area), may be in jeopardy,and will likely soon formally inquire just how much of said gold is really held by the Fed. As it turns out, Germany is not alone: as part of the "Rettet Unser Schweizer Gold", or the “Gold Initiative”: A Swiss Initiative to Secure the Swiss National Bank’s Gold Reserves initiative, launched recently by four members of the Swiss parliament, the Swiss people should have a right to vote on 3 simple things: i) keeping the Swiss gold physically in Switzerland; ii) forbidding the SNB from selling any more of its gold reserves, and iii) the SNB has to hold at least 20% of its assets in gold. Needless the say the implications of this vote actually succeeding are comparable to the Greeks holding a referendum on whether or not to be in the Eurozone. And everyone saw how quickly G-Pap was "eliminated" within hours of making that particular threat. Yet it begs the question: how many more international grassroots outcries for if not repatriation, then at least an audit of foreign gold held by the New York Fed have to take place, before Goldman's (and New York Fed's) Bill Dudley relents? And why are the international central banks not disclosing what their people demand, if only to confirm that the gold is present and accounted for, even if it is at the Federal Reserve?

The most profitable business of the future will be producing Space Available and For Lease signs. Betting on the intelligence of the American consumer has been a losing bet for decades. They will continue to swipe that credit card at the local 7-11 to buy those Funions, jalapeno cheese stuffed pretzels with a side of cheese dipping sauce, cartons of smokes, and 32 ounce Big Gulps of Mountain Dew until the message on the credit card machine comes back DENIED.  There will be crescendo of consequences as these stores are closed down. The rotting hulks of thousands of Sears and Kmarts will slowly decay; blighting the suburban landscape and beckoning criminals and the homeless. Retailers will be forced to lay-off hundreds of thousands of workers. Property taxes paid to local governments will dry up, resulting in worsening budget deficits. Sales taxes paid to state governments will plummet, forcing more government cutbacks and higher taxes. Mall owners and real estate developers will see their rental income dissipate. They will then proceed to default on their loans. Bankers will be stuck with billions in loan losses, at least until they are able to shift them to the American taxpayer – again.

Spain is next...

Insolvency will keep dragging the Euro-Area economy down until sovereign and bank balance sheets are repaired, but as Lombard Street Research  points out: eliminating the Ponzi debt without fracturing the entire credit system is impossible. The Lehman default occurred 13 months after the US TED spread crossed 100 basis points. The European equivalent crossed 100 basis points in September 2011, so its banking crisis would occur this autumn if a year or so is a normal incubation period. A Greek or any other significant default will precipitate a European banking crisis in the foreseeable future. Markets are already speculating on Portuguese negotiations for haircuts and Ireland can’t be far behind and the contagion to US (and global) banking systems is inevitable given counterparty risks, debt loads (and refi needs), and capital requirements (no matter how well hidden by MtM math). The contagion will likely show up as a risk premium in the credit markets initially as we suggest the recent underperformance of both US and European bank credit relative to stocks is a canary to keep an eye on.

Wonder how Americans can afford to buy millions of iGadgets, a second LCD TV for the shoe closet, and eat at restaurants more than almost any time in the past despite sliding personal income? Simple - increasingly fewer pay the biggest staple bill in a US household: their mortgage. The following story of Keith And Janet Ritter, who have lived in their Fort Washington, MD $1.29MM, 4,900 square foot McMansion for 5 years (which they purchase with no money down) without ever making a single mortgage payment, and who are not even close to being evicted, may explain much about the way US society currently operates, and why other perfectly responsible and hard-working taxpayers (who do have to pay for their mortgage) continue to fund tens of billions in Fannie and Freddie losses who are first on the hook to absorb the implicit losses by allowing families such as the Ritters to live in perpetuity without paying, and the banks to keep said mortgage on the books at par without any impairments.

For those who are in a hurry today, the bottom line is that Japan is in serious trouble right now and is a top candidate to be the next black swan. Here are the elements of difficulty that concern me the most, each one serving to reduce Japan's economic and financial stability:

• The total shutdown of all 54 nuclear plants, leading to an energy insufficiency
• Japan's trade deficit in negative territory for the first time in decades, driven largely by energy imports
• A budget deficit that is now 56% larger than revenues (!!)
• Total debt standing at a whopping 235% of GDP
• A recession shrinking Japan's economy at an annual rate of 2.3%
• Renewed efforts underway to debase the yen

As I wrote a shortly after the earthquake in March 2011, Japan is facing an economic meltdown. If it is not careful, it may well face a currency meltdown, too. These things take time to play out, but now almost exactly a year after the devastating earthquake of 2011, the difficulties for Japan are mounting -- as expected.

In what should come as a surprise to nobody, German banks have announced that they will accept the terms of the Greek PSI whose outcome is due on Thursday. Because as Reuters points out, German banks already have had the time and opportunity to park the bulk of their Greek exposure with the failed German bad bank, which is explicitly funded by the government (thus making the cost to the German government even higher): "While Greek sovereign debt owned by German lenders has a face value of roughly 15 billion euros ($20 billion), in most cases they have already written down that value in their books by about three quarters. FMS Wertmanagement, the biggest creditor with an exposure of nominally more than 8 billion euros, will accept the deal, a person close to the lender said on Monday. FMS, the bad bank set up to hold the toxic assets of bailed-out former bluechip lender Hypo Real Estate, is to formally decide on accepting the debt cut later this week, the person said." German banks... German banks... where else have we seen this today? Oh yes: "Die Welt said that more than half of the 800 lenders that tapped the ECB's 3Y LTRO last week were German, consisting mainly of small savings and cooperative banks." Thank you Jim Reid - so while Bundebank's Jens Weidmann huffs and puffs about the LTRO, it is his own banks are the biggest beneficiaries, in no small part to hedge against Greek exposure. But yes - at least following the absorption of tens of billions in intermediary capital via a variety of channels, German banks can now accept a 70%+ haircut, even if they continue to complain about it in the process: "Commerzbank, which had originally invested almost 3 billion euros in Greek sovereign bonds but has written down its exposure to 800 million, said last month it had little choice but to take part in the bond swap. At the time, chief executive Martin Blessing said: "The voluntariness (of the Greek debt swap) is about as voluntary as a confession at a Spanish inquisition trial."" The Spanish Inquisition appears to have won yet again.

The pyramid is the strongest structure known to Man. The weakest structure is the inverted pyramid. There is an economic theory called the Exter Pyramid to describe the financial system. It is an inverted pyramid ranking assets by risk. Gold, the safest asset, holds its place at the tip of the pyramid. Riskier assets, such as cash, deposits, bonds, stocks, real estate, non-monetary commodities, etc., take their respective place above gold. When the pyramid gets top-heavy, it has to re-adjust itself by reducing the value of the riskier assets and increasing the value of gold and other less risky assets. Although finding the true value of the total Exter Pyramid for a country is extremely difficult, we can use readily available data from a few asset classes to understand a basic structure.America's basic Exter Pyramid was worth USD 28.4 trillion (CNY 178.92 trillion), including gold. China's basic Exter Pyramid was worth CNY 126.1 trillion (USD 20.02 trillion) including gold. (In the charts above, gold was shown as a negative number for visual effect. The value of gold is based on the official holdings at that time multiplied by the current market price.) If you factor in GDP, the closeness of those numbers seems very odd.

Just the kind of scandal that the ballooning retirement-age population needs.

Less risk, maybe, but that's a long way from a sustained recovery. 

While last winter every downtick in corporate earnings was promptly "explained away" by executives using the harsh weather excuse, one has heard not a peep from companies on the topic of an abnormally accommodative climate over the past 4 months. And why would they - after all it would mean that any gains, not that there have been many as most companies have reported below average results, have been artificially boosted by one-time events. Needless to say, the mainstream media would rather not touch this topic with a ten foot pole: there is an election to be won and the public can not be disturbed with facts (heaven forbid someone should mention seasonal adjustments - that's a death sentence). Which is why ironically we have to go to Goldman, which as noted recently, has once again turned bearish on the economy for one reason or another, to quantify the impact of the balmy winter. "Reported growth in the CAI is 2.8% for December and 2.9% for January. The estimates here imply that excluding the effect of warm weather, growth would have been 2.5% in December and 2.5-2.7% in January. Note that although January was very warm relative to seasonal norms, this followed a gradual warming in temperatures in October through December. We think our estimates of the weather impact may be on the low side, given that snowfall was also below seasonal norms this year. Lower precipitation can raise activity in some sectors. Our estimates imply that a normalization in temperatures could be a modest headwind to growth over the next few months. The extent of the drag depends on the specification, but a plausible range would be 10-40bp in March if temperatures return to seasonal norms by that month." Looks like Newton was right after all, despite all attempts by central planners to deny reality.

Re: LTRO2, banks, CRE and the oppurtunity to see just how much free really costs...

The Blokes across the pond are starting to sound as bad as some of the sell side charlatans stateside. Either that or the weed over there is just that much better!

For those confused, the Fed's Beige Book has been upgraded to the Beige iPad (apparently Ben is not a fan of the black or white version). Regardless, the latest version has just been released spewing forth the usual reflexive platitudes, in which the economy is said to be better because the stock market is higher, and so forth. In other words, the same stuff that completely ignores $110 WTI. Via Bloomberg:

• FED SAYS U.S. ECONOMY EXPANDED AT `MODEST TO MODERATE PACE'
• FED SAYS CONSUMER SPENDING WAS `GENERALLY POSITIVE'
• FED SAYS MANUFACTURING EXPANDED AT `STEADY PACE' NATIONWIDE

And more such headlines which nobody will actually read, except for the algos which scalp the optimistic tone put there precisely for such a purpose.