"If I ask you what’s the risk in investing, you would answer the risk of losing money. But there actually are two risks in investing: One is to lose money and the other is to miss opportunity. You can eliminate either one, but you can’t eliminate both at the same time. So the question is how you’re going to position yourself versus these two risks: straight down the middle, more aggressive or more defensive. I think of it like a comedy movie where a guy is considering some activity. On his right shoulder is sitting an angel in a white robe. He says: «No, don’t do it! It’s not prudent, it’s not a good idea, it’s not proper and you’ll get in trouble». On the other shoulder is the devil in a red robe with his pitchfork. He whispers: «Do it, you’ll get rich». In the end, the devil usually wins. Caution, maturity and doing the right thing are old-fashioned ideas. And when they do battle against the desire to get rich, other than in panic times the desire to get rich usually wins. That’s why bubbles are created and frauds like Bernie Madoff get money." - Howard Marks
And just like that the Chinese yuan devaluation has shifted away from the merely "orderly." In the past few hours of trading, China, which as we reported two days ago has started intervening aggressively in the Yuan market, has seen its currency crash by nearly 0.9%, which may not seem like much, but is in fact the largest drop since December of 2008, and at last check was trading at around 6.18, even as the PBOC fixed the CNY reference rate 0.02% higher from the last official close to 6.1214, erasing pivot support point at 6.1346 and 6.1408. Naturally this means that the obverse, the CNYUSD, has crashed to as low as 0.1620. Should this move sustain without reverting, this will be the biggest weekly loss ever! The dramatic move is shown on the chart below.
A national average sounds an alarm: investors that drove up the housing market are bailing out
The seemingly incessant strengthening trend of the Chinese Yuan (much as with the seemingly inexorable rise of US equities or home prices) has encouraged huge amounts of structured products to be created over the past few years enabling traders to position for more of the same in increasingly levered ways. That was all going great until the last few weeks which has seen China enter the currency wars (as we explained here). The problem, among many facing China, is that these structured products will face major losses and as Morgan Stanley warns "real pain will come if CNY stays above these levels," leading to further capital withdrawal, illiquidity, and a potential vicious circle as it appears the PBOC is trying to break the virtuous carry trade that has fueled so much of its bubble economy.
It was about a year ago when we noted a core component of the US housing non-recovery: the time to sell foreclosed homes had just hit a record of 400 days across the nation. Fast forward to today when even the last traces of the lie that sustained the housing recovery myth are being swept away, and we get the following article from Bloomberg titled "Foreclosures Surging in New York-New Jersey Market." The good news (according to some): thousands of people could live mortgage free for years until the bank delays obtaining the keys to the foreclosed property. This was money which instead of going to the mortgage owner, would instead go to buy Made in China trinkets and gizmos and otherwise keep the US retail party humming. Which brings us to the bad news: the party - retail and otherwise - is ending, as courts and banks finally catch up with inventory levels on both sides of the foreclosure pipeline, and those who lived for years without spending a dollar for the roof above their head are suddenly forced to move out and allocated the major portion of their disposable income toward rent.
Concerns about the possibility of the Chinese property bubble bursting affecting economic growth in China and the world is supporting gold.
- Turkish PM says tapes of talk with son a fabrication (Reuters) but opposition confirms authenticity, and national TV carriers cut parliament when played live
- Inside the Showdown Atop Pimco, the World's Biggest Bond Firm (WSJ)
- Ex-Jefferies Trader’s Customers Say Lies Common Tactic (BBG)
- Bitcoin exchange Mt. Gox disappears in blow to virtual currency (Reuters)
- The messenger mania is spreading: SoftBank Said to Seek Stake in Naver’s Line Messaging Unit (BBG)
- Ukraine Replaces Central Bank Head (BBG)
- Yup, an actual headline: Harsh weather tests optimism over U.S. economy (Reuters)
- Hiring of Law Grads Improves for Some (BBG)
- Easy Currency Bet Gets Harder as the Chinese Yuan Tumbles (WSJ)
- In Ukraine turbulence, a lad from Lviv becomes the toast of Kiev (Reuters)
It’s like 34 drunken sailors holding each other up. That’s the best way I can think of to describe the latest product from the good idea factory that is the OECD. Over the weekend in yet another cushy five-star hotel, representatives from this unelected supranational bureaucracy announced plans for world governments to exchange all their citizens’ tax and financial data with one another. It’s a pathetic display of exactly the sort of tactics that governments embrace when they go broke. And most of these OECD countries ARE broke – Italy, Japan, the US, Spain, Greece, etc.
When Arthur Levitt's SEC adopted Rule 2a-7 in 1998, it handed the TBTF banks and GSEs a mortgage monopoly on a silver platter.
The last 3 days have seen China's Shanghai Composite index tumble over 3% - its largest drop since October as sentiment comes under pressure from concerns about tightening in the real estate sector. The pace of price appreciation has slowed notably - especially 'existing' apartment sales (i.e. the speculators are exiting) - as it appears houing demand is cooling off with the number of cities with falling MoM home prices rose to six in January from two in December.The PBOC has jawboned as much and real estate sector financial condtions are tightening is slowing as a number of banks curb lending to developers. This is weighing on copper prices also as construction activity slows (exacerbating problems in the shadow banking system's collateral pools). The PBOC is getting what they wanted - but may regret it.
The mirage of prosperity created by massive levels of debt has begun to show it foundational cracks. Without increased levels of personal savings, production and investment there is little ability to achieve stronger economic growth. While we can certainly "hope" for something different, there are some basic laws which are insurmountable. The physics of debt is one of them.
- Facebook CEO Raises Dealmaker Profile With $19 Billion Takeover (BBG)
- WhatsApp’s Founder Goes From Food Stamps to Billionaire (BBG)
- U.S. Feels Putin's Sharp Elbows in Ukraine (WSJ)
- PBOC Drains Cash as Overnight Rate Slides to Lowest in 10 Months (BBG)
- Fed Puts Rate Increase on the Radar (Hilsenrath)
- Banks Flouting Bonus Rules in Denmark Set to Be Named by FSA (BBG)
- Work Set to Resume on Upgrading Panama Canal (WSJ)
- Euro-Area Recovery Loses Pace as Manufacturing Weakens (BBG) - uh, what recovery?
- Ukraine Exposes EU Policy Disarray (WSJ)
While there are many hopes pinned on the housing recovery as a "driver" of economic growth in 2014, the data suggests otherwise. The optimism over the housing recovery has gotten well ahead of the underlying fundamentals. While the belief is that the current push in housing is a side-effect of a recovering economy, the reality may be a function of the speculative rush into buying rental properties for cash which created a temporary, and artificial, inventory suppression. The real driver of an economic recovery is full time employment that leads to rising wages and savings. Unfortunately, this is something that eludes the current Administration that is focused on creating new regulations on the average of every 8 minutes, raising the cost of healthcare and increasing taxes. Call us crazy, but maybe its time to try something different.
This morning's catastrophic drop in the National Association of Hope Home Builders sentiment index has rapidly been spun as due to the weather... of course, makes perfect sense, right? What would happen if these drops were actually real fundamentals? If the status quo, the "common knowledge" was shown to be full of shit (once again). Well, riddle us this Batman... if weather was to blame, then why did the "West" region plunge the most? In fact, why did The West plunge the most on record? Too much sunny dry weather not good for sales? In fact, even the entirely indpendent provider of real estate research Trulia said that weather is not to blame...
Last week, Federal Reserve Chairman Janet Yellen testified before Congress for the first time since replacing Ben Bernanke at the beginning of the month. Her testimony confirmed what many of us suspected, that interventionist Keynesian policies at the Federal Reserve are well-entrenched and far from over. Isn't it amazing that the same people who failed to see the real estate bubble developing, the same people who were so confident about economic recovery that they were talking about “green shoots” five years ago, the same people who have presided over the continued destruction of the dollar's purchasing power never suffer any repercussions for the failures they have caused?