REITs

REITs

Guest Post: The Next Secular Bull Market Is Still A Few Years Away

There have been several articles as of late discussing that the next great secular bull market has arrived. However, the reality is that this cycle is currently unlike anything that we have potentially witnessed in the past.  With massive central bank interventions, artificially suppressed interest rates, sub-par economic growth, high unemployment and elevated stock market prices it is likely that the current secular bear market may be longer than the historical average. No matter how you slice the data - the simple fact is that we are still years away from the end of the current secular bear market. The mistake that analysts, economists and the media continue to make is that the current ebbs and flows of the economy are part of a natural, and organic, economic cycle. If this was the case then there would be no need for continued injections of liquidity into the system in an ongoing attempt to artificially suppress interest rates, boost housing or inflate asset markets. From market-to-GDP ratios, cyclical P/Es, misconstrued earnings yields, and the analogs to previous Fed-blow bubbles, we appear near levels more consistent with cyclical bull market peaks rather than where secular bear markets have ended.

A Hard Landing In China Part 2 - Rest Of The World Impact

Following on from our earlier discussion of how a Chinese hard landing would evolve, SocGen now examines how a Chinese hard landing would impact the global economy. They see the contagion in several ways: mechanically (since China is part of the global economy) and through trade, financial and market channels. Mechanically, a slump in Chinese GDP growth to just 3% would cut our global GDP growth forecast by 0.6pp. Add to that the channels of transmission to the global economy, and our expectation is that a Chinese hard landing would result in 1.5pp being slashed from global GDP growth in the first year.

Dear Steve Liesman: Here Is How The US Financial System Really Works

Earlier today, Bill Frezza of the Competitive Enterprise Institute and CNBC's Steve Liesman got into a heated exchange over a recent Frezza article, based on some of the key points we made in a prior post "A Record $2 Trillion In Deposits Over Loans - The Fed's Indirect Market Propping Pathway Exposed" in which, as the title implies, we showed how it was that the Fed was indirectly intervening in the stock market by way of banks using excess deposits to chase risky returns and generally push the market higher. We urge readers to spend the few minutes of this clip to familiarize themselves with Frezza's point which is essentially what Zero Hedge suggested, and Liesman's objection that "this is something the banks don't do and can't do." Liesman's naive  view, as is to be expected for anyone who does not understand money creation under a fractional reserve system, was simple: the Fed does not create reserves to boost bank profits, and thus shareholder returns, and certainly is not using the fungible cash, which at the end of the day is what reserves amount to once dispersed among the US banks, to gun risk assets higher.

Alas, Steve is very much wrong.

Comment Of The Day: On The Self-Destructiveness Of Fed Policy

What creates real efficiency and competition are not eras of wealth and largesse, but eras of scarcity and change.  A good analogy is that war creates better armies and better weapons, not prolonged periods of peace.   Bernanke of course has zero understanding of what happens to large companies when financial reality is made irrelevant, and capital is made plentiful.  (Growth and efficiency are by no means a logical result). This is what happens when academics who are deeply inexperienced in business run monetary policy designed to stimulate business.   The market is going to bend him over the table and humiliate him eventually.  And then all that capital that he injected into the market is going to evaporate, and a generation of Americans will be financially obliterated.

More Un-Predictions: Deutsche's 13 Outliers For '13

Following on the heels of Byron Wien, Morgan Stanley's Surprises, and Saxo's Outrageous Predictions, Deutsche Bank's FX strategy team has created a who's who of 13 outliers for 2013. Quite frankly, given the extreme nature of monetary (and now fiscal) policy, asset allocation decisions, and bankers' and politicians' willingness to go into the media and lie directly to our faces, the comprehension of the possible (no matter how improbable) is far more important for risk management than the faith in the centrally-planned unreality our markets (and therefore ourselves) currently find themselves in. As they note, all too often, the tendency to not stray too far from a self-anchoring recent-history-extrapolated consensus (while apparently highly profitable for some for a microcosm of time) leads to unrecoverable drawdowns exactly when career-risk was the limiting factor. From Malaysian elections and EM bubbles bursting to Fed monetizing equities and South China Sea escalation, these outliers seem all to 'normal' in our brave new world.

Frontrunning: November 19

  • Israel Ready to Invade Gaza If Cease-Fire Efforts Fail (Bloomberg)
  • Petraeus: A Phony Hero for a Phony War (NYT)
  • IMF'S Lagarde says Greek deal should be "rooted in reality" (Reuters) "rooted" or "roofied"? And where was it until now?
  • ECB's Asmussen says Greece to need aid beyond 2014 (AP)
  • EU makes budget plans without (FT)
  • Japanese Poll Shows LDP Advantage Ahead of Election (WSJ)
  • Shanghai Composite Dips Below, Regains 2,000 Level (Bloomberg)
  • Bond investor takes big punt on Ireland (FT)
  • Noda defends BoJ’s independence (FT) Indewhatnow?
  • Inaba Says BOJ Could Ease More If Government Reins in Debt (Bloomberg) Actually it's the other way around
  • Miles Says Bank of England Can Do More If U.K. Slump Persists (Bloomberg) So much for the end of QE
  • US tax breaks worth $150bn face axe (FT)

Frontrunning: November 12

  • Jefferies to be bought by Ian Cumming's Leucadia in an all-stock deal for $3.59 billion or about $17/share (WSJ)
  • FBI Scrutinized on Petraeus (WSJ)
  • Identity of second woman emerges in Petraeus' downfall (Reuters)
  • SEC staffers used government computers for personal use (Reuters)
  • Japan edges towards fifth recession in 15 years  (FT)
  • Europe Finance Chiefs Seek Greek Pact as Economy Gloom Grows (BBG)
  • Americans Say Europe Lesson Means Act Now as Austerity Will Fail (BBG) - of course it would be great if Europe had ever implemented austerity...
  • Greece battles to avert €5bn default  (FT)
  • You don't bail out the US government for nothing: No Individual Charges In Probe of J.P. Morgan (WSJ)
  • Israel Warns of Painful Response to Fire From Gaza, Syria (BBG)
  • Greece's far-right party goes on the offensive (Reuters)
  • Don’t fear fiscal cliff, says Democrat  (FT)
  • Apple Settles HTC Patent Suits Shifting From Jobs’ War (BBG)
  • Man Set on Fire in Argentina Over Debt (EFE)
  • Iraq cancels $4.2-billion weapons deal with Russia over corruption concerns (Globe and Mail)
  • An Honest Guy on Wall Street (Bloomberg)

Following Japanese Models?

Perhaps those sage English philosophers 'The Vapors' were on to something 32 years ago when they asked if we were "Turning Japanese" for it seems the following charts from Nomura certainly suggest the US bond market is heading in that direction. From demographics to monetary policy; from investor allocations to flows; and from bond bubbles and volatility to long-term interest-rate paths, it seems we share a lot more than a love for sushi and pachinko with our neigbours across the ocean as we seem to be chasing after many Japanese models (of asset allocation and macro-economics).

When ¥11 Trillion Is Not Enough: Japan's QE 9 Disappoints, Halflife Zero, Time For QE 10

It was only yesterday that we pointed out the ever decreasing halflives of central bank interventions. We are grateful that none other than the biggest intervention basket case of all came out and proved us 100% correct, when the BOJ announced none other than QE 9 just one month after the impact from QE 8 fizzled about 8 hours after it was disclosed. This time around, the destructive "benefit" to the JPY was negative from the first second, resulting in the first instance of monetary easing that.. wasn't. Japan just came up with a brand new New Normal concept: tightening through easing, when its ¥11 trillion intervention proved to be woefully insufficient for a market addicted to ever more liquidity injections.

Guest Post: The Latest Bubble?

Wall Street is doing some wild and wacky things. UBS has just launched a 16-times-leveraged MBS ETN. The ETN, called the ETRACS Monthly Pay 2x Leveraged Mortgage REIT, offers double the return of the Market Vectors Global Mortgage REITs Index – itself an investment vehicle 8x leveraged to mortgage-backed securities. The idea appears to be that with the Fed acting as a buyer-of-last-resort that prices will take a smooth upward trajectory and that 16:1 leverage makes sense for retail investors as a bet on a sure thing.

Latest Unintended Casuality Of QEtc.: Mortgage REITs

In the four weeks since Bernanke unveiled QEtc. and its focus on the MBS market, mortgage REITs have slumped - losing more than half the year's gains amid heavy volume. The selling pressure is warranted as these vehicles tend to be owned by investors seeking high-yield dividend plays - and as such any risk to that stream means high-beta selling. With re-investment opportunities miserly - thanks to Bernanke's ZIRP and spread repression - dividend-paying ability remains questionable. The business model of these entities relies on high asset yields, low liability costs, and access to leverage and the three major hot buttons we look at below do not look like improving anytime soon in a QEtc. world.

Overnight Sentiment Better On Yet More Easing

In a world in which markets are simply policy instruments of central planners it is no surprise that the only thing that matters is how much money is injected by any given central bank at any given time. Last night, following the Fed and the BOJ, it was the turn of Australia, which in a "surprise" move cut policy rates by 25 bps. From SocGen: "Reacting to a weaker global economic outlook, which has moderated the outlook for growth in Australia, the Reserve Bank of Australia cut its policy rate today by 25bp to 3.25%, a move that was predicted by only a minority of forecasters (including us). Nevertheless, we believe that markets are too aggressively priced for further rate reductions: we expect a low of 3.00%, to be reached by year-end, but the swap market is currently discounting a low of 2.4% by mid-2013. The reasons the RBA stated for lowering rates centered mostly on the global economic outlook, which has softened over recent months, not least because of greater uncertainty about near-term prospects in China, and hence the outlook for Australia is seen as a “little weaker”. The RBA also stated that the resource investment peak may be lower than previously thought." Sure enough, the move sent Australian stocks to 5 month highs, and global equity futures spiking. Of course, in the open-ended global race to debase perhaps it is more surprising i) they did not do this sooner and ii) not more banks have "cut" yet. Ironically, while the ECB, BOE and SNB are still contemplating next steps to catch up with Bernanke, it is the BOJ which in the abysmal failure of its own QE 8 from three weeks ago, is now contemplating QE 9 - the foreign bond edition (because buying treasury and corporate bonds, ETFs and REITs is never enough). Naturally, all this additional liquidity and promises thereof, has sent futures to fresh highs as more and more latent inflation is loaded up in the global monetary system.