REITs

REITs

New York's Ultraluxury Office Vacancy Rate Jumps To Two Year High As Financial Firms Brace For Impact

Traditionally, when it comes to reading behind the manipulated media's tea leaf rhetoric and timing major inflection points in the economy, the most accurate predictor are financial firms, whose sense of true economic upside (or downside) while never infallible, is still better than most. Yet unlike employment, which is usually a lagging, or at best concurrent indicator, one aspect that has always been a tried and true leading indicator, has been real estate demand, in this case rental contracts. Due to the long-term lock up nature of commercial real estate contracts, firms are far less eager to engage in rental transactions (and bidding wars) when they expect a worsening macroeconomic environment. Which is why news that office vacancy in Manhattan's Plaza district, the area between Sixth Avenue and the East River from 47th to 65th streets, anchored by the landmark Plaza Hotel at Fifth Avenue and Central Park South which is home to some of the nation’s most expensive and prestigious office towers, and where America's largest hedge funds and PE firms have their headquarters, has just risen to 12.3%, or a two year high, is probably the most troubling news for the economy and a real indicator of what to expect of the immediate future.

The Fed Now Owns 27% Of All Duration, Rising At Over 10% Per Year

When it comes to diving trends in the Fed's take over of the Treasury market, there are those who haven't got the faintest clue about what is going on, such as Paul Krugman, who naively looks (as Bernanke expects all economists to) at the simple total notional of securities held by the Fed and concludes that the Fed is not doing anything to adjust fixed income risk-preference, and then there are those who grasp that when it comes to defining risk exposure in the bond market, and therefore in equities, all that matters is duration, expressed in terms of ten-year equivalents. Sadly, this is a data set that not every CTRL-V major or Nobel prize winner (in order of insight) can grab from the St. Louis Fed - it is however available to those who know where to look. And as the chart below shows, even as the Fed's balance sheet has remained flat in notional terms, its Ten Year equivalent exposure has soared, rising by 50% during Operation Twist alone, from $900 billion to $1.313 trillion. What this means in practical terms, as Stone McCarthy summarizes, is that the Fed now owns 27.05% of the entire inventory in outstanding ten-year equivalents. This leaves less than 75% of the market in private hands.

The Experimental Economy

On the heels of last Thursday’s Fed announcement, there has been much commentary on the whys and wherefores of a new quantitative easing (the so-called QE3). Rather than re-hashing well-covered ground, I want to instead discuss the potential effects and unintended consequences of this policy and how it may impact the investment landscape going forward. Suffice it to say that the Fed had its reasons. QE3 evidences a belief in the so-called “wealth-effect” – the idea that one will spend more if he/she feels wealthier – and the Fed also believes it can contain any negative consequences. However, others would argue that it’s another shot across the bow of our foreign lenders that we are willing to engage full-out in a currency war as this policy clearly weakens the U.S. dollar. Because the Fed has embarked on a path with little historical precedent – where a central bank has signaled the intent to expand its balance sheet as much as it needs to – we are all now part of an experimental economy.

Bank Of Japan Increases Asset Purchases By Y10 Trillion, Total Program Now Y80 Trillion, Total Debt Still Y1 Quadrillion

It seems like only yesterday that we were lamenting "Einstein rolling over in his grave" as a result of the BOJ's latest increase in its asset purchase program from Y65 to Y70 trillion, although technically it was 5 months ago on April 27. We would excuse Einstein if he were doing cartwheels in his grave right about now, following the BOJ's latest attempt to keep doing what has definitvely failed for 30 years, hoping this time it will be different, as a result of the just announced latest expansion in the asset purchase program's size by yet another Y10 trillion, this time to a total of Y80 trillion. The expansion impacts only JGBs and T-Bills, both of which will be monetized by a further Y5 trillion. Putting this in perspective, Japan's total public debt is Y1 quadrillion, and counting very fast. All other components of the Japanese LSAP program, including CP, Corporate Bonds, ETFs and REITs (yes, unlike the Fed, the BOJ is quite open about its equity and corporate bond purchases) remain the same. Bottom line, just as we predicted back in July 2009, the global race to debase continues unabated, and as a result of QEternity will merely accelerate until the only true currency is gold tungsten.

Global Retaliation To QEternity Begin: BOJ Considers Additional Easing

Last week it was the Fed crossing the Rubicon with infinite easing. We explained very clearly that the next steps would be everyone else joining the infinite easing party. Sure enough, here comes the first one:

  • BOJ TO CONSIDER ADDITIONAL EASING: NIKKEI

Keep in mind that the BOJ already monetizes ETFs and REITs, the very instruments which the Fed will soon be forced to buy. And so it begins - because when it comes to pushing CTRL and P, over and over, it really doesn't take much skill.

Is 11% This Election's Most Important Number... And If Not, Why Isn't It?

With the US presidential election looming in just two months, there is hardly a state that is as critical to the outcome of who America’s next president will be, as Florida. As Bloomberg vividly summarizes, Florida - and specifically its five swing counties: Hillsborough, Orange, Pinellas, Seminole and Volusia - was the state that determined the president in all of the last 3 elections: set between the Republican-dominated North Florida and the more Democratic southern counties, these suburban communities of middle-class voters are known for their shifting allegiances. In 2008, Obama took four of the five counties to capture Florida. George W. Bush won three of the counties, and the state, in 2004. In 2000, Volusia’s vote count was disputed by Vice President Al Gore. Gore won the county yet lost Florida by 537 votes, giving Bush his first term as president. It is quite fitting then that these five counties are very much indicative of the primary malaise that has plagued the country for the past 4 years: the inability of the housing market to rebound no matter how many trillions in printed dollars are thrown at it. Which brings us to the key number that probably should (but most likely won’t in this age of ultra short-term attention spans and constant redirection and focus shifts): 11% - this is the foreclosure rate in these 5 critical counties, double what it was 4 years ago, and three times higher than the national foreclosure average rate of 3.4%. In other words, if there ever was a time and place when economics, through its sheer failure to restore “household wealth” in this most decisive region, was a key issue, now is the time.

Bernanke Discusses "Theoritcal Limit" To QE, Says Too Much "Would Hurt The Market"

Some rather unexpected rational insight out of Bernanke responding to Patrick McHenry's question on whether and how much more QE the Fed can do:

  • "I assume there is a theoretical limit on QE as the Fed can only buy TSYs and Agencies"
  • "If the Fed owned too much TSYs and Agencies it would hurt the market"

But in closing:

  • "We still have some capacity at this point."

Perhaps the market was expecting that the Fed would admit it can buy ETFs and REITs like the BOJ, or that it can sell vol into the single digits, as its New York Fed trading desk is rumored to be doing, but this is hardly the stamp of endorsement to buy any stock come hell or high water that the algos now expect out of the Fed.

Japan Machinery Orders Implode As Global Economy Grinds To A Halt

Japan's core machinery orders were expected to post a modest -2.6% drop. Instead they had a worse collapse than anything seen in the aftermath of the Fukushima disaster, plunging by a stunning 14.8% . And the kick in the groin cherry on top was the current account surplus plunged by 62.6%: consensus forecast: -14.5%. The Japanese economy has once again ground to a halt, only this time it has no earthquake or nuclear explosion to blame. This time it is the entire world's fault, where demand has collapsed proportionately. As a reminder the BOJ expanded its QE yet again on April 27. Must be time for another QE because this time will certainly be different after more than 30 years of failures.  It is time for those brilliant central planners Ph.D's to do engage in more of the same insanity that Einstein warned about decades ago. And incidentally this is not a joke: on Thursday the BOJ is expected to ease yet again. As a reminder, the BOJ already buys ETFs, Corporate Bonds, and REITs. What's left: gold?

Presenting The Fundamental Flaw In The Fed's Thinking

This one simple chart below shows what is possibly the biggest and most fundamental flaw in Bernanke's approach to spurring the economy, which to him, of course, means rising prices of risky assets, aka the stock market.

Guest Post: Inflationeering

While a welcome development (and probably even more welcome on the other side of the Atlantic) it doesn’t make up for the fact that the explosive price increases during the boom years were never included. And it isn’t just real estate — equities was another market that massively inflated without being counted in official inflation statistics. It would have been simple at the time to calculate the effective inflation rate with these components included. A wiser economist than Greenspan might have at least paid attention to such information and tightened monetary policy to prevent the incipient bubbles from overheating. Of course, with inflation statistics calculated in the way they are (price changes to an overall basket of retail goods) there will always be a fight over what to include and what not to include. A better approach is to include everything.

Here Comes The Hilsenrath Leak: "Fed Considers More Action"

Three months ago, just when things looked like they were about to turn south, the Fed's trusty mouthpiece, Jon Hilsenrath, made it clear that the market can stop falling as the Fed was "considering" sterilized QE, or more Twist, something we explained later would be impossible in the current format as the Fed would run out of sub 3 Year paper by the end of August. It did however halt the drop in stocks for a month or two until Europe became permanently unfixed. Hilsenrath then cralwed back into his WSJ cubicle. Until today: two weeks before the all critical June 20 FOMC meeting, the faithful Fed scribe has been charged with his latest leak commission: "Fed Considers More Action Amid New Recovery Doubts." And as it has been leaked (now that people have actually done the appropriate math), so it shall be.