According to the latest BLS data, average hourly wages for all US workers in November rose at a stubbornly low 2.5% relative to the previous year, well below the Fed"s "target" of 3.5-4.5%, as countless economists are unable to explain how 4.1% unemployment, and "no slack" in the economy fails to boost wage growth. Another problem with tepid wage growth, in addition to crush the Fed"s credibility, is that it keeps a lid on how much general price levels can rise by. With record debt, it has been the Fed"s imperative to boost inflation at any cost (or rather at a cost of $4.5 trillion) to inflate away the debt overhang, however weak wages have made this impossible.
Well, not really. Because a quick look at US housing shows that while wages may be growing at roughly 2.5%, according to the latest Case Shiller data, every single metro area in the US saw home prices grow at a higher rate, while 16 of 20 major U.S. cities experienced home price growth of 5% or higher: double the average wage growth, and something which even the NAR has been complaining about with its chief economist Larry Yun warning that as the disconnect between prices and wages become wider, homes become increasingly unaffordable.
And while this should not come as a surprise - considering we have pointed it out on numerous occasions in the past - one look at the chart below suggests that something strange is taking place in Seattle, which has either become "Vancouver South" when it comes to Chinese hot money laundering, or there is an unprecedented mini housing bubble in the hipster capital of the world. Also worth keeping an eye on: price appreciation in Sin City has quietly surged in recent months, and in September home prices surged 10.2% Y/Y, the only other double digit price increase in the US after Seattle. Considering that Las Vegas was the epicenter of the last housing bubble when prices exploded higher only to crash, it may be a good idea to keep a close eye on price tendencies in this metro area.
Confirming the recent jump in home prices, at the national level in Octoner home prices for the Top 20 metro areas rose 6.4% YoY according to Case Shiller, the fastest rate since June 2014. As Bloomberg adds, "a lingering shortage of previously owned homes is keeping housing prices elevated. That’s allowed homeowners to recover the equity lost during the housing collapse and recession a decade ago."
“Home prices continue their climb supported by low inventories and increasing sales,” David Blitzer, chairman of the S&P index committee, said in a statement. But that climb may be interrupted by the Federal Reserve hiking interest rates next year, he said. “Since home prices are rising faster than wages, salaries, and inflation, some areas could see potential homebuyers compelled to look at renting."
Meamwhile, for those looking to buy for the first time, conditions are less favorable. Growth in property values is outpacing wage gains and limiting affordability, representing a headwind for the market.
Finally, putting the above data in context, here are two charts courtesy of real-estate expert Mark Hanson, the first of which shows how much household income increase is needed to buy the median priced home in key US cities...
... while the next chart shows the divergence between actual household income, and the income needed to buy the median priced house.
Until now, Canada"s soaring housing prices were just another innocent asset bubble spawned by low interest rates and an endless supply of Chinese cash that needed to get laundered. That said, massive bubbles are almost always followed by severe unintended consequences that can have a crippling impact on society as a whole...and in Toronto those unintended consequences are now manifesting themselves in the form of a rapidly deteriorating supply of strip clubs.
As Bloomberg points out today, the soaring value of Toronto real estate has made it all but impossible for strip club owners to turn down multi-million offers from condo developers leaving only a dozen strip clubs in a city whose purple neon lights used to be easily visible from the distant fringes of our solar system.
Condos are killing the Toronto strip club. In a city that once had more than 60 bars with nude dancers, only a dozen remain, the rest replaced by condominiums, restaurants, and housewares stores. Demand for homes downtown and for the retailers that serve them is driving land prices to records, tempting owners of the clubs, most of which are family-run, to sell at a time when business is slowing.
“Sometimes I feel like the last living dinosaur along Yonge Street,” says Allen Cooper, the second-generation owner of the famous—or infamous—Zanzibar Tavern. The former divorce lawyer says he has been approached by at least 30 suitors for his property in the past few years but is holding out for a “blow my socks off” offer. “I don’t know how many condos we’re going to get, but it seems like just a wall” of them, Cooper says.
Of course, with ~1-acre plots of land selling for C$225 million, it"s not difficult to understand why strip club owners are increasingly choosing to shut off their neon signs for good...even with the consolidation of market share it"s nearly impossible to make that lap dance math pencil out.
Remington’s Men of Steel, a male dance club behind a heavy door, sold to KingSett Capital Inc., which last year flipped it to Cresford Developments as part of a bigger portfolio on that block that went for about C$160 million ($125 million), according to real estate data supplier Altus Group. That club is closing next year, to be replaced by a 98-story condo.
The fading of the strip-club era can be seen in a five-block area along Yonge Street, near Toronto’s counterpart to Times Square, Yonge-Dundas Square. It was once dubbed Sin Strip for its neon-clad bars, sex shops, and movie theaters. Today there are about 20 development applications for condos and commercial buildings on the stretch.
Farther north, an entire city block is a construction site as two condo towers and some retail space replace a strip of colorful and creaky buildings that once offered body piercing and pole-dancing shoes. “We target a very specific market, mostly men. We’re not a shopping destination, so more people doesn’t mean a lot more business,” says Bill Greer, general manager and three-decade veteran of the Brass Rail Tavern, a two-story club in the area. “I don’t think we’ll be around in 10 years’ time.” Just outside the Brass Rail’s doors, a 75-story residential tower opened this year on a piece of land that cost C$53 million. An 80-story luxury tower is under construction following a C$225 million deal for less than 1 acre, according to data from Altus.
But at least one Toronto strip club owner, Spiro Koumoudouros of the House of Lancaster, has drawn a line in the sand saying he"s not going anywhere..."What am I going to do, sit at home and die?"...if only we could all exhibit such courage in times of extreme crisis.
Finally, since we know your interest in this story was only prompted by your desire to see a larger version of the teaser pic...here you go:
Silicon Valley is the home to tech giants like Facebook, Apple, and Google. It’s also home to a surging working homeless population who live in dilapidated RV’s, tents, and their own cars, all thanks to the policies Democrats love to implement.
The surging number of those working in Silicone Valley and still unable to afford adequate housing should be a warning about big government, but it sure doesn’t seem like anyone is taking notice as their taxes continue to rise.
Silicon Valley has the highest median income in the nation. But a soaring tax burden and expensive regulations have caused housing prices to increase which has also caused homelessness to surge.
More than 10,000 people were living without shelter across San Jose and Santa Clara Counties on any given night in 2016, though that figure is probably low. Thanks to big government, the cost of living is not low.
The governments in California continue to attempt to control deadly Hepatitis A outbreaks caused by a booming homeless population and usually do so by taking even more from those who actually work. The cycle will continue: socialists governments will put a cheap band-aid on the gaping wound they created themselves.
Rather than freeing poor people from dependence on benefactors and bosses, they merely transfer the dependence to the state, leaving the least politically connected people at the mercy of the political process. – FEE
The one thing government has are programs to help those in poverty. But those have proven ineffective. And the one thing that will work is the very thing government refuses to do: Climb off the backs of those they pretend they want to help.
Progressives routinely deplore the “affordable housing crisis” in American cities. But it is the very laws that Progressives favor—land-use policies, zoning codes, and building codes—that ratchet up housing costs, stand in the way of alternative housing options, and confine poor people to ghetto neighborhoods. Historically, when they have been free to do so, poor people have happily disregarded the ideals of political humanitarians and found their own ways to cut housing costs, even in bustling cities with tight housing markets. – FEE
Imagine just how much more money the working poor would have if the big government in California wasn’t stealing over half their income to implement the very rules and laws that continue to make “scraping by” even more expensive.
In the latest installment of RealVision"s interview series featuring Jim Grant, longtime publisher of Grant"s Interest-Rate Observer, the newsletter publisher sits down with Alan Fournier, the billionaire founder of Pennant Capital, to discuss one of the most widely discussed topics across modern asset markets: Volatility - or rather, the systemic risks posed by not only the paucity of volatility in modern markets, but how risk parity and low-vol targeting strategies have created imbalances that could lead to massive dislocations should volatility spike.
In the beginning of the talk, Fournier and Grant discuss how volatility has been artificially suppressed for so long that it"s essentially become an asset class unto itself. Investors have devised all these new volatility targeting strategies - like risk parity, for example, that have generated outsize returns since the financial crisis. But many don"t recognize the underlying risks. With so much money piled into the short-volatility trade, a large enough spike could trigger extremely painful selloffs in both bond and equity markets.
JG: And one would expect that if interest rates are going to turn, it might be kind of a noisy and dramatic turn.
Are you plugging in the interest rate aspect to this as well the bond market side of things?
AF: Well the thing that concerns me the most about this sort of overall technical setup, if you will, is that the reason people own bonds is they don"t correlate with stocks. So if something bad happens in the stock markets, bonds rally, right? So risk parity, some stocks in a levered bond fund, it"s been fabulous because that"s been what we"ve seen for the last 15 or 20 years. Well if we get a turn, which is just driven by a normal business cycle and that correlation comes apart, who knows what happens? But there"s a lot of money that"s been dedicated to these kinds of strategies, whether they"re vol targeting, risk parity. We"re in sort of a spooky time.
JG: You use the phrase the setup, which I think is a wonderful way of expressing the notion of an overall context of things, how the forces are aligned or misaligned. And so many of those forces in this particular cyclical moment seem to be unusual if not unprecedented. Certainly the level, the nominal level and real level of interest rates is one of those forces. The positive preoccupation with the efficacy and with the certainty of outcome of passive investing must be another, right?
AF: Yes.
JG: And the peace and quiet in the markets as reflected in readings in both the MVE Index, which registers bond activity, and the VIX Index, which measures agitation in the stock market, those things are at record or near level lows. So Alan, how do you see the constellation of these forces?
AF: Well, we joke on a trading desk when we come in the morning if the futures are down-- like today they were down a bit this morning. But we joke about what time they"re going to go positive during the day, and usually it"s after the Europeans go to the pub or something at around 11 o"clock. By 2 o"clock they"re positive.
And I just mentioned this because it"s very unusual and something I"ve never seen in 30 years or so of doing this that sort of nothing rattles this market. And I think some of it is the vol being depressed.
JG: Now let"s explain this. So volatility now, it"s like a thing. It used to be stocks and bonds.
AF: It used to be observed based upon how options are priced. Now it"s actually a source of income.
JG: Right. It"s like an asset class.
AF: It"s a bond.
JG: But it"s movement. It"s kind of capitalized movement, right?
AF: Right.
Toward the beginning of the interview, Fournier shared a story with Grant about how a high-net worth broker recently asked for meeting to pitch a suite of new "short volatility" investment products. After grilling the broker about the details of how the products are managed, he asked how the funds are protected in case of a sudden spike in volatility. The broker waved his question aside and said there products are all adequately hedged.
After doing some more due diligence, Fournier discovered that the broker was wrong. And it"s not that he lied, Fournier surmised - it"s that the broker didn"t have an appropriately deep understanding of how the products work.
AF: Yeah. So I"m going to tell you a little story which is interesting, which is suggestive of the idea that we"re pretty late in this tick-tock game.
JG: All right, I"m ready.
AF: Well a friend of a friend asked to come see me who is a high net worth broker at one of the investment banks. And he said, "Look, I know I can"t help you in the stock market because you"re doing your own thing in your fund and get that, but maybe we can help here with fixed income." I said, "Sure, come on by. Let"s talk."
He comes in and I ask the question, "So what are people doing for income?" And he said, "We have this great product that sells vol." And I said, "Oh, how does that work?" And, well, it was a very basic explanation. Selling puts, selling calls, straddles, blah, blah, blah. And I said, "What happens if the market goes down?" And he said, "Well, there are ways they protect against that." I was like OK, and I just was very curious. So I said, "Send me the documentation." So he sends me the brochure with all the legal details and so forth, and there"s really no protection. They"re just selling vol and collecting income, which has been successful.
In the most unsettling excerpt from the interview – for mom and pop investors, that is – Fournier shared a story about a talk he gave to a group of pension-fund investment-committee members. Some investment bank trying to scrounge up brokerage business had taken the group of these investors on a tour of Washington, D.C., and Fournier was recruited to speak about his experiences in the hedge fund industry as sort of a keynote for the day’s events.
So, Fournier told a story that emphasized the risks of selling volatility.
Afterward, his audience sat there, stone-faced. As he would come to find out, many of their funds were running vol-selling strategies which – as we’ve explained time and time again – are much riskier than most investors realize.
And these are pension funds – purportedly some of the most risk-averse institutional investors.
JG: So when you sell vol, what do you do exactly? Do you sell puts on the VIX Index?
AF: Yes, and different tenors. And there are strategies that will sell vol at a level and buy vol further down and try to dampen potential crash risk and those kinds of things. But essentially you"re just collecting income by being a house, selling puts.
So a few weeks later another investment bank invites me to come and speak to some pension investors. And they were taken them to Washington to sort of hear what was going on down there. And then they brought them up to New York and I was sort of the end of the day, talk to a hedge fund practitioner kind of thing. And I sat there and I told the story about how this guy was trying to sell me vol, expecting some kind of reaction from them.
JG: And they said so?
After doing some more due diligence, Fournier discovered that the broker was wrong. And it"s not that he lied, Fournier surmised - it"s that the broker didn"t have an appropriately deep understanding of how the products work.
JG: This is a group of--
AF: Pension funds, large European pension funds. And he said, "Yeah, but they have a strategy where, when you get a selloff, they sell more into the selloff." So if the VIX spikes from 10 to 15, you sell more. And then you continue to have this tremendous monthly pattern of income.
So as I was walking out of there I thought, my goodness, the central banks have succeeded in pushing people out on the risk curve. They"re taking people that are managing the pensions of state pensioners and they have them in negative earning sovereign instruments. And now they have them-- they"re so desperate for some yield, they"re systemically selling volatility, which is remarkable.
In one of the most interesting excerpts from the interview, Fournier explains how a chance breakfast meeting inspired him to switch from long subprime lenders to short a few years before the housing crisis began.
The timely switch allowed Fournier to book winning trades on both the long side – he cashed in as home prices climbed toward their pre-crisis peak – and against during the collapse. He was inspired to change his position after learning from a subprime mortgage broker how the loans the broker was selling worked.
After their discussion, it quickly became apparent to Fournier that the whole subprime lending model was reliant on home-price appreciation, and the minute housing prices peaked, there could be a very significant credit event.
JG: This is where we have different lines of work Alan, because in the years 2001, "02, "03, "04, "05, "06, Grant"s Interest Rate Observer deplored these queues of people lining up irrationally and uneconomically to buy the houses, the makers of which you were long.
It takes all kinds of people to make a world. I’m not throwing stones.
AF: We also got long subprime lenders. And we got to know them well. And early on it was clear that this was going to be a booming opportunity for subprime lenders. I mean, you were taking debt that was costing folks very high rates on credit cards and pulling equity out of homes. And so that was a natural arbitrage that created this big opportunity. And then using subprime to fund the purchase of second homes, driving up real estate prices. And I was actually at a breakfast with a company coming public that I ended up investing in where I asked them a number of questions about how these loans work. And it became very clear that the whole key to those loans was home price appreciation. And at that breakfast, I kind of logged this view, that, wow, when this turns, it"s going to be a very significant credit event.
JG: Let me, if I may just interrupt to observe, how unusual it is for someone who has been long, a big theme, to turn around and successfully to change views and become short, successfully, that same theme. It"s done sometimes at a bar in recounting fabulous fabled stories, but rarely in real life. Tell me about kind of the intellectual flexibility this requires. When did you decide to kind of jettison the bullish view on subprime?
AF: Well, it was a matter of first developing understanding of what was going on and how this reflexive process, classic Soros reflexive process was interacting with the real world. And it was very simple. Easy credit drive up home prices. The fact that home prices was growing up was making credit easier. And so it was a matter of how long that would play out and when it would end. We had the patience to wait. And we made some money in long side of some of the subprime lenders during this period. And it was really gaining the knowledge of what these CDO and CDS securities were that was an eye-opening opportunity for me.
So Fournier switched from being long doomed mortgage lenders like American Home Mortgage to shorting the mortgage-backed security products that would eventually slide all the way to zero.
Later in the interview, Grant asks Fournier for his thoughts on bitcoin.
In a heartening display of modesty and intellect, Fournier demurred, instead of offering a barrage of chaotic, unqualified opinions like some of his peers have tended to do.
If the economy is doing just fine, then why is homelessness at levels not seen “since the Great Depression” in major cities all over the country?
If the U.S. economy was actually in good shape, we would expect that the number of people that are homeless would be going down or at least stabilizing. Instead, we have a growing national crisis on our hands. In fact, within the past two years “at least 10 cities or municipal regions in California, Oregon and Washington” have declared a state of emergency because the number of homeless is growing so rapidly.
Things are particularly bad in southern California, and this year the Midnight Mission will literally be feeding a small army of people that have nowhere to sleep at night…
Thanksgiving meals will be served to thousands of homeless and near-homeless individuals today on Skid Row and in Pasadena and Canoga Park amid calls for donations and volunteers for the rest of the year.
The Midnight Mission will serve Thanksgiving brunch to nearly 2,500 homeless and near-homeless men, women and children, according to Georgia Berkovich, its director of public affairs.
Overall, the Midnight Mission serves more than a million meals a year, and Berkovich says that homelessness hasn’t been this bad in southern California “since the Great Depression”…
Berkovich said the group has been serving nearly 1 million meals a year each year since 2013.
“We haven’t seen numbers like this since the Great Depression,” she said.
And of course the official numbers confirm what Berkovich is claiming. According to an article published earlier this year, the number of homeless people living in Los Angeles County has never been higher…
The number of homeless people in Los Angeles has jumped to a new record, as city officials grapple with a humanitarian crisis of proportions remarkable for a modern American metropolis.
Municipal leaders said that a recent count over several nights found 55,188 homeless people living in a survey region comprising most of Los Angeles County, up more than 25% from last year.
If the California economy is truly doing well, then why is this happening?
We see the same thing happening when we look at the east coast. Just check out these numbers from New York City…
In recent years the number of homeless people has grown. Whereas rents increased by 18% between 2005 and 2015, incomes rose by 5%. When Rudy Giuliani entered City Hall in 1994, 24,000 people lived in shelters. About 31,000 lived in them when Mike Bloomberg became mayor in 2002. When Bill de Blasio entered City Hall in 2014, 51,500 did. The number of homeless people now in shelters is around 63,000.
For New York, this is the highest that the homeless population has been since the Great Depression, and city leaders are trying to come up with a solution.
Housing prices are soaring here thanks to the tech industry, but the boom comes with a consequence: A surge in homelessness marked by 400 unauthorized tent camps in parks, under bridges, on freeway medians and along busy sidewalks. The liberal city is trying to figure out what to do.
Are you noticing a theme?
Homelessness is at epidemic levels all over the U.S., and this crisis is getting worse with each passing day. Some communities are trying to care for their growing homeless populations, but others are simply trying to force them to go somewhere else. They are doing this by essentially making it illegal to be homeless. In some cities it is now a crime to engage in “public camping”, to “block a walkway” or to create any sort of “temporary structure for human habitation”. These laws specifically target the homeless, and they are very cruel.
Many of us tend to picture the homeless as mostly lazy older men that don’t want to work and that instead want to drink or do drugs all day.
But the truth is that women and children make up a significant percentage of the homeless.
In fact, the number of homeless children in our country has increased by about 60 percent since the end of the last recession.
And there are thousands upon thousands of military veterans that are homeless. For example, a 34-year-old man named Johnny that served in the Marine Corps recently used his last 20 dollars to buy fuel for a woman that had run out of gas and was stranded along I-95 in Miami…
Pulled over on the side of I-95, McClure, 27, was approached by a homeless man named Johnny. She was apprehensive at first, but Johnny told her to get back into her car and to lock the doors while he walked to get her help. He went to a nearby gas station, used his last $20 fill a can and brought it back to fill up her car.
Grateful, but without a dollar to repay him, McClure promised she would come back with something.
In the weeks since, she’s returned to the spot along I-95 where Johnny stays with cash, snacks and Wawa gift cards. Each time she’s stopped by with her boyfriend, Mark D’Amico, they’ve learned a bit more about Johnny’s story, and become humbled by his gratitude.
Deciding that they wanted to do even more for Johnny, they started a GoFundMe page for him and have since raised approximately $250,000.
So it looks like there is going to be a happy ending to Johnny’s story, but the truth is that more people are falling into homelessness with each passing day.
A record number of store closures - 6,735 - have already been announced this year. That’s more than triple the tally for 2016, according to Fung Global Retail and Technology, a retail think tank.
And there have been 620 bankruptcies in the sector so far this year, according to BankruptcyData.com, up 31% from the same period last year. Prominent names such as Toys R Us, Gymboree, Payless Shoes and RadioShack have all filed this year, and Sears Holdings (SHLD), which owns both the iconic Sears and Kmart chains, has warned there is “substantial doubt” it can remain in business.
Sadly, analysts are projecting that the number of store closings could be as high as 9,000 next year.
Yes, there are some areas of the country that are doing well right now, but there are many others that are not.
Let us always remember to have compassion on those that are struggling, because someday we may be the ones that end up needing some help.
Sweden’s property bubble is probably the world’s biggest, despite which it gets relatively little coverage in the mainstream financial media - although that might be about to change. Warnings about this bubble are not new. In March 2016, Moody’s issued a very explicit warning that Sweden’s negative interest rates were propagating an unsustainable housing bubble.
The central banks of Switzerland, Denmark and Sweden (all rated Aaa stable) have been among the first to push policy rates into negative territory. A year into this novel experience, Moody"s Investors Service concludes that, from among the three countries, Sweden is most at risk of an - ultimately unsustainable - asset bubble…
"The Riksbank has not been successful in engineering higher inflation, while Sweden"s GDP growth continues to be among the strongest in the advanced economies," says Kathrin Muehlbronner, a Senior Vice President at Moody"s.
"At the same time, the unintended consequences of the ultra-loose monetary policy are becoming increasingly apparent - in the form of rapidly rising house prices and persistently strong growth in mortgage credit", adds Ms Muehlbronner. In Moody"s view, these trends will likely continue as interest rates will remain low, raising the risk of a house price bubble, with potentially adverse effects on financial stability as and when house prices reverse trends.
In October 2016, the Riksbank’s Governor, Stefan Ingves, spoke in grave terms to the FT about the impact of negative rates on house prices.
But despite a lack of drama so far, Mr Ingves remains worried about a bad ending due to risks over financial stability.
He said: “It remains an issue because we are mismanaging our housing market. Our housing market isn’t under control, in my view.” The ratio of household debt to disposable income in Sweden is one of the highest in the world at more than 180 per cent and the Riksbank estimates it will continue to rise in the coming years.
Last month, we revisited Sweden’s housing bubble (see here) pointing out.
…nowhere would the bursting of Sweden"s unprecedented asset bubble be more concerning than in the country"s home prices.
And to get a sense of just how bad it could get, here is a chart from Nordea"s Andreas Wallstrom, showing nearly 140 years of real house prices in Sweden"s capital, Stockholm, with an emphasis on the exponential surge in the past 2 decades. As Wallstromg sarcastically points out, the big irony in this is that "the current monetary policy regime, which aims for "price stability", started in 1995." Ah yes, presenting "price stability", aka the world"s biggest housing bubble.
On Monday, Reuters reported that SEB’s Housing Price Indicator suffered its second biggest ever drop this month.
Swedes turned less optimistic on the housing market in November, a report showed, after figures suggesting a long run of price rises may be coming to an end amid signals that authorities will squeeze mortgage borrowers to reduce the risk of a crash.
Monday’s Housing Price Indicator from banking group SEB posted its second biggest drop ever, declining by 39 points and lagging only a steeper fall 10 years ago. According to SEB, 43 percent of households expect prices to rise over the coming year, down from 66 percent the previous month. The number expecting prices to decline doubled to 32 percent.
The Reuters piece quoted SEB saying that the indicator signaled a slowdown but “does not yet signal outright declines”. A day later and we have clear evidence of outright declines. Here is a summary of the key prices changes for October 2017 versus the previous month in the NASDAQ OMX Valueguard-KTH Housing Index - known as the HOX.
Prices for housing prices in Sweden as a whole declined by 3.0% versus September;
House prices in Sweden fell by 3.2% and apartment prices by 2.8%;
Stockholm house prices fell 4.0% in October and apartment prices by 3.4%; and
Gothenburg house prices fell by 1.6% and apartment prices by 1.2%.
With the market starting to crack, we can rely on the regulators, as usual, to take action after the fact. From a Reuters report yesterday.
Sweden’s financial watchdog has proposed a further tightening of mortgage repayment rules to keep a lid on spiralling debt that could spell danger for the cooling property market and the wider economy. A surge in building and tougher mortgage rules have put the brakes on a 20-year bull run in the Swedish property market, but authorities remain concerned that debt levels among the highest in Europe are still rising. The country’s Financial Supervisory Authority (FSA) on Monday proposed new rules to force the biggest borrowers to make larger mortgage repayments in an effort to reduce risks.
“Prices have risen more than 30 percent in the past three years and the risk level is elevated,” FSA chief economist Henrik Braconier told reporters.
Reuters reported this comment from Braconier.
“It is not a catastrophe if prices fall a little.”
There are two types of inflation in the world… the “inflation” that you and I experience in the form of a rising cost of living induced by Central Banks devaluing our currencies…
...and the inflation that Central Banks are “targeting” in the bizarre claim that somehow hitting said targets will unleash economic growth.
Inflation #1 is depicted in the chart below. This is the reason why everything "costs" more today than it used to.
Inflation #2 is some kind of nebulous concept that Central Bankers talk about without ever admitting that they themselves change how they define “inflation” to suit their political purposes.
Indeed, hearing a Central Banker talk about how we need to target inflation in light of the above chart is like hearing a raging drunk talk about targeting an appropriate level of drinking.
Jokes aside, inflation is a painful reality for the world. And the bad news is that it’s about to worsen dramatically.
Why does this matter?
Because the Bond Bubble trades based on inflation.
When inflation rises, so do bond yields to compensate.
The sovereign bond market is over $76 trillion in size. It"s the "smart" money in the financial system. So when it starts to "speak" it"s smart to listen.
With that in mind, take a look at the chart for the 10-Year US Treasury. We’ve already taken out the bull market begun in 2007. The single most important bond in the world is tracking lower just as housing prices did in 2006 before the housing bubble burst.
Put simply, BIG INFLATION is THE BIG MONEY trend today. And smart investors will use it to generate literal fortunes.
Imagine if you"d prepared your portfolio for a collapse in Tech Stocks in 2000... or a collapse in banks in 2008? Imagine just how much money you could have made with the right investments.
THAT is the kind of potential we have today. And if you"re not already taking steps to prepare for this, it"s time to get a move on.
We just published a Special Investment Report concerning FIVE secret investments you can use to make inflation pay ou as it rips through the financial system in the months ahead
The report is titled Survive the Inflationary Storm. And it explains in very simply terms how to make inflation PAY YOU.
We are making just 100 copies available to the public.
Another week, another warning regarding financial crash scenarios from those keen minds at the IMF.
In “Here Is The IMF’s Global Financial Crash Scenario” last week, we highlighted the institution’s surprisingly candid discussion hidden away in its latest Financial Stability Report “Rising Medium-Term Vulnerabilities Could Derail the Global Recovery"…or as we paraphrased the IMF’s “politically correct way of saying the financial system is on the verge of crashing”.
As we noted previously, in the section also called "Global Financial Dislocation Scenario" because "crash" sounds just a little too pedestrian, the IMF uses a DSGE model to project the current global financial situation, and ominously admits that "concerns about a continuing buildup in debt loads and overstretched asset valuations could have global economic repercussions" and - in modeling out the next crash, pardon "dislocation" - the IMF conducts a "scenario analysis" to illustrate how a repricing of risks could "lead to a rise in credit spreads and a fall in capital market and housing prices, derailing the economic recovery and undermining financial stability."
This week the IMF has gone a step further, courting the mainstream financial media to publicise its warning about the dangers of historically low volatility and related short volatility strategies.
As The FT reports, The International Monetary Fund has warned that the increasing use of exotic financial products tied to equity volatility by investors such as pension funds is creating unknown risks that could result in a severe shock to financial markets. In an interview with the Financial Times Tobias Adrian, director of the Monetary and Capital Markets Department of the IMF, said an increasing appetite for yield was driving investors to look for ways to boost income through complex instruments.
“The combination of low yields and low volatility facilitates the use of leverage by investors to increase returns, and we have seen rapid growth in some types of products that do this,” he said.
It explains some of the short vol strategies that we’ve been expressing concern about for several years. To wit.
Mr Adrian’s warning comes amid increasing evidence that pension funds and insurance companies are venturing into riskier types of investments to gain income.
Some are also effectively writing insurance contracts against a market crash to pocket premiums. Last year the $14bn Hawaii Employees Retirement System said it was writing put options to boost its income, while other US pension schemes such as the South Carolina Retirement System Investment Commission and Illinois State Universities Retirement System have also hired outside managers to use option writing strategies. The IMF estimates that assets invested in volatility targeting strategies have risen to about $500bn, with this amount increasing by more than half over the past three years. Marko Kolanovic, head of macro, derivative and quantitative Strategies at JPMorgan, last month warned of “strategies that sell on ‘autopilot’”, and how risk management models that use volatility could be luring investors into taking on too much risk.
“Very expensive assets often have very low volatility, and despite downside risk are deemed perfectly safe by these models,” he wrote in a note to clients.
Artemis estimates that financial engineering strategies that are short vol, either explicitly or implicitly, amount to more than $2 trillion. However, both Artemis and the IMF are “on the same page” when it comes to what would unfold if there was a sustained spike in volatility. The FT continues...
The IMF believes that sustained low volatility increases incentives for investors to take on higher levels of leverage while causing risk models that use volatility as an important input to understate real levels of risk participants may be taking on.
“A sustained increase in volatility could then trigger a sell-off in the assets underlying these products, amplifying the shock to markets,” Mr Adrian said…
With equity implied volatility continuing to drop over the course of this year, investors who have bet that markets will remain tranquil have been rewarded. Yet the true quantity of complex products being sold that are linked to volatility of various assets is hard to ascertain due to such deals mostly being done in private. Regulators therefore find it difficult to map out the risks in the event of an unexpected market shock.
My good friend Peter Boockvar recently shared a chart with me. The University of Michigan’s Surveys of Consumers have been tracking consumers and their expectations about the direction of the stock market over the next year. We are now at an all-time high in the expectation that the stock market will go up.
The Market Ignores Monetary Uncertainty
It is simply mind-boggling to couple that chart with the chart of the VIX shorts (I wrote about the VIX craze in this this issue of Thoughts from the Frontline).
Peter writes:
Bullish stock market sentiment has gotten extreme again, according to Investors Intelligence. Bulls rose 2.9 pts to 60.4 after being below 50 one month ago. Bears sunk to just 15.1 from 17 last week. That’s the least amount since May 2015. The spread between the two is the most since March, and II said, “The bull count reenters the ‘danger zone’ at 60% and higher. That calls for defensive measures.” What we’ve seen this year the last few times bulls got to 60+ was a period of stall and consolidation. When the bull/bear spread last peaked in March, stocks chopped around for 2 months. Stocks then resumed its rally when bulls got back around 50. Expect another repeat.
Only a few weeks ago the CNN Fear & Greed Index topped out at 98. It has since retreated from such extreme greed levels to merely high measures of greed. Understand, the CNN index is not a sentiment index; it uses seven market indicators that show how investors are actually investing. I actually find it quite useful to look at every now and then.
The chart below, which Doug Kass found on Zero Hedge, pretty much says it all. Economic policy uncertainty is at an all-time high, yet uncertainty about the future of the markets is at an all-time low.
Why This Is Happening Now
At the end of his email blitz, which had loaded me up on data, Dougie sent me this summary:
At the root of my concern is that the Bull Market in Complacency has been stimulated by:
the excess liquidity provided by the world’s central bankers,
serving up a virtuous cycle of fund inflows into ever more popular ETFs (passive investors) that buy not when stocks are cheap but when inflows are readily flowing,
the dominance of risk parity and volatility trending, who worship at the altar of price momentum brought on by those ETFs (and are also agnostic to “value,” balance sheets,” income statements),
the reduced role of active investors like hedge funds – the slack is picked up by ETFs and Quant strategies,
when coupled with precarious positioning by speculators and market participants:
who have profited from shorting volatility and have gotten so one-sided (by shorting VIX and VXX futures) that any quick market sell off will likely be exacerbated, much like portfolio insurance’s role in a previous large drawdown,
which in turn will force leveraged risk parity portfolios to de-risk (and reducing the chance of fast turn back up in the markets),
and could lead to an end of the virtuous cycle – if ETFs start to sell, who is left to buy?
Now they are telling us that as they take that money back off the table, they will have no effect on the markets. And all the data that I just presented above tells us that investors are simply shrugging their shoulders at what is roughly called “quantitative tightening,” or QT.
In the 1930s, the Federal Reserve grew its balance sheet significantly. Then they simply left it alone, the economy grew, and the balance sheet became a nonfactor in the following decades. I don’t know why today’s Fed couldn’t do the same thing.
There really is no inflation to speak of, except asset price inflation, and nobody really worries about that. We all want our stocks and home prices to go up, so there’s no real reason for the central bank to lean against inflationary fears; and raising rates and doing QT at the same time seems to me to be taking a little more risk than necessary.
And they’re doing it in the midst of the greatest bull market in complacency to emerge in my lifetime.
Do they think that taking literally trillions of dollars off their balance sheet over the next few years is not going to have a reverse effect on asset prices? Or at least some effect? Is it really worth the risk? Remember the TV show Hill Street Blues? Sergeant Phil Esterhaus would end his daily briefing, as he sent the policemen out on their patrols, with the words, “Let’s be careful out there.”
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Sharp macroeconomic analysis, big market calls, and shrewd predictions are all in a week’s work for visionary thinker and acclaimed financial expert John Mauldin. Since 2001, investors have turned to his Thoughts from the Frontline to be informed about what’s really going on in the economy. Join hundreds of thousands of readers, and get it free in your inbox every week.
When it comes to the cost of living in cities, a general rule of thumb is that housing prices are much higher in the country’s economic and population hubs, especially in the cities along the coasts.
As Visual Capitalist"s Jeff Desjardins notes, particularly in recent years, prices have been pushed sky-high in places like New York City or San Francisco through a combination of limited supply of new homes, increasing demand, shifting demographics, and government regulations.
PUTTING IT INTO PERSPECTIVE
Today’s visualization from HowMuch.net applies a common denominator to compare 97 of the biggest cities in the United States. Using a measure of median household income against the average mortgage payment in each city, we get a gauge of how many hours must be worked each month just to pay down the house.
The visualization uses data from the U.S. Census for household income and Zillow for median home listing price, while calculating mortgage payments based on a standard 30-year term.
Using the above method to compare the amount of hours it takes to pay down a monthly mortgage, we see some interesting contrasts in the country.
Here are the five most expensive cities in the United States for housing:
With about 170 hours in a normal work month, the average people in these cities are spending 50% or more of their income just to pay down their mortgages. It’s worst in New York City and Los Angeles, where at least 65% of income is going towards housing.
These cities stand in stark contrast to the five cheapest cities based on hours of work needed:
In a city like Memphis, TN it takes only 18.4 hours of work a month to pay down the average mortgage. That’s equal to only about 10% of monthly household income.
COASTAL DISPARITY
Interestingly, even though coastal hubs have high prices relative to the cities in the middle of the country, they differ quite widely against each other. This discrepancy does not necessarily show in terms of ranking, but more in terms of the actual hours of work needed.
Washington, D.C., for example, requires less than half the hours of work to pay down a mortgage than Los Angeles or New York City. Meanwhile, a popular west coast hub like Seattle only needs 72.8 hours in comparison to New York’s 113.5 hours.
Everyone knows location is the most important part of real estate. You can’t change where your house is (all things being equal). You have to consider school districts, crime rates, commute times—the list goes on and on. It can be much simpler when you’re considering buying a home to compare apples to apples so you can see how the real estate market differs according to location.
So HowMuch.net created a new visualization showing land and housing prices at a glance.
The blue dots represent the value of an acre of land, and the red circles indicate the median value of a home. The bigger the blue dot and the larger the red circle, the more expensive it is to become a property owner. Small circles and dots likewise indicate a very low cost of purchasing property. The home values are from the U.S. Census Bureau’s 2015 American Consumer Survey, and the numbers behind the land values come from the Bureau of Economic Analysis.
As HowMuch.net notes, several things stand out in our illustration.
An acre of land is much more valuable in the Northeast compared to any other part of the country. This is partly because the Eastern seaboard is a very densely populated area with several large cities, most notably New York. It is also a historical artifact that Europeans settled New England first and then moved west, meaning that New York and Massachusetts have some of the oldest modern structures anywhere in the U.S. In other words, Eastern cities are a lot older than Midwestern cities, so there isn’t a lot of farmland for suburban expansion anymore. We should also mention that in terms of geographic size, these are some of the smallest states in the country. Matter of fact, the three states where the cost of an acre of land is greater than the median price of a house are all located on the East Coast, and they happen to be some of the smallest states in the Union (Rhode Island, Connecticut, and New Jersey).
Median home values (the red circles) are a different and more complicated story. California has the most expensive houses by far ($449,100). Oregon and Washington boast similarly high housing valuations as well ($264,100 and $284,000, respectively). It is also expensive to buy a home on the East Coast with six out of the top ten states with the most expensive median home values.
But there’s a noticeable dip in both housing and land prices in southern and midwestern states. Prices slowly rise the further you move from east to west. This highlights unique economic developments over the last several years, including the boom in oil exploration in North Dakota and the growth of Western cities thanks to young people,like Denver. Snowbirds also tend to move to Florida and Arizona after they retire, which also pushes up housing prices in those places.
Top 5 Most Expensive States to Buy a Home
California - Value per acre: $39,092; Median Home Value: $449,100
Massachusetts - Value per acre: $102,214; Median Home Value: $352,100
New Jersey - Value per acre: $196,410; Median Home Value: $322,600
Maryland - Value per acre: $75,429; Median Home Value: $299,800
New York - Value per acre: 41,314; Median Home Value: $293,500
Top 5 Cheapest States to Buy a Home
West Virginia - Value per acre: $10,537; Median Home Value: $112,100
Mississippi - Value per acre: $5,565; Median Home Value: 112,700
Arkansas - Value per acre: $6,739; Median Home Value: $120,700
Oklahoma - Value per acre: $7,364; Median Home Value: $126,800
Kentucky - Value per acre: $7,209; Median Home Value: $130,000
All this shows that the laws of supply and demand are alive and well in the real estate market. You can easily find cheap acres of land where they are plentiful and un-useful (sorry, Nevada), but owning property is a lot more expensive in smaller places crowded with lots of people. As always, location, location, location.
Since the late 1990s, Manhattan real estate has become one of the premier destinations for foreigners - particularly wealthy Russian and Chinese businessmen - looking to stash their money offshore, helping to transform once-derelict neighborhoods like Soho into trendy hubs for the global elite, while sending housing prices throughout the city rocketing higher, putting the American ideal of homeownership out of reach for millions of middle-class New Yorkers.
But since the beginning of the year, untenably high prices, combined with an expected pullback in foreign investment have dramatically changed the outlook for both commercial and residential real estate in the city. To wit, in research published last month, Morgan Stanley forecast that China’s latest crackdown on capital outflows and corporate leverage would hammer NYC’s commercial real-estate market, leading to an 84% drop in overseas property investment by Chinese corporations during 2017, and another 18% in 2018, potentially resulting in a sharp decline in prices.
And now, the earliest signs of a similar shakeout in residential real-estate are beginning to emerge. As Bloomberg reports, something unusual happened in New York’s residential market last month: Even as the number of newly signed leases rose to an all-time high, the vacancy rate for apartments in the borough climbed – meaning that, even after offering renters tantalizing concessions, landlords struggled to offload all of the newly available supply.
This amounted to a boon for renters, who whittled an average of 2% off their asking rents in August. Landlords also added concessions like a free months’ rent on 24% of new agreements, double the share from a year earlier, Miller Samuel and Douglas Elliman said.
Ultimately, they signed 12% more leases than during the same period a year earlier, helping to keep prices stable – for now, at least. The median Manhattan rent, after concessions were subtracted, was $3,377 last month, up 0.5 percent from August 2016.”
Still, the vacancy rate climbed to 2.27% from 2.14% a year earlier, the first annual increase since February. This problem isn"t confined to residential real-estate. As we noted back in May, commercial landlords are having similar difficulties finding tenants. And with ever more housing units expected to hit the market across the five boroughs next year, the problem is poised to worsen.
In another troubling sign for Manhattan real-estate developers, rents in August declined in almost every Manhattan neighborhood. And while the number of signed co-op contracts climbed 13% from last year, condo sales dropped 11% versus August 2016.
Rent declines were particularly steep in the borough’s trendiest neighborhoods. In Soho and Tribeca, the borough’s costliest neighborhoods for rentals, the median rent was $5,100, down 15% from a year earlier. Upper West Side rents fell 2.8% to $3,698, while leasing costs in the West Village dropped 3.8% to $3,850.
And as the city’s postcrisis construction boom continues, Bloomberg, citing a survey by Miller Samuel and Douglas Elliman, noted that Manhattan had 7,497 apartments listed for rent at the end of August, or 31% more than the monthly average since they started keeping the data in January 2008.
“It really does show just how much inventory there is out there,” said Hal Gavzie, who oversees leasing at Douglas Elliman. “Yes, we have so many leases being signed - and yet, you still have so many options for customers out there.”
Or as another NYC real-estate maven put it...
“We’re going to see prices come down a bit as these landlords get concerned about filling the vacancies before the winter,” Gavzie said. “Nobody wants their apartments vacant in November.”
Of course, while these developments might make landlords nervous, they carry a massive benefit for the city’s poorest and most vulnerable residents. As we noted last month, fluctuations in the size of New York City’s homeless population are incredibly sensitive to real-estate prices. A 5% increase in the average residential real-estate price in New York City can cause the homeless population to climb by 3.9%.
And after the homeless population climbed by an unprecedented 40% over the past year, perhaps this is the solution for New York"s "homelessness problem" that Mayor Bill de Blasio is looking for.
Over a decade ago, the U.S. residential housing market was revealed to be perhaps the biggest ponzi scheme ever created as easy financing enabled people to buy/build countless investment properties, that they were in no way adequately capitalized to own, with no money down all based on the premise that the house could be "flipped" before the first mortgage payment even came due. It was a classic ponzi that worked great for a while but inevitably turned south when home prices suddenly soured and their was no cash equity backing the trillions of dollars in outstanding mortgage debt.
But, if a new report from LF Economics is even directionally accurate, then the bubble currently percolating in Australia could take the residential housing ponzi game to a whole new level courtesy of a "creative" little product called "cross-collateralized residential mortgages."
The Australian mortgage market has “ballooned” due to banks issuing new loans against unrealised capital gains of existing investment properties, creating a $1.7 trillion “house of cards”, a new report warns.
The report, “The Big Rort”, by LF Economics founder Lindsay David, argues Australian banks’ use of “combined loan to value ratio” — less common in other countries — makes it easy for investors to accumulate “multiple properties in a relatively short period of time despite high house prices relative to income”.
“The use of unrealised capital gain (equity) of one property to secure financing to purchase another property in Australia is extreme,” the report says.
“This approach allows lenders to report the cross-collateral security of one property which is then used as collateral against the total loan size to purchase another property. This approach substitutes as a cash deposit.
“This has exacerbated risks in the housing market as little to no cash deposits are used.”
Yes, you read that correctly...Australian housing speculators can literally use unrealized gains in investment properties as a "cash substitute" for down payments on other investment properties. Of course, we"re not experts at "the mathematics," but if you constantly take every dollar worth of equity you accrue and pledge it as collateral toward a new purchase then doesn"t that mean the entire system is built on debt and no actual equity at all?
As LF Economics points out, just like the American mortgage bubble, the current ponzi scheme in Australia is also completely dependent on constantly rising prices.
The report describes the system as a “classic mortgage Ponzi finance model”, with newly purchased properties often generating net rental income losses, adversely impacting upon cash flows.
“Profitability is therefore predicated upon ever-rising housing prices,” the report says. “When house prices have fallen in a local market, many borrowers were unable to service the principal on their mortgages when the interest only period expires or are unable to roll over the interest-only period.”
And, just like the American bubble, much of the madness is being funded by unsuspecting foreign investors.
LF Economics argues that while international money markets have until now provided “remarkably affordable funding” enabling Australian banks to issue “large and risky loans”, there is a growing risk the wholesale lending community will walk away from the Australian banking system.
“[Many] international wholesale lenders ... may find out the hard way that they have invested into nothing more than a $1.7 trillion ‘piss in a fancy bottle scam’,” the report says.
Meanwhile, there is no shortage of "success stories" from people who make next to no money doing their "day jobs" but have been able to acquire dozens of investment properties with nothing but debt.
Last month, a young Sydney couple revealed how they had racked up $1.2 million in debt on a portfolio of five properties in just two years.
Roy Palleson and Rowena Ebona, appearing on the ABC’s Four Corners, said they had no concerns about their debt — nearly 10 times their combined income of $135,000 — and were hoping to expand their portfolio to 20 investment properties “initially”.
Prominent Sydney property investor Nathan Birch, who accumulated more than 200 properties worth an estimated $55 million by channelling the equity from capital gains into deposits for new purchases, earlier this year announced he was selling off some of his portfolio.
Mr Birch blamed the move on tougher loan serviceability restrictions by the banks. “Anytime you withdraw equity, you need to show income to service that new loan,” he said. “Sadly, the banks don’t value rental income as highly as they once did.”
Eddie Dilleen, a young investor with 10 properties worth about $2 million, last month said he was not fazed by tightening lending environment or talks of a housing bubble.
Mr Dilleen said the majority of his portfolio was positively geared, largely because he avoided borrowing against existing properties, instead saving up for each new deposit by working several jobs.
Conclusion: "Short everything that guy has touched."
A UK co-living company has announced that it will begin accepting down payments made in bitcoin, according to CoinTelegraph, making it that much easier for traders hooked on effortless, outstanding returns to speculate in another bubble-prone market: UK housing.
Co-living pioneer The Collective announced the decision on Tuesday, saying it’s the first developer that will accept payments in cryptocurrency. The company added that it’s exploring how to accept rental payments in bitcoin, which it hopes to implement later in the year. It said that its decision to accept bitcoin was related to demand from international clients.
The company has pledged to perform a “spot conversion” of users’ deposits – a fancy way of saying it intends to hedge its position – so that it bears any financial risk while holding the deposit.
“The Collective"s online booking form for its Old Oak living scheme, an ambitious co-living development with 550 rooms, will be accepting Bitcoin as a deposit on the flats.
The standard deposit is £500, which equates to about 0.148 at time of publishing. Additionally, with the volatile nature of Bitcoin seemingly holding back its ability to be utilized as a currency, The Collective has pledged “spot conversion,” which means it will bear any financial risk while holding the deposit, returning it at the original value when the tenancy finishes.”
The Collective’s chief executive and founder Reza Merchant said the decision was a bold move for the UK property market.
“The rise and adoption of cryptocurrency globally, particularly Bitcoin, is a fascinating development in how people store value and transact for goods and services worldwide.
With many savers and investors now choosing and becoming more comfortable with cryptocurrency, people will expect to be able to use it to pay for life’s essentials, including housing deposits and rent.”
It’s a major step indeed. Housing prices in London have risen 65% since 2011, compared with bitcoin’s more-than 300% climb since the beginning of the year. But we imagine some less risk-averse bitcoin investors might be attracted to the deal, reasoning that it’s a smart way to lock in their investment returns.
UK’s Land Registry data for three London boroughs shows transaction volumes in London are at all-time lows. Back in December asking prices in London dropped 4.3%, with inner London down 6%. More exclusive areas dropped by as much as 10%.
Between 2006 and 2016, average home prices in the capital grew from £257,000 to £474,000 or by a very substantial 84.4%. These large gains were "built" on the back of the very large appreciation in prices between 1996 and 2006.
Despite this, the Collective’s head of technology, Jon Taylor, told CoinTelegraph that their company is proudly breaking down barriers to bitcoin’s legitimacy.
“One of the biggest barriers to the popularity of Bitcoin is making it more consumer-friendly, and we believe this will become established as an easy and convenient way to pay deposits.”
According to CoinTelegraph, private property owners in the US have occasionally priced their property in bitcoin in the hopes of attracting buyers, as well as accumulating the valuable digital currency. A well-regarded Miami trader recently placed his house for sale in Bitcoin after first trying to entice the seller to pay him in bitcoin back in 2014.
With the economic threat of Brexit looming in the not-too-distant future, some say the UK housing market is headed for a leveling off if not an outright drop. But who knows, maybe we will see one last leg higher as the crypto traders look to cash in their winnings before the next Mt Gox kills the market.
