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Next Central Bank Puts QE Unwind on the Calendar

Next Central Bank Puts QE Unwind on the Calendar

The end of an era spreads.

Markets were surprised today when the Bank of England took a “hawkish” turn and announced that three out of nine members of its Monetary Policy Committee – including influential Chief Economist Andrew Haldane, who’d been considered dovish – voted to raise the Bank Rate to 0.75%, thus dissenting from the majority who kept it at 0.5%. This dissension, particularly by Haldane, communicated to the markets that a rate hike at the next meeting in August is likely. The beaten-down UK pound jumped.

But less prominent was the announcement about the QE unwind. Like other central banks, the BoE heavily engaged in QE and maintains a balance sheet of £435 billion ($577 billion) of British government bonds and £10 billion ($13 billion) in UK corporate bonds that it had acquired during the Brexit kerfuffle.

Before it starts shedding assets on its balance sheet, however, the BoE wants to raise the Bank Rate enough to where it can cut it “materially” if needed, “reflecting the Committee’s preference to use Bank Rate as the primary instrument for monetary policy,” as it said.

In this, it parallels the Fed. The Fed started its QE unwind in October 2017, after it had already raised its target range for the federal funds rate four times.

The BoE’s previous guidance was that the QE unwind would start when the Bank Rate is “around 2%.” Back in the day when this guidance was given, NIRP had broken out all over Europe, and pundits assumed that the BoE would never be able to raise its rate to anywhere near 2%, and so the QE unwind could never happen.

Today the BoE moved down its guidance about the beginning of the QE unwind to a time when the Bank Rate is “around 1.5%.”

…click on the above link to read the rest of the article…

Why a US-Style Housing Bust & Mortgage Crisis Can Happen in Canada, Australia, and Other Bubble Markets

Why a US-Style Housing Bust & Mortgage Crisis Can Happen in Canada, Australia, and Other Bubble Markets

Despite persistent and false memes to the contrary.

When a housing downturn gets big enough, there will be a mortgage crisis, and it will hit banks, shadow banks, and mortgage insurers no matter what the mortgage laws are: that’s what the US mortgage crisis has demonstrated. Yet many industry organs and media outlets in Canada, Australia, and other places with acute housing bubbles are trying to hide behind a false meme about US mortgage laws. What happened there cannot happen here, they say.

So we’re going to debunk this meme.

“Jingle mail” was a phenomenon during the US mortgage crisis when homeowners and small-scale investors, unable or unwilling to make mortgage payments, abandoned the place, figuratively mailing the keys to the bank. This phenomenon took various forms, such as homeowners who stopped making payments but continued to live in the home, sometimes for years, because the foreclosure process was hopelessly bogged down.

All this became a problem only after home prices dropped substantially below the amount people owed on their mortgages, which made it impossible for them to sell the home and pay off the mortgage.

This is rarely a problem in a rising housing market. Default rates are minuscule because it’s easy to sell the home and pay off the mortgage. And during these times, lenders hide behind these low default rates. But these default rates are only low because home prices are rising.

But when home prices drop sharply, after years of low-down-payment requirements and thus little equity cushion, suddenly soaring defaults are a problem that “came out of nowhere.”

…click on the above link to read the rest of the article…

Chasing Yield during ZIRP & NIRP Evidently Starved Human Brains of Oxygen. Now the Price Is Due

Chasing Yield during ZIRP & NIRP Evidently Starved Human Brains of Oxygen. Now the Price Is Due

See Argentina’s 100-year dollar-bond and emerging-market “turmoil” as the Hot Money flees.

Let’s be clear: It’s not just Argentina. But Argentina is the most elegant example. The exodus of the hot money from emerging markets where cheap dollar-debts were used to fund pet projects and jack up leverage is – once again – in full swing. Cheap dollar-debt in emerging markets is an old sin that, like all old sins, is repeated endlessly. The outcome is always trouble. But during the act, it sure is a lot of fun for everyone.

The exodus of the hot money is even gripping the non-basket-case emerging economies of Asia where it’s causing the worst indigestion since 2008. Bloomberg:

Overseas funds are pulling out of six major Asian emerging equity markets at a pace unseen since the global financial crisis of 2008 – withdrawing $19 billion from India, Indonesia, the Philippines, South Korea, Taiwan, and Thailand so far this year.

While emerging markets shone in the first quarter, suggesting resilience to Federal Reserve tightening, that image has shattered over the past two months. With American money market funds now offering yields around 2% – where 10-year Treasuries were just last September – and prospects for more Fed hikes, the bar for heading into riskier assets has been raised.

“It’s not a great set-up for emerging markets,” James Sullivan, head of Asia ex-Japan equities research at JPMorgan Chase, told Bloomberg. “We’ve still only priced in about two thirds of the US rate increases we expect to see over the next 12 months. So the Fed is continuing to get more hawkish, but the market still hasn’t caught up.”

Emerging markets have responded to this new environment and a newly hawkish Fed with all kinds of gyrations, including raising rates in order to prop up their currencies. For example, the central banks of Argentina and Turkey hiked key rates to 40% and 17.75% respectively.

…click on the above link to read the rest of the article…

What’s Going On with Trucking and Rail?

What’s Going On with Trucking and Rail?

Everything is spiking, setting off “inflationary concerns.”

When consumer products companies, retailers, oil-and-gas drillers, manufacturers, and other companies complain that shipping goods within the US is confronting them with soaring costs, capacity constraints, and delays, they’re not making this up. Trucking companies and railroads – an infamously cyclical industry that suffered through the “transportation recession” from 2015 through much of 2016 – are jacking up their prices with gusto.

The total amount that shippers spent on freight by truck, rail, barge, and air is skyrocketing, according to the Cass Freight Expenditure Index, which tracks the amounts spent by shippers on all modes of transportation. This spending is a function of price and volume. In May, soaring prices and shipping volume pushed spending up by 17.3% compared to a year ago, the 8th double-digit year-over-year increase in a row:

“May’s 17.3% increase clearly signals that capacity is tight, demand is strong, and shippers are willing to pay up for services to get goods delivered in all major modes throughout the transportation industry,” the Cass report said.

And the rising price of fuel and the related fuel surcharges added to the amounts spent: the price of diesel was up 27% at the end of May from a year ago.

The Cass Truckload Linehaul Index, which tracks per-mile full-truckload pricing but does not include fuel or fuel surcharges and is not impacted by rising diesel prices, jumped 9.0% in May compared to a year ago, the largest year-over-year increase in the data going back to 2005. And “the strength is continuing to accelerate,” Cass said in its Linehaul report:

…click on the above link to read the rest of the article…

Next Mortgage Default Tsunami Isn’t Going to Drown Big Banks but “Shadow Banks”

Next Mortgage Default Tsunami Isn’t Going to Drown Big Banks but “Shadow Banks”

As banks pull back from mortgage lending amid inflated prices and rising rates, “shadow banks” become very aggressive.

In the first quarter 2018, banks and non-bank mortgage lenders – the “shadow banks” – originated 1.81 million loans for residential properties (1 to 4 units). In the diversified US mortgage industry, the top 10 banks and “shadow banks” alone originated 260,570 mortgages, or 14.4% of the total, amounting to $75 billion. We’ll get to those top 10 in a moment.

Banks are institutions that take deposits and use those deposits to fund part of their lending activities. They’re watched over by federal and state bank regulators, from the Fed on down. Since the Financial Crisis and the bailouts, they were forced to increase their capital cushions, which are now large.

Non-bank lenders do not take deposits, and thus have to fund their lending in other ways, including by borrowing from big banks and issuing bonds. They’re not regulated by bank regulators, and their capital cushions are minimal. During the last mortgage crisis, the non-bank mortgage lenders were the first to collapse – and none were bailed out.

So let’s see.

Of those 1.81 million mortgages originated in Q1 by all banks and non-banks, according to property data provider, ATTOM Data Solutions:

  • 666,000 were purchase mortgages, up 2% from a year ago
  • 800,000 were refinance mortgages (refis), down 11% from a year ago due to rising interest rates.
  • 348,000 were Home Equity Lines of Credit (HELOCs), up 14% from a year ago

HELOCs, which allow homeowners to use their perceived home equity as an ATM, are once again booming: $67 billion were taken out in Q1, though that’s still less than half of peak-HELOC in Q2 2006, when over $140 billion were taken out.

The Top 10 Mortgage Lenders in Q1 2018

…click on the above link to read the rest of the article…

China’s Global Electricity Takeover

China’s Global Electricity Takeover

Powered by low-cost state-funded capital

There has been no shortage of stories recently about looming trade wars and foreign investments with questionable implications for national security. But the business press recently took notice of one particularly large investment number: $452 billion. This is the amount China’s state controlled power companies have invested abroad over the past five years.

The list of actual and potential Chinese utility investment locations includes Pakistan, Russia, Nigeria, Brazil, Chile, Portugal, Philippines, Germany, and the UK.

Roughly one third of this almost half a trillion dollars of investment relates to power transmission projects. The Chinese are exporting their ultra-high voltage transmission technology. This, supposedly, is the secret of China’s technology-export success. Generally speaking, moving bulk electricity at higher voltages reduces line losses, which in turn reduces the cost of transmission.

Transmission expenses, however,  account for slightly less than 10% of end-use electricity costs, a relatively small piece of cost of the final product.  A typical high voltage transmission line experiences losses of about 4% on average. An ultra-high voltage line brings losses down to about 1%. But reducing losses in this fashion requires more capital. Obtaining meaningful savings elsewhere in the power production process should count for far more.

In the semi-deregulated power markets common nowadays, transmission operators run the power grid – somewhat like policemen at a busy intersection directing traffic. Although only minor government functionaries, those directing traffic have a considerable amount power. They decide who proceeds and who shall have extra time to respond to text messages. In the context of the power transmission grid, grid operators as traffic cops have a considerable amount of power and responsibility. For this reason, some local authorities have been reticent about ceding this vital function to Chinese investment and control.

…click on the above link to read the rest of the article…

The Dollar’s Purchasing Power Drops 2.9% in May from Year Ago, Fastest Drop since Nov 2011

The Dollar’s Purchasing Power Drops 2.9% in May from Year Ago, Fastest Drop since Nov 2011

Even as “hedonic quality adjustments” perform miracles to repress surging new and used vehicle inflation.

Consumer price inflation, as measured by the Consumer Price Index, released this morning by the Bureau of Labor Statistics, jumped by 2.8% in May from a year ago, after having already jumped by 2.5% in April. It was the fastest year-over-year rise since February 2012:

Inflation is just a nice way of saying that the dollar is losing its purchasing power, and that income earned in dollars is buying less and less, an experience consumers go through when they buy stuff. The purchasing power of the dollar dropped 2.93% in May from a year ago, the fastest drop since November 2011. The chart below shows the index of the dollar’s swooning purchasing power:

The CPI without food and energy rose 2.24% from a year ago, after having already risen 2.14% in April.

These year-over-year percentage changes in the Consumer Price Index are slower than what consumers experience in terms of actual price increases. Here are two big examples of how this discrepancy is happening: prices of used vehicles and new vehicles.

The CPI for used cars and trucks fell 1.7% in May from a year ago (not seasonally adjusted), according to the BLS. This index has been falling much of the time during the last decade with exception of the “Cash for Clunkers” period and its consequences, which took a whole generation of often perfectly good older cars off the road, and thus actually raised prices on what was left (the spike in this chart from 2010-2012):

The chart below shows the actual index of used car- and truck-price inflation over the decades. Note that this CPI for used vehicles in May is at the same level as in 1994:

…click on the above link to read the rest of the article…

My Views on US-Canada Trade, Steel’s Impact on National Security, NAFTA, and the Dollar

My Views on US-Canada Trade, Steel’s Impact on National Security, NAFTA, and the Dollar

Wolf Richter with Jim Goddard on This Week in Money:

Trade agreements are designed to benefit companies, not people – which is part of the problem. We also get into whether gold and silver will remain stuck in the current trading range, and whether there will be a recession under Trump.

 

How Chinese Investors Inflate Housing Markets in the US, Canada, and Australia, as Governments Try to Stem the Tide

How Chinese Investors Inflate Housing Markets in the US, Canada, and Australia, as Governments Try to Stem the Tide

The “waterbed effect” of money flows.

Top residential real estate brokerages in the US have been promoting US homes to investors in China for years. Brokerage firms in Canada, Australia, New Zealand, and other countries have done the same. Commissions are at stake! They have set up units in China and are partnering with Chinese real estate portals, such as Juwai.com.

Warren Buffett’s Berkshire Hathaway HomeServices, a subsidiary of HomeServices – the second largest residential brokerage in the US – entered the fray belatedly a year ago with a marketing agreement with Juwai.com “to syndicate all of its franchisees’ residential listings.”

And not just in the trophy cities on the coasts, but all of Berkshire’s listings, anywhere.

One of the properties it offers on Juwai.com today is this mansion on 8387 Ford Road, Superior Township, Michigan:

Scrolling down the page of any of these listings reveals four red buttons that lead to the crux of these deals for Chinese investors (so-so translations below):

  • Top left: Guide on how to buy a house in the US.
  • Top right: Guide with maps of school districts and housing around the “top 100” universities.
  • Bottom left: Guide for obtaining a US investor immigrant visa EB-5
  • Bottom right: Guide on how to apply for study abroad.

And these brokerage firms in the US, Canada, Australia, New Zealand, and other countries are doing expos and conferences in China to lure investors to make the leap. This massive marketing effort in China by these firms has worked like a charm.

Juwai.com predicts, according to the Wall Street Journal, that Chinese investors will plow $1.5 trillion into assets abroad over the next decade, with about half of that going into foreign property.

…click on the above link to read the rest of the article…

Huge New Prop under the Stock Market is a One-Time Affair

Huge New Prop under the Stock Market is a One-Time Affair

Crash insurance with an expiration date. But its working while it lasts.

In May, with great and perfectly orchestrated fanfare, US corporations announced plans to buy back $173.6 billion of their own shares sometime in the future. It was the largest monthly buyback announcement ever. And some of the announcements were expertly timed to overcome operational debacles.

The record amount of share repurchase announcements was due “in large part” to the changes in the corporate tax law, according to TrimTabs, which gathered the data.

This report was released when the digital ink was still drying on my musings about the FANGMAN stocks – Facebook, Amazon, Netflix, Google’s parent Alphabet, Microsoft, Apple, and Nvidia – that are so immensely overvalued that Goldman Sachs considered it necessary to come out with a note explaining that, based on fundamentals, they’re actually not in a bubble, which I had some fun pooh-pooing.

Some of the FANGMAN stocks are massive share buyback queens, such as Apple and Microsoft. Others are bottomless cash-sinkholes, such as junk-rated Netflix, which has to constantly raise new money, either by selling more shares or selling debt, so that it has more fuel to burn through, and it doesn’t have a dime to buy back its own shares.

That $173.6 billion in share repurchase plans includes the record-breaking mega-announcement from Apple that it would buy back $100 billion of its own shares. Here are the top five that account for $134.3 billion, or 77% of the total:

  • Apple: $100 billion
  • Micron: $10 billion
  • Qualcomm: $8.8 billion
  • Adobe: $8.0 billion
  • T-Mobile: $7.5 billion

To put that May total of $173.6 billion – these are just announcements of planned repurchases sometime in the future that may never fully transpire – into perspective: In Q1, total actual share buybacks reported by the S&P 500 companies amounted to $178 billion, an all-time record. That averages out to “only” $59.3 billion a month on average, compared to the announcements in May of $173.6 billion.

…click on the above link to read the rest of the article…

 

Toronto’s House Price Bubble Not Fun Anymore

Toronto’s House Price Bubble Not Fun Anymore

Average price of single-family house plunges 13%, or by C$160,000 from peak. Sales of homes priced over C$1.5 million collapse by 63%. Condos still hanging on.

Housing in the Greater Toronto Area is, let’s say, retrenching. Canada’s largest housing market has seen an enormous two-decade surge in prices that culminated in utter craziness in April 2017, when the Home Price Index had skyrocketed 32% from a year earlier. But now the hangover has set in and the bubble isn’t fun anymore.

Home sales plunged 22% in May compared to a year ago, to 7,834 homes, according to the Toronto Real Estate Board (TREB). It affected all types of homes, even the once red-hot condos:

  • Detached houses -28.5%
  • Semi-detached houses -29.4%
  • Townhouses -13.4%
  • Condos -15.5%.

It was particularly unpleasant at the higher end: Sales of homes costing C$1.5 million or more plummeted by 46% year-over-year to 508 homes in May 2018, according to TREB data. Compared to the April 2017 peak of 1,362 sales in that price range, sales in May collapsed by 63%.

But it’s not just at the high end. At the low end too. In May, sales of homes below C$500,000 – about 68% of them were condos – fell by 36% year-over-year to 5,253 homes.

The TREB publishes two types of prices – the average price and its proprietary MLS Home Price Index based on a “composite benchmark home.” Both fell in May compared to a year ago.

The average price in May for the Greater Toronto Area (GTA) fell 6.6% year-over-year to C$805,320, and is now down 12.3%, or an ear-ringing C$113,000, from the crazy peak in April 2017.

There are no perfect measures of home prices in a market. Each has its own drawbacks. Average home prices can be impacted by the mix and by a few large outliers – but over the longer term, it gives a good impression of the direction. The chart below shows the percentage change in average home prices in the GTA compared to a year earlier:

…click on the above link to read the rest of the article…

“Bunker,” the Fuel for the Giant Engines in Large Cargo Ships

“Bunker,” the Fuel for the Giant Engines in Large Cargo Ships

The world grapples with the emissions.

When pricing a container shipment, we are sometimes told rates have gone up because “bunker oil” has increased in price or that the delivery will take a few extra days because shipowners ordered their skippers to slow down to save “bunker oil.”

But what is this “bunker oil”?

The term “bunker oil” defines all types of fuel used by the shipping industry and generally speaking can be split in two categories: distillates and residuals.

Distillates are produced during fractional distillation of crude oil and generally are very close in density to diesel #2, the mainstay fuel in trucking and agriculture, but slighter denser.

Residuals are produced from the thick sludge left over at the bottom of the refinery’s fractionating column and are only a step or two removed from bitumen, the stuff used to pave roads: the most widespread types of residual bunker available have densities ranging from 500 to 700cSt at room temperature. For comparison, the densest types of diesel fuel have a density of under 35cSt at room temperature. This means that this type of bunker has to be pre-heated before it can be pumped into the fuel system.

There are also several blends of distillates and residuals, or of various residuals, whose density ranges from 300 to 400 cSt, which are sold to provide a cheap alternative to straight diesel fuel while at the same time helping to meet environmental legislation.

Pollution by maritime vessels is regulated worldwide by the International Convention for the Prevention of Pollution from Ships (MARPOL), first ratified in 1973, and regularly amended over the years, the last time in 2013.

The MARPOL protocol legislates all aspects of ship-related pollution, from emission levels to how waste from the ship latrines should be processed and disposed of (not a joke when modern cruise ships are involved).

…click on the above link to read the rest of the article…

Visa Goes Down in the UK, Chaos Ensues, Cash is Suddenly King

Visa Goes Down in the UK, Chaos Ensues, Cash is Suddenly King

War on Cash Suffers Setback.

For over 12 hours on Friday, shopping centers in the UK and other parts of Europe were plunged into chaos as millions of consumers were unable to use their Visa debit or credit cards at points of sale. The credit card company, which was finally able to restore normal service early Saturday morning, said it had no reason to believe the hardware failure was due to “any unauthorized access or malicious event”.

While the mayhem caused by the outage may have been short lived, it served as a stark reminder of the risks, both for consumers and retailers, of depending purely on cashless payments. In the UK, the chaos unleashed was particularly acute since it is one of the world’s most cashless economies, pipped to the post only by Canada and Sweden, as a recent study by industry analysts reported.

In 2017, cards overtook cash for retail payments in UK for the first time ever, according to figures from the British Retail Consortium. According to Visa, payment processing through its systems accounts for a staggering £1 in every £3 of all retail spending in the UK. Which is why, when those systems stopped working yesterday, the chaos was greater in the UK than almost anywhere else as cashless customers missed trains, were unable to fill up their cars, pay for their groceries, or even clear their bar tab — this was Friday, after all!

“There is never a good time for the payments system to go down but a Friday afternoon, when there is a flood of people leaving work, must be among the worst,” one banking industry source said. The only way for people to pay for stuff was with co-branded Mastercard cards, or hard cold cash. Luckily, Visa cards were still working at ATMs, although the queues were considerably longer than normal.

…click on the above link to read the rest of the article…

Another Nuclear Bailout?

Another Nuclear Bailout?

As pulp fiction aficionados, we love a good hostage situation.

Last week, New Jersey joined the list of states seemingly eager to bail out politically well-connected nuclear power plant operators. Governor Phil Murphy signed a bill that would grant subsidies of up to $300 million per yearto the owners of the Salem and Hope Creek nuclear power stations, two plants in southern New Jersey approaching the end of their useful lives.

PSEG Nuclear, an affiliate of the state’s largest utility, owns 100% of Hope Creek and 57% of Salem. It made clear that it would not put any new investment into these large, aging power stations without a subsidy, threatening a full closure within a brief period.

As pulp fiction aficionados, we love a good hostage situation. In this case the “hostages” are several thousand utility employees and presumably voters.

The potential adverse economic impact of a power plant closures is regionally significant. State and local governments have become dependent on property and related taxes levied on these facilities. Not surprisingly for this genre the hostages, so to speak, have relatives.

The state legislature’s bill would add a surcharge on electric utility customer bills. This would amount to about $40 per year for a typical residential customer, adding a not inconsiderable 3% to the average electric bill in the state. A ransom is also typical in these dramas.

The nuclear plant’s owners commissioned a study that laid out the supposed costs of a plant closure. It concluded that average electric bills would increase by 3-4%. Retiring plants of this size and type entails two types of expenditures that would be passed along to ratepayers:

  • The cost of replacement power.
  • Accelerated expenditures for nuclear plant closure.

However, the legislature voted to keep the nuclear plants open and raise customer electric bills by almost the amount that closure would have cost.

…click on the above link to read the rest of the article…

Which Banks Are Most Exposed to Italy’s Sovereign Debt? (Other than the Horribly Exposed Italian Banks)

Which Banks Are Most Exposed to Italy’s Sovereign Debt? (Other than the Horribly Exposed Italian Banks)

“Doom loop” begins to exact its pound of flesh.

Risk. Exposure. Contagion. These are three words we’re likely to hear more and more in relation to Europe, as the Eurozone’s debt crisis returns.

On Friday, Italy’s 10-year risk premium — the spread between Italian ten-year bond yields and their German counterparts — surged almost 20 basis points to 212 basis points. This was the highest level since May 2017, when a number of Italy’s banks, including third biggest bank Monte dei Paschi di Siena (MPS), were on the brink of collapse and were either “resolved” or bailed out. Now, they’re all beginning to wobble again.

Shares of bailed-out and now majority-state-owned MPS, whose management the new government says it would like to change, are down 20% in the last two weeks’ trading. The shares of Unicredit and Intesa, Italy’s two biggest banks, have respectively shed 10% and 18% during the same period.

One of the big questions investors are asking themselves is which banks are most exposed to Italian debt.

A recent study by the Bank for International Settlements shows Italian government debt represents nearly 20% of Italian banks’ assets — one of the highest levels in the world. In total there are ten banks with Italian sovereign-debt holdings that represent over 100% of their tier-1 capital (which is used to measure bank solvency), according to research by Eric Dor, the director of Economic Studies at IESEG School of Management.

The list includes Italy’s two largest lenders, Unicredit and Intesa Sanpaolo, whose exposure to Italian government bonds represent the equivalent of 145% of their tier-1 capital. Also listed are Italy’s third largest bank, Banco BPM (327%), Monte dei Paschi di Siena (206%), BPER Banca (176%) and Banca Carige (151%).

…click on the above link to read the rest of the article…

Olduvai II: Exodus
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Olduvai
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Olduvai II: Exodus
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Olduvai III: Cataclysm
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