While the Chinese Wuhan virus (aka, the Fauci Flu) has plagued the world, another Chinese “export” is also suffering what is known as contagion: China’s real estate sector.
Real estate companies Evergrande, Kaisa, Shimao and Chinese Estates are falling like a rock today.
But it has been a steady decline since Q1 2021 except for Chinese Estates. But they have resumed their death dive.
On the debt side, Evergrande is down to 18.856 while Kaisa has lost less (but still quite a bit) and Shimao’s bond look almost like a good investment, relative to Kaisa and Evergrande. But they are all sucking wind. Maybe they all have the Fauci Flu?
Let’s see if this latest Chinese “export” washes ashore in the USA.
I love how The Federal Reserve talking heads, the media, economists like Paul Krugman, all refer to inflation as “transitory” and excessive liquidity as “temporary.”
Let’s look at a variety of alternative investments to the S&P 500, GameStop, Bitcoin, Ethereum and Gold after The Federal Reserve’s and Federal government massive (over)reaction to COVID in early 2020. Gold is the first asset to surge after M2 Money surged, but has declined since. Game Stop had a big surge (likely due to positive vibes on Reddit), but has been volatile and generally falling since “The Surge.” Bitcoin had a delayed surge as did Ethereum. Despite fear about government regulation, Ethereum in particular remains elevated.
The “temporary” stimulus has resulted in the lowest M2 Money velocity in history. And we will have to see if the “temporary” excess liquidity in the financial system is truly temporary.
Here is a chart to show the “Stimulytpo” effect on commercial and industrial loans which surged (including PPP loans) but have simmered down to pre-COVID levels.
The earnings for GameStop were terrible (down 39.7% YoY). But at least Christmas season is upon us and maybe GameStop will surge with a good retail spending season.
But what happens to markets if the Federal government “stimulypto” is removed? If it ever is.
I love listening to Fed talking heads (or Fear The Talking Fed). They mostly seem to acknowledge that inflation is a problem and that the excessive monetary stimulus should be reduced.
But then I see the chart of The Fed’s balance sheet and The Fed’s reverse repo operations.
Then we have Federal Reserve Governor Christopher Waller saying that Th Fed could start raising interest rates as early as its March 15-16 meeting, after deciding to end asset purchases sooner than planned. My question is … why wait until the March meeting?
Is it fear of the Omincron Variant (which sounds like a Frederick Forsyth thriller)? Does The Fed not want to rock the boat prior to the Christmas season? The US is at or near full employment, so what is the real reason for delaying a rate increase until March or June? Or the fear that Congress won’t pass Biden’s Build Back Better Act?
Fed Funds Futures infer that one rate hike will occur at the June Fed Open Market Committee (FOMC) meeting and one at the November meeting.
It was bound to happen given the growth rate of Chinese real estate construction.
(Bloomberg) — China Evergrande Group was labeled a defaulter by S&P Global Ratings, the second credit-risk assessor to do so.
S&P Global cut Evergrande to “selective default” over its failure to make coupon payments by the end of a grace period earlier this month, a move that may trigger cross defaults on the developer’s $19.2 billion of dollar debt. S&P Global also withdrew its ratings on the group at Evergrande’s request.
Fitch Ratings was the first to declare the property developer in default on Dec. 9. Long considered by many investors as too big to fail, Evergrande has become the largest casualty of Chinese President Xi Jinping’s campaign to tame the country’s overindebted conglomerates and overheated property market. Concern has since spread to higher-rated firms like Shimao Group Holdings Ltd. as liquidity stress intensifies.
A cautionary tale of government pushing real estate construction.
The Freddie Mac 30-year mortgage commitment rate rose to 3.12%. But once we subtract the gut-wrenching inflation rate, the REAL 30-year mortgage rate is -3.689%.
The nominal Freddie Mac 30-year commitment rate rose to 3.12% which is still lower than 3.18% back on April 1, 2021 after surge in rates following Biden’s taking the office of Presidency in January.
Meanwhile, the REAL Case-Shiller National home price index (CS National YoY – CPI YoY) is growing at the fastest rate in history. Great if you already own a home, but lethal if you are renting and want to move to homeownership.
Meanwhile, REAL wage growth is at -1.94% YoY.
Well, Chairman Powell and The Gang failed to raise the Fed Funds Target Rate yet again, but let us know that they will tighten someday soon. The Fed Funds Futures are signalling a rate hike at the June 2022 meeting and another at the November meeting.
While The Fed couldn’t care less about the Taylor Rule, it is still interesting to note just how out of touch The Fed FOMC is with reality. The Taylor Rule indicates that their target rate should be 16.94% rather than the current target rate of 0.25%.
Keeping the target rate unchanged in the face of gut-wrenching inflation is a bold strategy, Cotton.
The Federal Reserve’s massive stimulus combined with Federal spending has led to US housing starts rising 11.8% in November. Housing starts remain elevated compared to pre-COVID levels.
1-unit starts rose 11.29% while 5+ (multifamily) starts rose 12.1% in November. All areas in the US saw growth except for the Midwest where starts fell by 7.27%.
Yes, with Powell leaving rates untouched … again … in The Fed’s effort to … not scare markets. Inflation be damned. Powell is the God of Hellfire!
Like John Belushi from The Blues Brothers, Fed Chair Jerome Powell is saying that the markets lackluster response in terms of bond yields to his “hawkish” announcement yesterday “isn’t his fault.”
(Bloomberg)Federal Reserve boss Jerome Powell appears unperturbed by the fact that longer-term bond yields remain low even as officials lay the ground work for tighter policy and inflation is ticking higher.
While the drop in longer-term rates may be viewed by some as indicative of where so-called terminal rates for U.S. policy might ultimately lie, Powell on Wednesday emphasized the impact of ultra-low yields in places like Japan and Germany in helping to keep them anchored.
“A lot of things go into the long rates and the place I would start is just look at global sovereign yields around the world,” Powell said at a news conference following the Fed’s final scheduled policy meeting for the year, which saw officials ramp up the pace of stimulus withdrawal and boost predictions for rate hikes in 2022. The Fed Chair noted that rates on Japanese and German government bonds are “so much lower” than those on Treasuries and that with currency hedging taken into account American debt provides investors with a higher yield. “I’m not troubled by where the long bond is,” he said.
This stands as something of a contrast to the view expressed back in 2005 by one of Powell’s predecessors. Back then, Fed chief Alan Greenspan described a decline in long-term bond yields even in the face of six policy rate increases as a “conundrum.”
Or it could be that no one REALLY believes that Central Banks will ever cut interest rates, despite surging inflation.
The US Treasury 10-year yield dropped 7 basis points overnight and remains just south of 1.50%. The Eurozone remains below 1% (with Germany at -0.358% and France at -0.009% at the 10-year mark). Japan is at 0.039%. This is what Powell means by low global rates keeping US long-term rates down.
The 10-year Treasury term premium (measured before Powell’s head fake on raising rates) has returned to pre-Biden levels.
Meanwhile, global equities futures are up across the board (well, except for Mexico).
The Fed could have raised their target rate if they were REALLY interested in cooling inflation. The Taylor Rule remains at 14.94% while The Fed is stalled at 0.25%. Even if you don’t like the Taylor Rule, it still highlights how ridiculous Fed Stimulypto is.
Well, we do have a government-propelled economic recovery, but at a cost of declining REAL wages thanks to the highest inflation rate in 40 years.
Prices paid to U.S. producers posted a record annual increase of almost 10% in November, a surge that will sustain a pipeline of inflationary pressures well into 2022.
The producer price index for final demand increased 9.6% from a year earlier and 0.8% from the prior month, Labor Department data showed Tuesday. Both advances topped economists’ forecasts.
Even more interesting (or frightening) is that PPI Final Demand YoY is soaring faster than CPI YoY. If CPI catches up to PPI, then we have serious trouble.
With inflation seemingly growing out of control, Powell and Biden should sing “76 Trillion Dollars” which will be the US national debt after Biden and Congress get done with their spending splurge.
According to Markets Insider, lumber prices are up 127% from its most recent low. With demand high and supplies low, record low interest rates still drive homeowners to the market, so much that builders are struggling to keep up.
Note the surge in lumber futures prices back in April and May 2021 that eased. But lumber futures prices are gaining steam again.
Let’s see what happens to lumber prices and new home prices if and when The Federal Reserve decides to takes its gargantuan foot off the monetary accelerator pedal.
In other housing-related news, China’s Evergrande remains in the news as its stock price founders.
Inflation-adjusted return of Treasuries fell to lowest since the 1980s. For bond investors, this is their version of Kevin’s Famous Chili from The Office! Or The Fed’s Famous Chili!
(Bloomberg) — Treasury investors are losing more money than they have in four decades, once inflation is taken into account. And if markets are right, they’re unlikely to come out ahead for years.
The federal government’s debt has already lost about 2% outright over the past year as the Federal Reserve started removing pandemic-era stimulus from the economy and inched closer toward raising interest rates. But on top of that, the consumer price index has surged 6.8%, putting investors even deeper in the hole.
Taken together, that’s resulting in the worst real returns — or those adjusted for inflation — since the early 1980s, when then Fed Chair Paul Volcker was in the midst of fighting a wage-price spiral. What’s more, the dynamic isn’t expected to change: The bond market is projecting that 10-year Treasury yields will hold below the inflation rate for the next decade, meaning any investment income will be more than wiped out by the rising cost of living.
If we look at the REAL 10-year Treasury yield and REAL Fed Funds Target Rate, they are both negative.
Let’s see if Powell spills his famous chili on Wednesday at 2:00PM EST. The Fed keeps saying they are serious about controlling inflation, just like Kevin Malone.
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