Death Star? Fed Seems Resigned to Bubble Risk in Effort to Extend Expansion (Declining R-Star)

Asset bubbles abound thanks to Central Bank low rate policies. And these aren’t tiny bubbles, but gargantuan asset bubbles.

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(Bloomberg) — Some Federal Reserve policy makers seem resigned to running a heightened risk of asset bubbles and other financial excesses as they seek to keep the economic expansion going.

That’s one of the messages tucked inside the minutes of the Federal Open Market Committee’s March 19-20 policy making meeting.

“A few participants observed that the appropriate path for policy, insofar as it implied lower interest rates for longer periods of time, could lead to greater financial stability risks,’’ according to the minutes, published April 10.

Chairman Jerome Powell could be one of those officials. He’s publicly pointed out that the last two expansions ended not in a burst of inflation, but in financial froth, first a dot-com stock market boom, then a housing bubble.

A willingness by the Fed to court such perils by holding rates down should be good for the economy for a while. After all, the aim of such a policy would be to sustain growth at a healthy enough clip to meet the Fed’s twin goals of maximum employment and 2 percent inflation.

But that monetary stance could store up trouble down the road should the financial threats materialize.

“Easy financial conditions today are good news for downside risks in the short-term but they’re bad news in the medium term,” senior International Monetary Fund official Tobias Adriantold a Boston Fed conference last year.

In economists’ parlance, here’s the Fed’s dilemma: R-star — the neutral interest rate that stabilizes the economy when it’s meeting the Fed’s goals — may be so low that it also prompts super-risky behavior by investors.

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Behind the fall in R-star: an aging population and slower productivity growth that has boosted savings and depressed investment.

Catch a falling star? Or is it a Death Star?

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CRE Bubble? Commercial Real Estate Prices Since The Financial Crisis (Apartments Have Largest Run-up, Retail Has Poorest)

Given the advent of on-line shopping, commercial real estate prices are not quite back to where they were at the height of the asset bubble prior to the financial crisis of 2008-2009. Suburban office space is barely above the pre-crisis peak.

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On the other hand, apartment prices are substantially above where they were in 2008-2009, as are CBD (Central Business District) offices.

All with the help of The Federal Reserve’s low interest rate policies. But notice that the growth rate of CRE has slowed (except for apartments).

The good news for CRE investors? The Fed isn’t likely to keep raising their target rate or continue to shrink their balance sheet.

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Trump Announces Fannie And Freddie “Cap And Release” Plan

Fannie Mae and Freddie Mac’s stay in regulatory purgatory may be coming to an end.

President Trump announced his plan to recapitalize the GSEs Fannie Mae and Freddie Mac and release them into the wild.

The memorandum is short, both in length and details.

The President is directing the Secretary of the Treasury and the Secretary of Housing and Urban Development to craft administrative and legislative options for housing finance reform.

  1. Treasury will prepare a reform plan for Fannie Mae and Freddie Mac
  2. HUD will prepare a reform plan for the housing finance agencies it oversees.

What is left out of the memo is … whether Fannie and Freddie will carry a Federal guarantee or not. And where their capital will come from.

So, rather than shutting them down, Trump is “catching and releasing” like undersized lobsters. But these are not undersized (or “chicken” lobsters, but extremely large financial institutions.

For example, Fannie Mae has a loan book of 3.26 trillion …

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while Freddie Mac’s loan book is $1.93 trillion.

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This compares with Bank of America’s loan book of almost a trillion dollars.

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Wells Fargo has a similar loan book to BofA.

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So, how much capital will Fannie and Freddie have to raise to get released given their YUGE book of loans, given their interest rate exposure?

Its almost Supernatural that Fannie and Freddie are escaping purgatory.

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An Occurrence At The Federal Reserve: Increased SMART Money & Equity Volatility, Crushed Bond Volatility

Ambrose Bierce wrote a short story about a man being hanged during the American Civil War and what went through his mind in his final moments. It is called “An Occurrence At Owl Creek Bridge.” Hauntingly similar to today’s plight: overoptimistic expectations before being hung, then …. snap.

In summary., Ben Bernanke and The Federal Reserve entered the markets in 2008 in force. The Fed Funds Target rate was raised once during President Obama’s two terms as President, but eight times since President Trump’s election as President. Plus, The Fed’s Quantitative Tightening (in terms of its balance sheet) begin in earnest in 2019.

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Once The Fed hurled its monetary weight at the economy in 2008, the stock market had an amazing run. but since The Fed started to raise rates and began their balance sheet unwind, the S&P 500 index has increased in volatility as has the SMART Money Flow Index.

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The bond market volatility indices have gotten crushed by central banks.

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On the real estate front, equity REITs, like the small cap Russell equity indices, seemed to be benefit greatly from The Fed’s Zero Interest Rate Policy and QE. Mortgage REITs, on the other hand, kind of died with the financial crisis and never recovered. The RCA CPPI commercial real estate index too off like a missile.

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Like in the Ambrose Bierce short story “An Occurrence At Owl Creek Bridge,” The Fed and other central banks are quitting any attempts at rate normalization (for fear that they might hear that dreaded “snap” at the end of the monetary rope].

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Wipeout! US Department Store Sales Hit A New Record Low Since 1992 (Retail REIT And CMBS Alert!)

The US Commerce Department reported that Department stores are a “wipeout.”

E-commerce is wiping out brick and mortar stores are a rapid rate.

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At the same time, e-commerce sales are rising rapidly.

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It’s not the end of the world for bricks and mortar shopping. Consumers still eat at out at restaurants, use fitness clubs, bars, etc. But it does cause a rethinking of retail REIT and CMBS valuation and growth projections.

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Retail Inferno! Gap, JCPenney, Victoria’s Secret, Foot Locker, 465 Store Closures in 48 Hours (Examples Of Columbus OH-Based Washington Prime REIT And Limited Brands)

The retail inferno continues!

Last week, the US experienced a large crash in retail spending in December in the form of MoM Real Personal Consumption Expenditures.

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Then we have this gut-wrenching report on retail stores.

The ‘retail apocalypse’ is alive and well this week with major chains such as Gap, JCPenney, Victoria’s Secret and Foot Locker all announcing massive closures, totaling the death of more than 465 stores over the last 48 hours.

In the last 48 hours alone, several shopping-center staples unveiled plans to trim their footprints across the U.S. Gap Inc. said it would slash the store count of its struggling namesake brand by 230 locations over the next two years, just hours after J.C. Penney Co. confirmed it would shutter18 department stores. That news came on the heels of L Brands Inc.’s decision to close 53 Victoria’s Secrets in North America this year. And it’s not just apparel: Tesla Inc., whose galleries are often inside shopping centers, just said it’s moving all its sales online.

These moves come on top of all of the chains that have already announced they’re closing down or reducing their footprints due to bankruptcy. This includes Payless Inc., which is abandoning 2,500 stores, Things Remembered, which is closing most of its 400 stores and selling the rest, while mall favorite Brookstone Inc. slims down operations and Sears continues to shutter locations. Taken as a whole, many of today’s shopping centers are becoming little more than an assemblage of fast-fashion retailers, Apple stores and food courts.

As an example of how retail Real Estate Investment Trusts (REITs) have been hurt by changing consumer shopping habits, take Washington Prime REIT (formerly Glimcher REIT) from Columbus Ohio. With Amazon’s rise since 2014, Washington Prime has dived from over $20 per share to its current share price of $5.14.

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Also, Columbus, Ohio-based Limited Brands (aka, L Brands) was trading at over $100 per share in 2015, but is now trading at $27.50. The Limited empire once included The Limited, Limited Too, Limited Express,. Galyans, Henri Bendel, Abercrombie and Fitch, Lane Bryant., Lerner, Victoria’s Secret, Bath and Body Works and Pink. Only the last three still have a mall footprint with The Limited going solely on-line. How the mighty have fallen.

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Of course, empty space can be repurposed with gyms (Planet Fitness), churches, physician’s offices, more bad chain restaurants and … day care facilities.

But it isn’t just retail. Check out the crashing price per square foot of suburban office space for Northern Virginia where office conversions are all the rage.

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And Northern Virginia office vacancies are launching into outer space.

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