Pop Goes The Weasel! S&P 500 Drops 2% On Chinese Property Developer Contagion (VIX Spikes)

Pop goes the weasel!

(Bloomberg) — The S&P 500 Index extended its decline past 2% Monday afternoon amid growing investor jitters about China’s real estate crackdown potentially sparking a financial contagion. And the Hang Seng fell 3.30% overnight.

The benchmark gauge was down 2.1% as of 12:08 p.m. in New York. All of the 11 major industry groups declined, with the energy, financials and materials sectors leading the losses. The tech-heavy Nasdaq 100 index slumped 2.4%, while the blue-chip Dow Jones Industrial Average retreated 1.9%.

By 2:33pm, the Dow is down 2.55%, NASDAQ down 3.15%.

Volatility also soared, with the Cboe Volatility Index — often called Wall Street’s “fear index” — jumping as much as 29% to 26.75, the highest level in over four months.

“While the Evergrande situation is front and center, the reality is, stock market valuations are overstretched and the market has enjoyed too long of a break from volatility and Monday’s stock market declines are not surprising,” said David Bahnsen, chief investment officer at the Bahnsen Group, a wealth management firm.

As Evergrande bonds continue to tank.

Meanwhile, most commodity prices are falling … except for UK Natural Gas Futures which are up 16.5%!

Pop goes the weasel!

Kind Of A Drag! The Taper That Will Really Bite Into U.S. Growth Isn’t the Fed’s (As The Fed’s Repo Facility Hits An All-time High)

Kind of a drag … when Federal government stimulus fades just as The Fed tries to decide on slowing its balance sheet expansion.

(Bloomberg) — In the coming Year of the Taper, it’s the fiscal version that will really bite.

The chatter in U.S. financial markets is all about the Federal Reserve’s yet-to-be-announced reduction of its bond purchases. That’s obscuring something important: the already-under-way cutback of the federal government’s budgetary support — which is likely to have a much bigger impact on economic growth next year.

The U.S. expansion looks set to slow sharply in the second half of 2022 as measures that propped up the economy during the pandemic — from stimulus checks for households to no-cost financing for small companies — fade from view.

That will be the case even if President Joe Biden manages to win Congressional approval for the bulk of his $3.5 trillion Build Back Better agenda. The spending will stretch over years, with limited impact in 2022. It will also be at least partly paid for by tax increases that slow the economy down rather than speed it up.

And then the is Treasury Secretary Janet Yellen renewing her call for Congress to raise or suspend the U.S. debt ceiling, saying the government will otherwise run out of money to pay its bills sometime in October.

We can see the CDS market reacting … slightly … to Yellen’s concerns.

But next to Argentina’s CDS, the US looks positively tame.

And there is a little disturbance in the Fed Funds Futures volatility.

Then we have the volatility cube showing The Fed’s rate suppression at the short end and expected volatility in the future.

And there we have The Fed’s temporary repo facility hitting an all-time high.

Mercy, mercy, mercy!

Eurodollar Futures Volume Surge Anticipates Fed Taper Signal (Are You Ready For Feddy?)

The next Federal Reserve Open Market Committee (FOMC) meeting is next week with an announcement on Wednesday, September 22nd.

(Bloomberg) — Volume in the December 2024 eurodollar futures contract has surged Friday, approaching 200k, highest in the strip. Weekly volume exceeds 800k ahead of next week’s FOMC meeting. The December 2024 contract is a proxy for the Fed’s taper timeline, similar to the belly of the Treasuries curve (aka, the belly of the beast).

As of 2:30pm ET, nearly 197k Dec24 eurodollar contracts had traded, bringing weekly total to 816k, third most in its lifetime; notable flows on the day have included three block trades for 5k each:

The contract also appeared in curve trades including 9.3k Sep24/Dec24 3-month, 18.9k Dec23/Dec24 12-month and 24.8k Dec22/Dec24 24-month

The Dec22/Dec24 eurodollar spread has been in the spotlight since Morgan Stanley recommended the steepener in June as a way to exploit the disconnect between expectations for the pace and timing of Fed rate increases

As of today, we see a kink in the US Dollar Swaps curve at 21m.

With inflation the highest since 2008, and M2 Money still growing at 12.1% YoY, it is time for The Fed to take it foot off the accelerator pedal.

The Fed’s Dots Plot as of the last FOMC meeting indicates a willingness to let the Fed Funds Target rate start rising again after over a decade of rate suppression.

Given the fear of The Fed tapering (eventually), is it any wonders alternative investments such as Bitcoin have risen as The Fed cut rates?

Will Fed Chair Jerome Powell and the gang announce a change on September 22nd? Probably need a fortune teller to answer that question.

Urkel Economy! US Consumer Confidence Lowest In Decades Thanks To Rising Prices (Home Buying Conditions Fall To 60)

This is the Steve Urkel economy where The Federal Reserve and Federal government screw everything up with their policies (or follicies) and say “Whoops! Did I do that?”

(Bloomberg) — U.S. consumer sentiment rose slightly in early September but remained close to a near-decade low, while buying conditions deteriorated to their worst since 1980 because of high prices.

The University of Michigan’s preliminary sentiment index edged up to 71 from 70.3 in August, data released Friday showed. The figure trailed the median estimate of 72 in a Bloomberg survey of economists.

Buying conditions for household durables, homes and motor vehicles all fell to the lowest in decades. The report said the declines were due to complaints about high prices. Consumers expect inflation to rise 4.7% over the coming year, matching the highest since 2008.

September’s UMich Buying Conditions for Houses fell to 60 … thanks to superheated house prices.

I can just picture Fed Chair Jerome Powell channeling Steve Urkel and saying “Whoops!! Did I do that?”

Retail REITs TRIPLE Whammy: House Bubble Burst, Online Shopping, COVID

It is tough to operate a retail Real Estate Investment Trust (REIT) in the face of the triple whammy that hit retail shopping. First, there was the housing bubble/subprime crisis of 2008-2009. Then there was the advent of on-line shopping, then COVID.

I look at the NAREIT retail index and two retail REITs for comparison: Simon Property Group and Washington REIT. And as a proxy for online shopping, I compare them to Amazon. Both Washington REIT and the NAREIT retail index were at loft valuations at the peak of the housing bubble, but crashed with the onset of the housing bubble burst and ensuing financial crisis. But following The Great Recession, both recovered by 2016 (along with Simon Property Group which actually far exceeded their pre-Great Recession peak.

But then retail mall disaster struck. In the form of on-line shopping. I use Amazon to represent on-line shopping. While NAREIT Retail and Simon fell from their 2016 peak, Washington REIT got clobbered.

Then Covid struck. When combined with on-line shopping and fear mongering by Anthony Fauci, retail REITs got hit hard. But all three have rebounded slightly since their nadir in 2020.

An interesting case study is Glimcher REIT, a formerly privately-held commercial real estate development company from Columbus Ohio. Like other retail REITs, Glimcher was crushed by the financial crisis and Great Recession. Glimcher’s share price fought back to $14.06 per share (down considerably from $29.28 in February 2007).

Washington Prime Group Inc. acquired Glimcher Realty Trust for $4.3 Billion in stock and cash Including the assumption of Glimcher’s debt. Right as on-line shopping took off. And the Covid struck a death blow leaving Washington Prime trading at $0.98. Washington REIT is transforming into a multifamily REIT given the overbuilding of DC area office space and the triple whammy of retail centers.

Retail REITs have almost recovered from Covid, thanks to the massive monetary stimulus from The Federal Reserve. Not to mention fiscal stimulus from DC.

Yup, a triple whammy has hit retail REITs with some faring better than others.

But the NAREIT RESIDENTIAL Index has exploded with Fed stimulus.

Well done, Pazuzu Powell!

China’s Most Insolvent Property Developer, Evergrande, Won’t Be Able To Make Interest Payments (China’s Lehman Moment?)

According to Bloomberg, Chinese authorities told major lenders to China Evergrande Group not to expect interest payments due next week on bank loans, which takes the cash-strapped developer a step closer the nation’s largest modern-day restructurings, and guarantees that China’s “Lehman Moment” is now just a matter of days, if not hours.

According to Bloomberg, citing unnamed sources, the Ministry of Housing and Urban-Rural Development told banks in a meeting this week that Evergrande won’t be able to pay its debt obligations due on Sept. 20, and instead most of Evergrande’s working capital in now being used to resume construction on existing projects, the housing ministry told bankers, according to a Bloomberg source.

And since nonpayment of interest and principal will represent an event of default, the company is unlikely to make any subsequent interest, or principal, payments either since it will have already default even though Bloomberg claims that “Evergrande is still discussing the possibility of getting extensions and rolling over some loans.” It won’t, especially since the developer will also miss a principal payment on at least one loan next week, which means it’s game over.

China Evergrande Group may undergo one of the country’s biggest-ever debt restructurings, if the developer’s distressed-level bond prices are any indication.

Singapore LLC, also predicts Evergrande may default and enter restructuring. That risk is being priced in, with many of Evergrande’s dollar bonds trading near 30 cents.

Debt delinquencies at developers the size of Evergrande are so rare in China that investors, analysts and regulators would only have a few case studies to go on. Kaisa Group Holdings Ltd. in 2015 became the first Chinese builder to default on dollar bonds. The restructuring of another, China Fortune Land Development Co., is currently under negotiation.

Do I detect a trend in Evergrande’s US stock price?

Update: China has a variation of the Wuhan Flu and it is spreading throughout other Chinese property developers after Evergrande’s main unit (onshore real estate) said that trading in all of its onshore bonds would be suspended on Sept 16 to ensure fair information disclosure following a downgrade to A from AA (which in China is viewed as the lowest investment grade rating) by China Chengxin International.

August US Inflation At 5.3% YoY, Real Avg Hourly Earnings At -0.9% (Gasoline Up 42.7% YoY, Used Cars And Trucks Up 31.9% YoY, Home Prices Up 18.6% YoY)

US inflation remained about the same in August as it was in July. CPI YoY fell ever so slightly from 5.4% in July to 5.3% in August. Real hourly earnings remain negative.

The source of consumer inflation? Gasoline prices rose 42.7% YoY while used cars and trucks rose 31.9% YoY.

Shelter rose 2.8% YoY. That is odd since the Case-Shiller national price index is growing at a torrid 18.61% YoY pace and the Zillow Rent Index YoY has recovered to a sizzling 9.24% YoY pace.

The YoY heatmap of inflation.

However, with the exception of home prices and rent, we are seeing a slowing of used car, foodstuffs and regular gas prices over the summer.

Yikes! Time to trim The Fed’s asset purchases!!

Broken Transmission: Bank Deposits Have Exceeded Bank Credit Since Covid (C&I Lending Down -13.5% YoY, Residential Lending Down -2.1% YoY)

US banks have the Phed Pneumonia and the Fauci Flu.

Since the Covid outbreak in early 2020, The Federal Reserve lowered their target rate and super-spiked their balance sheet. Helping to lower bank deposit rates to near zero.

But despite near zero bank deposit rates, we seeing bank deposits are larger than bank credit such as commercial and industrial loans, residential mortgages loans, car loans, etc. Normally, bank credit EXCEEDS bank deposits.

The problem? One of them is negative growth in commercial and industrial lending. It declined 13.5% YoY in August. Of course, The Federal government extended emergency business loans that were counted as C&I loans, hence the spike in C&I loan growth in May 2020. But now we are seeing a real slowdown in C&I lending.

Residential lending is down 2.1% YoY as of September 10 (for August).

Commercial real estate lending? At least it is growing at a 2.9% YoY pace for August.

Credit cards and other revolving plans increase steadily since 2014 and then declined after the Fauci Flu struck. But credit cards and revolving credit has started to rise again.

The Fed’s massive overreaction to Covid caused a storm surge in C&I lending that has subsided. But other bank lending has slowed as well.

Lots of bank assets with nowhere to go.

No wonder M2 Money Velocity (GDP/M2 Money) is at historic lows.

Remember, Federal Reserve Chair Jerome Powell is up for reappointment and President Biden must make a decision on his reappointment.

U.S. Producer Prices Increased in August by More Than Forecast (Hot, Hot, Hot!) Fed Pouring Money Into Clogged System

Producer prices are getting hot, hot, hot!

(Bloomberg) — Prices paid to U.S. producers increased in August by more than forecast as persistent supply chain disruptions squeeze production costs higher.

The producer price index for final demand increased 0.7% from the prior month and 8.3% from a year ago, a fresh series high, Labor Department data showed Friday. Excluding the volatile food and energy components, the so-called core PPI advanced 0.6%, and was up 6.7% from August of last year.

PPI Final Demand prices rose 8.3% YoY in August.

Given that there are shortages in the economy, why is The Federal Reserve pumping so much money into the system? It is like repeatedly flushing a clogged toilet hoping it will clear.

The correct way to clear a clogged economic toilet.

Not The Fed way of clearing clogged toilets. Pumping trillions of dollars into a clogged economic system.

The Fed’s comment on their plumbing prowess? “Come on feel the noiz!”

Because inflation is run, runaway.

Rent Inflation: National Average RENT Rose 10.3% YoY (Fed’s Got A Line On YOU!)

Not only after home prices screaming at near 20% YoY growth, but apartment rents are surging as well.

(Bloomberg) — Apartment rents were up in August from a year earlier in all the top 30 U.S. metro areas, the first time that’s happened since the start of the pandemic, according to a new report by Yardi.

The national average rent in multi-family buildings rose 10.3% from a year earlier to $1,539 — the first double-digit rise in the dataset’s history — after a $25 increase in August, the real-estate firm said. Over the past 10 years, the average pace of growth has been 2%.