CLICK CHART TO ENLARGE
Negative Interest Rates?
This chart mashup shows the Euro Zone experiencing sudden price deflation since 2012 along with negative momentum in loan creation to the non-financial sector. Business, Industry AND Labour have no pricing power and as a result, balance sheet repair (reducing debt, increasing assets) is de rigueur in Euroland.
The European Central Bank Governing Council member Ardo Hansson said "...the ECB stands ready to cut borrowing costs further and is technically prepared to make its deposit rate negative
; charging banks to hold their excess cash at the ECB in an effort to spur them to lend it to households and companies." (Bloomberg
Unfortunately that's not the way it works. Banks lend to credit worthy customers who want to leverage debt to grow their business. If the household sector is not spending, then the business sector has less income and no incentive to expand.
As mentioned in the previous post last week (Beveridge Curve
) Canada is busy giving up national and local jurisdiction in secretive attempts to join new trade agreements with pan Pacific trading partners via TPP (Trans Pacific Partnership). The European equivalent is CETA (Comprehensive Economic and Trade Agreement) with the Euro Zone. According to Rabble
...The European Commission wanted a way to win more public contracts for EU-based multinational companies, including construction, public infrastructure and engineering firms.
The solution, which is hidden in CETA’s procurement chapter, is to permanently block all levels of government in Canada from preferring Canadian or local companies, and make it illegal to ask bidding companies from Canada or the EU to make sure a portion of goods, services or labour used to fulfil public contracts is sourced locally.
If you are a Canadian business operating in Canada and want to bid on contracts in Canada, you will eventually have to bid against all the low cost industrial and service companies in Europe, Asia, North America etal. If you are Canadian Labour, I suggest you keep retraining as time permits to the highest skill level you can accomplish because the competitive job pool in Canada is going to expand dramatically.
CLICK Francisco Goya 1799 from Los Caprichos
Trick or Treat
I have reported in the past (July 24, 2013) on big money buying up swaths of bank owned U.S. residential properties in the last 2 years for buy, hold and flip when capital gains return despite current negative yields.
is reporting that:
"Blackstone Group LP (BX), builder of the biggest single-family rental home business in the U.S. is using its experience to replicate the model in Spain where property prices have dropped 40 percent
A few quotes from the Bloomberg
The world’s largest private-equity firm, which has spent $7.5 billion buying 40,000 homes in the U.S., agreed in July to purchase 18 apartment blocks from the city of Madrid for 125.5 million euros ($173 million). The firm is bidding against investors including Goldman Sachs Group Inc. for another 1,458 housing units being sold by Madrid’s regional government, according to three people with knowledge of the auction, who asked not to be identified because the information is private.
While Spain traditionally has a lower percentage of renters than the U.S., the (Spanish) government last year introduced measures to increase demand in the rental market by abolishing tax breaks for individual home buyers, passing legislation to protect landlords by speeding up evictions of tenants who don’t pay, allowing owners to raise rents above the annual inflation rate and reducing the duration of leases.
Three years of austerity, unemployment at 26 percent and a drought in mortgage lending are forcing more Spaniards to rent (rather than own) and (banks) to attract foreign funds to invest in the country’s unsold homes, which may total 1.5 million units according to some estimates.
Blackstone (in the U.S.) is now attempting to sell debt backed by the rental payments, the first securitization of its type, with Deutsche Bank AG (DBK) holding a meeting today in New York to market $479.1 million of the securities backed by mortgages on 3,207 properties. Blackstone’s long-term wager is that the homes’ values will rise, positioning the firm to exit at a profit.
Oh, did I mention that the wire services have reported that Spain is officially "out of recession" according to the Madrid-based Bank of Spain: "Gross domestic product expanded 0.1 percent in the third quarter, growing for the first time in more than two years."
Happy Halloween, here's some Wikipedia reading:
...and here is Richard Wilkinson's Ted Talk (2011): How economic inequality harms societies. The hard data on economic inequality shows what gets worse when rich and poor are too far apart; real effects on health, lifespan, even such basic values as trust. "If Americans want to live the American dream, they should go to Denmark".
CLICK CHART TO ENLARGE
Lecturing birds how to fly
The October 2013 Credit Suisse Global Wealth Databook contains lots of comparitive charts on recent national and global changes in wealth. This one shows the change in household wealth between 2012 and 2013. The authors point out that since 2000, Canadian per capita wealth has been rising at about 3.7% Y/Y after discounting for exchange rates.
Relative to the U.S. Canada has a more equal wealth distribution with both a smaller percentage of people with less than US$10,000 and a larger percentage with wealth above US$100,000 and the Canadian wealthy account for 3% of the top 1% of global wealth holders, despite having only 0.5% of the world’s population. So far so good.But look at the inset chart of the Canadian Trade Balance; since the pit of gloom in March 2009 the advances in wealth measures are at the expense of Canadian export production. We are not producing and selling stuff to other nations as our main activity.
As Credit Suisse points out; financial assets account for more than half of household
wealth and so with fire sale credit available, Canadians have been deriving their wealth by consuming on margin fueled by their cohort bidding up financial asset prices. Indeed this wealth created by consumption is subject to all the agents continuing to agree on rising valuations. There is no room for depreciation in the model.
The plan might have looked good on a policy paper, but capital flight is not anchored to a national border and as it becomes more concentrated in fewer hands, it can very quickly flow towards markets that are deemed more exploitable. As Nassim Taleb conjects:
We have the illusion that the world functions thanks to programmed design, university research, and bureaucratic funding, but there is compelling—very compelling—evidence to show that this is an illusion, the illusion I call lecturing birds how to fly. Nassim Taleb "Antifragile: Things That Gain from Disorder"
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Institutional Advisors Analysis of ITB CLICK TO ENLARGE CHARTS
"The 26.20 high in May was part of "Rounding Top" pattern. The failure was 21.15 June low. Support is at 15-16. Technically, the peak for the housing sector was anticipated by lumber achieving an Upside Exhaustion in March. On the financial side, Utilities XLU accomplished an Upside Exhaustion in April. This is also breaking down."
Cash Buyers Defenestrate CLICK CHART TO ENLARGE
Not only in the U.S. but cash buyers of real estate investment stocks and trusts (REITs) in Canada, Europe and Asia (IYR, FTY, PSR, RWO, IFGL) have been selling the July 2013 peak.
And now in August the "Chinese buy real estate at any price" Guggenheim AlphaShares China Real Estate ETF (TAO) looks to have joined the cash exit window.
Kiss and Tell Cash Index
"This key sector (Housing) had a huge impact on the broad market in 2007/2008. Will the price action result in a different outcome this time?" Chris Kimble
goes on to make the point that:
Home builders created a bearish wedge in 2006, broke support, rallied to "kiss the underside" of resistance then proceed to fall over 80% in value and the broad market followed.
Over the past couple of years, Home builders formed a large bearish rising wedge, broke support, rallied to kiss the underside of resistance 90 days ago. Since the "kiss" took place, the Home builders ETF (ITB) is down 20% in value and Real Estate ETF (IYR) is not far behind down 15%.
CLICK TO ENLARGE CHART
From The Economist March 16, 2013 "After more than five years of financial turmoil, some stockmarkets are back to, or close to, their pre-crisis levels. Stockmarkets rose until mid-to-late 2007, and even into 2008, before the severity of the financial crisis hit them; their troughs were in early 2009. Last week the Dow Jones Industrial Average surpassed its previous peak (though it is still around 7% off once inflation is taken into account). The S&P 500 and Germany’s DAX are expected to reach all-time highs soon. The FTSE 100 is near its 2007 peak, which was only 3% shy of its record high in December 1999. Not all stockmarkets have recovered to this degree. Greece’s Athex composite index is still more than 80% below its peak in October 2007."
CLICK TO ENLARGE CHART
The current animal spirits are still feeding off of debt and Canada continues to be a leader in leveraging it. Canadian credit market debt is now 165% of disposable income (Statistics Canada March 15, 2013).
Canadian household debt continues to trend higher (chart left).
As can be seen from the chart above in the upper panel on stock and commodity markets, not all stock markets are back to their pre-blowout highs of 2007-08, most are not. Nor are the commodity markets back to their 2011 highs. Unless they breakout, as a minority of stock markets have, then the trend for commodity prices is still down. The combination of falling commodity prices and rising debt levels is not a successful investment model.
Real estate prices will follow commodity prices as new houses come on stream at prices below existing built houses. As credit risk gets re-examined, replacement value, comparative value and income value will all point to a return to fundamentals.
CLICK TO ENLARGE CHART
Said the Canadian Finance Minister Mr. Jim Flaherty to the question: “How much of a kick are we going to take on the revenue side because of lower nominal GDP?"
"Significant, it’s significant.” I watched the interview over my usual morning bowl of gruel and also heard Jim say that "We will stay on track to balance the budget in 2015-16."
CLICK TO ENLARGE CHART
If the Government is heading towards negative spending and the trade balance is already in negative balance, then you dear private sector better get out there and start spending because the last time I looked, Canadian Producers (IPPI) can't seem to get it up. See my Canadian Deflation Update
CLICK to ENLARGE Super Rich Sources of Power
Follow the Money or "First there is a mountain, then there is no mountain, then there is." (Zen Aphorism, Donovan, etal)The Super Rich are peevish (contrary) when it comes to accepting what comes out of the mouths of real estate promoters: "Vancouver is Unique". I heard this oft touted phrase from a genial Realtor last weekend at his west side Vancouver open house in a below street level grade "garden" condo asking well over $600,000 (~$650/sf); it looked to me like a good place for starting a mold farm.
The tables presented here are from The Wealth Report 2012
created by Knight Frank
and Citi Private Banking
gleaned from opinions of their HNWI (High Net Worth Individuals) aka The Super Rich.
CLICK to ENLARGE Super Rich Important Cities
To gauge which cities are considered the most important to the world’s HNWIs, The Wealth Report surveyed Citi Private Bank’s wealth advisors around the world and Knight Frank’s global network of luxury property specialists. They asked which are the most important cities to their clients now, which will be the most important in 10 years, and which are growing in importance the fastest. In addition respondents were also asked to name the cities that they felt were global leaders in the fields of economic activity, political power, knowledge and influence, and quality of life.
Apparently very wealthy people enjoy Vancouver over Toronto for "Quality of Life" but as a destination for "Knowledge, Influence, Political Power or Economic Activity", Canadian cities don't make the list. When it comes to grading Canadian cities by the well heeled with respect to a trend to rising importance in the world, only Vancouver is currently viewed in ranking as important but with a bias to the downside as developing destinations move up the list.
If we look at the top tier cities in these two tables, it's evident that the Super Rich, the 1-2%, the Go-to-Folks want reliable established proven money and power centric cities (London, New York, Paris) or alternatively they look for emerging volatile liquidity centers (Beijing, Shanghai, Singapore) so they can leverage some change.
Canada is a nice place to visit and perhaps dabble in real estate flipping during a manic heat wave but the real money is flowing elsewhere.
A new page devoted to Whale Watching and the Knight Frank data is here now
Image Credit: MorgueFile.com
Depression is a Choice
By Steve Randy Waldman
April 17, 2012
"We (the U.S.) are in a depression, but not because we don’t know how to remedy the problem. We are in a depression because it is our revealed preference, as a polity, not to remedy the problem. We are choosing continued depression because we prefer it to the alternatives.
But the preferences of developed, aging polities — first Japan, now the United States and Europe — are obvious to a dispassionate observer. Their overwhelming priority is to protect the purchasing power of incumbent creditors.
That’s it. That’s everything. All other considerations are secondary. These preferences are reflected in what the polities do, how they behave. They swoop in with incredible speed and force to bail out the financial sectors in which creditors are invested, trampling over prior norms and laws as necessary.
The same preferences are reflected in what the polities omit to do. They do not pursue monetary policy with sufficient force to ensure expenditure growth even at risk of inflation. They do not purse fiscal policy with sufficient force to ensure employment even at risk of inflation. They remain forever vigilant that neither monetary ease nor fiscal profligacy engender inflation. The tepid policy experiments that are occasionally embarked upon they sabotage at the very first hint of inflation.
The purchasing power of holders of nominal debt must not be put at risk. That is the overriding preference, in context of which observed behavior is rational." Read Full Article An Example in Real TimeThe Dutch Left’s Embrace of the Austerity Suicide Pact: It’s Necessary for the Children!
by William K. Black, April 30, 2012 SOURCE: NewEconomicPerspectives.org
"A remarkable, thing has just taken place in the Netherlands. The ruling Dutch political coalition collapsed when the ultra-right wing party refused to support its coalition partners’ austerity package that called for tax increases and reduced government expenditures.
The bizarre fact is that European leaders, at the precise time that neoclassical (utopian?) economic dogma has utterly discredited itself empirically, has embraced the failed dogma with a passion worthy of the most formulaic romance novel. This embrace is not limited to politicians from the extreme right; much of the left’s political leadership has gotten all steamy about austerity
." Read Full Article
Canadian Exports & Eurozone Output
merchandise exports declined 3.9% and imports edged up 0.2%. As a result, Canada's trade surplus decreased from $1.9 billion in January to $292 million in February.
Exports declined to $39.6 billion, as volumes fell 3.5% in February. After posting several monthly increases, exports of energy products and automotive products were the main contributors to the overall decline.
Exports to the United States decreased 3.8% to $29.3 billion. Lower exports of crude petroleum were the largest contributor to the decline. Imports from the United States edged up 0.4% to $24.5 billion. Consequently, Canada's trade surplus with the United States decreased from $6.1 billion in January to $4.8 billion in February.
Exports to countries other than the United States fell 4.0% to $10.3 billion. Imports from countries other than the United States declined 0.2% to $14.9 billion. As a result, Canada's trade deficit with countries other than the United States increased from $4.1 billion in January to $4.5 billion in February. Source
: Stats Can via tradingeconomics.com
PMI Composite Output Index fell to a five-month low in April, according to the preliminary ‘flash’ reading which is based on around 85% of usual monthly replies. The index fell for the third month in a row to 47.4, down from 49.1 in March, to signal a faster rate of decline of private sector economic activity. Output has fallen seven times in the past eight months.
Output fell at the fastest rates for five months in both manufacturing and services, with the former seeing the steeper rate of decline.
By country, growth slowed to only a very modest pace in Germany, showing the weakest expansion in the current five-month sequence as weak service sector growth was offset by a sharp decline in manufacturing output. France meanwhile saw output fall for the second month in a row, with the rate of decline accelerating to the fastest since October. Falling manufacturing output was
accompanied by a steep deterioration in service sector activity.
The big-two euro countries nevertheless continued to outperform the rest of the region where output fell sharply, down for the eleventh successive month and at the fastest pace for four months. Steep declines in both manufacturing output and services activity were seen in the periphery.
Source: The Markit www.markiteconomics.com via pragcap.com
Perceived economic safe-havens. NOT
British Foreign Secretary William Hague warned (in 1998 and again in 2011) that the Euro crisis is "a burning building with no exits".
"It was folly to create this system, it will be written about for centuries as a kind of historical monument to collective folly. But it’s there and we have to deal with it." Daily Mail News article here
from September 30, 2011.
Apart from the Euro Headlines that are buffeting the financial markets every week, many Eurone Zone members are in bubble territory when it comes to their local real estate markets.
To quote Jesse Colombo (thebubblebubble.com): "Could Sweden or Finland be the scene of the next European financial crisis? It is actually far likelier than most people realize. While the world has been laser- focused on the woes of the heavily-indebted PIIGS nations for the last couple of years, property markets in Northern and Western European countries have been bubbling up to dizzying new heights in a repeat performance of the very property bubbles that caused the global financial crisis in the first place. Nordic and Western European countries such as Norway and Switzerland have attracted strong investment inflows due to their perceived economic safe-haven statuses (Think Canada - BR), serving to further inflate these countries’ preexisting property bubbles that had expanded from the mid-1990s until 2008. With their overheating economies and ballooning property bubbles, today’s safe-haven European countries may very well be tomorrow’s Greeces and Italys." READ THE REST OF ANALYSIS HERE