How America's Housing Non-Recovery Led To Record Income Inequality Submitted by Tyler Durden on 07/05/2013 14:04 -0400 Bond Census Bureau Creditors fixed France Great Depression Housing Starts Monetary Policy Mortgage Backed Securities recovery With bond yields soaring over fears of a Fed tapering, and 30 Year fixed mortgages on the verge of crossing 5.00%, it is inevitable that any "speculative" investment property components, driven by cheap and abundant credit, to what continues to be incorrectly labeled a housing recovery, will crash and burn in the days and weeks ahead. This was already confirmed when looking at mortgage applications, which tumbled at the fastest pace in three years . However, as the following note from CLSA's Chris Wood explains, there is another angle when a housing recovery is not a housing recovery : a surging Gini coefficient. In fact as Wood observes that " the Gini coefficient had apparently reached in 2006 the previous high seen in 1929, prior to the Great Depression ." In other words, the US now has greater income inequality than even during its worst economic episode in history. This means, unfortunately, not that the problem has been avoided but that the ‘great reckoning’ has been deferred to another day as the speculative classes have continued to game the system by resort to carry trades actively encouraged by the Fed and other central bankers , which is why fixed income markets freak out when they see signs of an exit. Precisely. It also means, even simpler, that the rich are getting richer, while the poor not only can't afford to buy homes, but are getting poorer by the day. For some colorful stories of what previous episodes of such unprecedented social divergence may ultimately leads to, just speak to France circa 1788. From CLSA's Greed and Fear If housing has staged an impressive pickup in activity, GREED fear’s view remains that the recovery in American housing is different from a conventional recovery from a housing bust in that it has been jump started to a huge extent by massive investor demand in the context of the unusual circumstances provided by unconventional monetary policy , including the Fed’s buying of mortgage backed securities (MBS). The Fed’s holding of MBS totalled US$1.2tn at the end of June. The degree to which yield-seeking investors, including specialised investment funds, have driven the housing recovery is best illustrated by the extent to which the new mortgage applications index has not recovered as much as say housing starts. Thus, the US new purchase mortgage application index has so far risen by 29% from its low reached in October 2011, while US housing starts are up 91% from their April 2009 low (see Figure 5). It is, therefore, necessary to continue to watch the new mortgage applications index closely for evidence that the baton in the housing recovery will be passed from investors to end buyers. In this respect, the obvious constraints on end buyers are a lack of income to service the mortgage and, more importantly, a lack of sufficient equity in terms of what is required by banks post-crisis to have a mortgage. Indeed there is a risk that investors, on account of still attractive rental yields compared to what is available in fixed income markets, keep pushing up prices so that houses become unaffordable again. Certainly, in GREED fear’s view investors will be much less concerned by rising mortgage rates, courtesy of the recent Treasury bond sell-off, than would-be home owners. The above thesis of an investment property boom, as opposed to a conventional housing recovery, raises another consequence of unconventional orthodoxy. This is that the practical way these policies work is to lead to ever more extreme wealth distribution, as reflected in America’s Gini coefficient which measures the degree of income inequality . The Gini coefficient has risen from 0.386 in 1968 to 0.47 in 2006 and was 0.477 in 2011, according to the US Census Bureau (see Figure 6). This is because the wealthy are geared into rising asset prices, particularly prices of financial assets, whereas ordinary people are geared into average hourly earnings growth . In this respect the Gini coefficient had apparently reached in 2006 the previous high seen in 1929, prior to the Great Depression . This is a reminder that capitalism’s natural way of dealing with excesses is via business failure and liquidation; which is why wealth distribution would have become much less extreme as a consequence of the 2008 crisis if losses had been imposed on creditors to bust financial institutions, for example owners of bank bonds, in line with capitalist principles; as opposed to the favoured ‘bailout’ approach pursued for the most part by Washington. This means, unfortunately, not that the problem has been avoided but that the ‘great reckoning’ has been deferred to another day as the speculative classes have continued to game the system by resort to carry trades actively encouraged by the Fed and other central bankers, which is why fixed income markets freak out when they see signs of an exit. But the point to remember is that the leverage taken on in such trades is highly risky because of the underlying deflationary trend. * * * Which is precisely why the Fed's pseudo-exit via hints of tapering is why the entire house of "housing recovery" cards is set to tumble any minute: because quite simply it was never a recovery to begin with, but merely the latest cheap credit-funded, hot potato flipping ploy conceived by the Fed to benefit its private bank backers. And, as always, it will be everyone else left to fund their bailout once this latest credit bubble pops and the TBTF card is used one more time... 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Credit Shock Dead Ahead: China Money Formation Soars To 2-Year High As Delinquent Loans Surge By 29% Submitted by Tyler Durden on 05/10/2013 08:33 -0400 Capital Markets China Credit Conditions Gross Domestic Product Housing Market Housing Prices M2 non-performing loans Real estate Reality SocGen Yuan A month ago we pointed out that even as the Chinese credit bubble - at a record 240% of GDP on a consolidated basis - is now clearly out of control, the far more disturbing aspect of China's credit-fueled economy is the ever declining boost to economic growth as a result of every incremental dollar created. Indeed, as the economic response to "credit shock" becomes lower and lower, even as the inflationary impact lingers, the PBOC is caught between a stagnating rock and an inflationary hard place. Nonetheless, there are few options and with the shark-like need to continue growing, or at least moving, in order to prevent collapse, China did precisely what we expected it to do: boost credit growth even more despite the obvious tapering economic impact of such money creation. Sure enough, overnight China reported that its M2 growth accelerated in April from 15.7% in March, to 16.1% on a Y/Y basis: the fastest pace of credit creation in two years . Yes, the PBOC may not be creating money, but the Chinese pseudo-sovereign commercial banks, sure are, and at a pace that puts the rest of the world to shame. From SocGen: China’s M2 growth accelerated unexpectedly from 15.7% yoy in March to 16.1% yoy in April (Cons. 15.5%; SG 15.2%), the fastest pace in two years. Although a base effect was partly responsible, it is also the case that credit conditions continued to be very accommodative. The bigger than anticipated new bank lending figure – CNY 792.9bn or 26.9% yoy – is one piece of proof. Although the flow of total social financing normalised lower from CNY 2.5tn in March to CNY 1.7tn, the stock growth sped up further to 22.3% yoy from 21.6% yoy. And there are those who wonder why food prices soared in April despite the obviously contractionary tumble in the PPI... Furthermore, as we pointed out two days ago when we looked at the glaringly obvious export data manipulation, the idle-money inflationary pressures in China are likely far, far worse than what is reported, and with the SHCOMP unable to absorb excess liquidity due to its shallow nature (unlike the SP or the Nikkei225), and with the government establishing new and improved housing market curbs with every passing day, all this soaring hot money is about to spill over into the economy, and which point it will not be the USD that Chinese consumers flocks to in order to preserve their wealth (hint: see 2011 when China had its last episode of outright spiking inflation). But, as usually happens, that's just half of story. Since in China, unlike the G-0 world, loan creation is still mediated by commercial banks (at least as long as the PBOC continues to sit on the sidelines), and not sourced directly by the monetary authority which can absorb virtually infinite bad loans before faith in the currency is shaken, the problem of bad loans is starting to become quite tangible. As China Daily reports , citing PwC research, the total mount of overdue loans among China's top 10 listed banks exploded by 29% in one year, rising to $79.3 billion at the end of 2012 compared to 2011. Bad loans are weighing heavily on China's top commercial banks this year, and are likely to hit profitability and asset quality, a report released by PwC claimed on Thursday. The study revealed that total overdue loans among the country's top 10 listed banks had increased to 486.5 billion yuan ($79.3 billion) by the end of last year, up 29 percent from 2011. The average overdue loan ratio rose to 1.21 percent from 1.06 percent, "a considerable deterioration", said Jimmy Leung, PwC's banking and capital markets leader for China. In some regions, the ratio reached 5 to 7 percent, he added. The ratio of special-mention loans, debts that could potentially turn sour, among the five largest joint stock banks rose to 1.03 percent in 2012 from 2011's 0.93 percent. Chinese banks follow the international five-category system that classifies loans as "pass", "special-mention", "substandard", "doubtful" and "loss", in line with their inherent risks. The last three groups are regarded as non-performing loans. And here's another reason why China finds itself in a dead end dilemma with no way out: on one hand it does not want any more housing inflation for obvious bubble reasons. On the other, any collapse in housing prices will crash its banking sector. What to do? "The economic uncertainties and tightened rules on the real estate market would pose a tougher test for commercial lenders this year," added Raymond Yung, PwC's financial services leader for China. "If property prices show big declines, bank lending would be in jeopardy....It's time for Chinese banks to strengthen their management of collecting repayments, and writing off more soured loans more positively." Only they can't, because that process would require the full disclosure of just how bad the true delinquent loan state of the commercial banking sector is. And since this is China, where economic data is always misreported by orders of magnitude, one truly is scared to look beneath the surface, and where such an event can be delayed (not avoided), only as long as new loan creation is soaring and is sufficiently high to offset the conversion of performing loans into NPLs. Which, perhaps explains, why April new credit soared to the highest in two years. And this in turn, will be curbed too, once inflation - that ultimate arbiter of reality - comes roaring back. In the meantime, and as always, we take delight in all amusing gold "smashes", "crashes", or whatever else they are called, as we continue to recall just what asset the Chinese bought with both hands and feet in all markets - physical and paper - in 2011, when China's inflation went off the charts. Because it wasn't the USD, and because we know that this time will not be different. Average: 4.857145 Your rating: None Average: 4.9 ( 7 votes) Tweet - advertisements - Change is about to catch Republicans by surprise. A financial journalist says a scandal brewing in DC will catch most Republicans by surprise, and will alter the political system. 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What Do High Yield Bonds Know That No One Else Does? Submitted by Tyler Durden on 10/26/2012 14:20 -0400 Barclays Bond CDS High Yield Wizened old market participants are often heard mumbling into their cups of green tea that "credit anticipates, and equity confirms" and so it is once again that the credit markets - fresh from the exuberance of endless technical flows, CLOs, and PIK-Toggles - has made a rather abrupt U-Turn in recent weeks. As Barclays points out, the ratio of High-Yield bond spreads to Investment-Grade bond spreads is its highest in three years as IG has been dragged lower by QEtc's impact on MBS and rotation up the spread spectrum. Typically, this kind of push would mean high-beta credit would outperform but far from it as cash bond markets have gapped out very recently. With call constraints (thanks to ZIRP) on high-yield bonds, the extreme price dislocation (given HY's inability to rally 'enough') will likely drag IG credit out - and that is a very crowded trade. Just one more unintended consequence from the Fed. HY bond spreads are pricing in considerably more pain than IG bond spreads - what do they know? CDS markets are not moving as much - having short-squeezed recently and just reracking with stocks. Bonds - real money accounts - are in trouble here...if this differential remains... but it seems that the crap-end of the credit quality spectrum remains active with new issuance. Average: 5 Your rating: None Average: 5 ( 4 votes) Tweet Login or register to post comments 9255 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: CDS Market Begins Trading Imaginary Credit With LIBOR-Style Fixings 8 Ways Of Looking At A High Yield Bond Selloff What Does High Yield Credit Know That Stocks Don't? Why The High-Yield Market Won't See A Performance-Chasing Rally Dow Closes At Highest Since 2007 As High Yield Outperforms
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