Spot The Bubble: Average New Home Price Soars By Most Ever In One Month To All Time High Submitted by Tyler Durden on 05/23/2013 10:35 -0400 Census Bureau Reality Curious why in yesterday's FOMC minutes the following line " a few participants expressed concern that conditions in certain U.S. financial markets were becoming too buoyant" received special attention? Here is the reason: as the chart below shows, according to the census bureau , the average new home sale price just hit a new all time high, rising by a record 15.4% to a record $330,800. In a country in which real disposable consumer income is flat at best and in reality declining, it only makes sense that the average new home price just hit a level not seen since the prior credit-bubble fueled housing peak. Average new home sale price: And the sequential change in the average new home sale price: Obviously both of the above charts are justified by the average real disposable income per capita in the US: Or maybe not... Average: 4.333335 Your rating: None Average: 4.3 ( 9 votes) Tweet - advertisements - VectorVest Stock Analysis. Find out Whether a Stock is a Buy, Sell or Hold. Get your Free Stock Analysis simply by clicking here! Login or register to post comments 14818 reads Printer-friendly version Send to friend Similar Articles You Might Enjoy: Guest Post: It's Always The Best Time To Buy Guest Post: Will John Paulson Be Wrong This Time? Guest Post: The Unsafe Foundation of Our Housing 'Recovery' New Home Sales Plummet 13% To 284,000 Annualized Rate, 19K Actual Homes Sold Lowest Monthly Ever Public College Tuition Soars By Most Ever (Or Searching For Deflation In All The Wrong Places)
UBS On Japan - Are You 'Abe'liever? Submitted by Tyler Durden on 05/23/2013 13:42 -0400 Apple Bank of Japan Demographics European Union Germany Gross Domestic Product Japan Authored by Duncan Wooldridge via UBS, We totally get why many are excited by the recent cyclical improvement in the Japanese economy. However, just because industrial production is turning up on the back of exports and 1Q GDP grew more than expected doesn’t mean Abeconomics is working . Our colleague, Paul Donovan, correctly pointed out these improvements occurred before the Bank of Japan aggressively started to ramp up base money and there’s been no structural reform to date. Hence, most of the improvement in Japan is probably best described as a standard cyclical improvement in the aftermath of very depressed growth that was also heavily influenced by last year’s downturn in global trade. Recent positive momentum in the economy will likely be sustained for a few more quarters and then of course later this year and early next year consumption should accelerate ahead of a consumption tax hike scheduled for April 2014. So for Abe-believers there will be fuel to support their optimism. However, once you move beyond that and think about what comes afterwards things look more challenging. Can Japan sustainably lift aggregate demand above supply? If that cannot be done then it’s hard to see deflation resolved in a fundamentally positive way. Aggregate demand is heavily influenced by demographics and exports. We published chart 1 recently and it shows that historically the growth rate in Japan’s labour force is an excellent indicator for inflation. That’s because the growth in the labour force affects the level and growth of aggregate wages since total wages equal the number of workers multiplied by wages per worker. That has an affect on consumption and aggregate demand. We did some back of the envelope calculations that suggest even with wages per worker growing by 1% the aggregate wage level might not rise. Meanwhile the consensus is busy writing report after report on what Japan means for Asia. In our view, the more interesting question is what does Asia mean for Japan? Exports will play a vital role in Japan’s efforts to raise aggregate demand above supply. So here’s the problem. We’ve argued consistently that Asia is 5 years into building a credit bubble in an effort to substitute credit-led domestic demand to offset trend weakness in external demand. Our central thesis back in 2009 was that Asia’s willingness to increase leverage would be helpful to growth, asset prices and profits in the region, and by extension intra-Asian trade. But we also argued that with time and higher leverage Asia’s credit-led growth would suffer from diminishing marginal benefits of taking on more debt. That is arguably where much of the region is today and partly explains why Chinese growth is beginning to disappoint expectations. It’s highly likely that Asian economic growth a few years from now will slow significantly as the region’s credit-led growth policies become progressively less effective and produce untoward headwinds for growth. After all, there is always a significant slowdown in growth waiting for you on the other side of any aggressive credit expansion. The problem for Japan is that over 50% of her exports go to Asia. Hence, improving exports are currently helping cyclically but a slowdown in exports – led by weakening Asian demand -- a year or so out is likely. A slowdown in exports to Asia along with a shrinking Japanese consumer base will make it more difficult for Japan to sustainably inflate aggregate demand relative to capacity or supply. This is especially true since capacity is sticky and Japan arguably has too much capacity. A country’s capital stock, along with labour, allows it to provide goods and services to the population; i.e., to meet aggregate demand. Japan has the highest per capita capital stock in the world despite having a shrinking population that is expected to accelerate over the next few decades. The only country in our sample that presently looks similar to Japan is Germany. However, that’s not an apple to apple comparison. First, it’s true that Germany’s capital stock is high, far higher than the US, and its population is shrinking. But in Germany’s case its internal demographics are far less important because it is part of the European Union and importantly labour can move freely between Germany and other EU members. Hence, even though Germany’s population is shrinking its labour force continues to grow unlike Japan , and as we mentioned earlier that affects aggregate demand. Secondly, Germany shares the same currency with its major trade partners, which gives it a competitive advantage in many respects. So we sum it all up like this. There are definitely signs that Japan’s economy are improving cyclically. However, structurally demographics remain a major headwind to raising aggregate demand. We feel many investors have not yet considered what slower growth for Asia will mean for Japan in the medium term. This will make it more difficult to raise aggregate demand above supply since capacity is sticky and Japan already has excess capacity. Average: 4.5 Your rating: None Average: 4.5 ( 2 votes)
How To Arbitrage The People's Bank Of China Submitted by Tyler Durden on 05/21/2013 18:39 -0400 China Hong Kong LIBOR Since there are now numerous hard proofs that China’s export data (and to some extent import data as well) were significantly distorted recently , we naturally wonder the incentives behind the distortion and the detailed mechanism of these manipulations. As BofAML notes, there are four reasons why the distortions have risen so sharply since Q4 2012 but the various arbitrages (described in actionable detail below) between onshore and offshore currencies and interest rate differentials (and the role of gold in this) remain in place to make judging China's real trade growth as much art as science. Via BofAML, In the starting period of using RMB for trade settlement (2010-2011), people might not learn the trick on how to benefit from the differential between CNH and CNY exchange rates. And the differential was quite small before October 2012 when markets perceived a significant RMB/USD depreciation. Only since 4Q12 several preconditions were ripe for massively manipulating trade data. First, RMB/USD started appreciating again. Second, the China’s economic growth started rebounding. These two preconditions made it attractive to bring in hot money via over-reporting exports. Third, the differentials between CNH/USD and CNY/USD got widened in 4Q12 with CNH/USD becoming more expensive than CNY/USD, making it’s profitable to do arbitrage (more details below). Fourth, people were experienced enough to use RMB trade settlement to carry out relatively complicated arbitrage. Arbitrage the CNY-CNH exchange rate differentials Demand for RMB assets in offshore markets has picked up since 4Q12 on a better growth outlook and the introduction of new investment tools such as RQFII, causing CNH/USD (RMB traded offshore) to be more expensive than CNY/USD (RMB traded onshore). At the peak in January, CNH was 0.6% more expensive than CNY. Consequently, arbitrage opportunities between CNY and CNH arise if people can manage to bring CNY to offshore RMB centers like Hong Kong. The trick is seemingly complicated, but actually the arbitrage is quite simple. Let’s use an example to reveal the mechanism of this arbitrage. 1. In mainland China, an arbitrager could borrow US$1.0mn and convert to CNY at exchange rate 6.20 (so he gets RMB6.2mn); 2. He could import something with minimum transportation costs such as gold from Hong Kong and settle the imports with the borrowed RMB6.2mn. In this way, this RMB6.2mn flows to Hong Kong and becomes CNH; 3. He then instructs his business partners (or his Hong Kong subsidiaries) to converts the RMB6.2mn to USD in HK. Assuming USD/CNH is 6.15, he gets US$1,008,130; 4. Finally he exports the previously imported gold which is settled in USD. In this way, US$1,008,130 flows into mainland China and the arbitrager completes the whole deal with a profit at US$8130 (perhaps less than that due to some transport and custom fees). Arbitrage the differentials between CNH and CNY interest rates Another arbitrage can gain purely from the interest rate differentials between CNH and CNY. Note interest rates for RMB are different onshore and off-shore. An arbitrager can gain by borrowing CNH at low rates, converting CNH to CNY and depositing CNY at higher rates. Currently the spread could be around 70bp. Here is an example on how to carry out this arbitrage. 1. In mainland China, an arbitrager borrows RMB1.0mn at a rate of 6% for two weeks (the time needed for getting CNH loans in Hong Kong), he then deposits RMB1.0mn in a bank with deposit rate at 3% and ask the bank to issue L/C for him; 2. With the L/C, his Hong Kong partners could get RMB1.0mn loans from HK bank for one year. The arbitrager then export something with minimum transportation costs to Hong Kong and the RMB1.0mn is sent to mainland China. He repays the RMB1.0mn. 3. His profit is calculated as follows. The revenue is the differential between the onshore RMB deposit rate and the offshore RMB financing costs. Currently the spread is around 70bp after deducting related costs, so the revenue is RMB7000. His cost for borrowing RMB1.0mn for one month is 2500. So his risk-free net return is RMB4500. Arbitrage on interest rates differential and RMB appreciation The most complicated arbitrage can gain from RMB appreciation, the interest rate differentials between onshore RMB and offshore USD, and the differential between CNH/USD and CNY/USD. Note that 1yr RMB deposit rate in China is now 3.0% but 1yr dollar lending rate in HK is lower than 2% (LIBOR +100bp). Here is an example on how to carry out this arbitrage. 1. In mainland China, an arbitrager borrows RMB1.0mn at a rate of 6% for two weeks, he then put RMB1.0mn as 1yr time deposits in a bank at 3% and ask the bank to issue L/C for him; 2. Assume USD/CNH is 6.15. With the L/C, his Hong Kong partners could get 1yr dollar loans of US$162,602 (=1000,000/6.15) at 2% from a HK bank. 3. The arbitrager then exports something with minimum transportation costs to Hong Kong and the US$162,602 is sent to mainland China. Assuming USD/CNY is at 6.2, he can get RMB1,008,132. He repays the original RMB loan at the amount of RMB1002,500 (RMB2,500 is interest payment) and obtain an immediate profit at RMB5632 which he will also put in 1yr deposit. 4. One year later, his time deposits will be valued at RMB1,035,801 (with interest payment). Assuming CNY/USD appreciated 2%, he can convert his this to US$171,774. 5. He imports the goods from Hong Kong he exported a year ago by paying US$165854 (=162602*1.02). In this way he moves US$165854 to HK to repay his loans (principal plus interest payment). 6. His net profit (in one year) is US$5920. Outright hot money inflow In the above three cases of arbitrage, the person could even raise prices of exports which were previously imported to bring in hot money. When people believe the Chinese economy is safe (especially as growth recovers) and CNY/USD will appreciate, they have the incentive to take in hot money to benefit from higher interest rates in China (than USD rates) and CNY/USD appreciation. Average: 4 Your rating: None Average: 4 ( 3 votes)
Presenting The Findings Of The Working Group On Extreme American Inequality Submitted by Tyler Durden on 08/29/2010 17:26 -0400 Ben Bernanke Chesapeake Energy Federal Deposit Insurance Corporation Federal Reserve Great Depression Gross Domestic Product Jim O'Neill Meltdown Real estate Recession Savings Rate Securities and Exchange Commission America has long had a working group on financial markets (whose sole purpose some suggest is to keep stocks from plunging in times of turbulence ), so why not have a working group on that other much more critical phenomenon of US society: a trend of unprecedented unequal wealth distribution, which can be summarized as simply as pointing out that 1% of US society holds more wealth (or 33.8% of total), than 90% of the remaining portion of America (26.0%), and also is in possession of more than half of all stocks, bonds and mutual fund holdings in the US . Well, there is, even if is not formally recognized, and made up of the same distinguished professionals as the PPT (Geithner, Bernanke, Gensler and Schapiro). Hereby we present some of the key findings of the Working Group on Extreme Inequality . Percentage of U.S. total income in 1976 that went to the top 1% of American households: 8.9. Percentage in 2007: 23.5. Only other year since 1913 that the top 1 percent’s share was that high: 1928. Combined net worth of the Forbes 400 wealthiest Americans in 2007: $1.5 trillion. Combined net worth of the poorest 50% of American households: $1.6 trillion. U.S. minimum wage, per hour: $7.25. Hourly pay of Chesapeake Energy CEO Aubrey McClendon, for an 80-hour week: $27,034.74. Average hourly wage in 1972, adjusted for inflation: $20.06 In 2008: $18.52. A look at income data: Median household income in 2008 was $50,303, according to Census data. Half of American households had income greater than this figure, half had less. Between the end of World War II and the late 1970s, incomes in the United States were becoming more equal. In other words, incomes at the bottom were rising faster than those at the top. Since the late 1970s, this trend has reversed. For example, data from tax returns show that the top 1% of households received 8.9% of all pre-tax income in 1976. In 2007, the top 1% share had more than doubled to 23.5%. There is reason to suspect that this level of income inequality is dangerous to our economy. The only other year since 1913 that the wealthy claimed such a large share of national income was 1928, when the top 1% share was 23.9%. The following year, the stock market crashed, which led to the Great Depression. After peaking again in 2007, the U.S. stock market crashed in 2008, leading to what some are now calling the “Great Recession.” Between 1979 and 2008, the top 5% of American families saw their real incomes increase 73%, according to Census data. Over the same period, the lowest-income fifth saw a decrease in real income of 4.1%. In 1980, the average income of the top 5% of families was 10.9 times as large as the average income of the bottom 20 percent, according to Census data. In 2008, the ratio was 20.6 times. The current recession has hit incomes hard across the board. Median household income declined 3.6% in 2008, the largest single-year decline on record . Adjusting for inflation, incomes reached their lowest point since 1997. (Center on Budget and Policy Priorities analysis of Census data). Wealth Facts Wealth is equivalent to “net worth,” which is equal to your assets minus your liabilities. Examples of assets include checking and savings accounts, vehicles, a home that you own, mutual funds, stocks and bonds, real estate, and retirement accounts. Examples of liabilities include a car loan, credit card balance, student loan, personal loan, mortgage, and other bills you still need to pay. Median net worth in 2007, the latest year for which figures are available, was $120,300. Half of American households had net worth greater than this figure, half had less. Net worth is even more unequal than income in the United States. In 2007, the latest year for which figures are available from the Federal Reserve Board, the richest 1% of U.S. households owned 33.8% of the nation’s private wealth. That’s more than the combined wealth of the bottom 90 percent. The top 1% also own 50.9% of all stocks, bonds, and mutual fund assets. Retirement accounts like 401(k)s are more equally distributed. The top 1% owns only 14.5% of all retirement account assets, while the bottom 90% owns 40.5%. The total inflation-adjusted net worth of the Forbes 400 rose from $502 billion in 1995 to $1.6 trillion in 2007 before dropping back to $1.3 trillion in 2009. Net Worth is highly unequal when it comes to race. In 2004, the latest year for which Federal Reserve figures are available, the typical white household had a net worth about seven times as large as the typical African American or Hispanic household. Since the 1980s, Americans have spent more and more of their income on expenses, leaving less for savings. The U.S. Personal Savings Rate declined from 10.9 percent in 1982 to 1.4 percent in 2005 before rising to 2.7 percent by 2008. Facts on CEO Pay: From 2006 through 2008, the top five executives at the 20 banks that have accepted the most federal bailout dollars since the meltdown averaged $32 million each in personal compensation. One hundred average U.S. workers would have to work over 1,000 years to make as much as these 100 executives made in three years. (Institute for Policy Studies, Executive Excess 2009) Since January 1, 2008, the top 20 financial industry recipients of bailout aid have together laid off more than 160,000 employees. In 2008, the 20 CEOs at these firms each averaged $13.8 million, for a collective total of over a quarter-billion dollars in compensation. (Institute for Policy Studies, Executive Excess 2009) These Top 20 Financial Bailout CEOs averaged 85 times more pay than the regulators who direct the Securities and Exchange Commission and the Federal Deposit Insurance Corporation. These two agencies, many analysts agree, have largely lacked the experienced and committed staff they need to protect average Americans from financial industry recklessness. (Institute for Policy Studies, Executive Excess 2009) And lastly, wage facts : Between 1972 and 1993, the average hourly wage dropped from $20.06 to $16.82 in 2008 dollars. Since 1993, the average hourly wage has regained only a part of the ground lost, rising to $18.52. Adjusted for inflation, the average wage in 2008 was still lower than it was in 1979. So now that we know that the US middle class is making less than it did in 1970 in real terms, that the uber-rich control the majority of America's wealth, and control more net income that 90% of society, the rich are getting richer, the poor are getting poorer (and in general all of society is starting to read like a skewed non-Gaussian distribution curve comparable to something one would find in a Taleb novel), it is more than clear that the US middle class is now on the endangered species list. And while the slow by sure decline of that social buffer that has kept the civil peace within American society for so many years is a fact, it is no surprise that pundits like Jim O'Neill is suggesting to forget the historical driver of 70% of US GDP (and 30% of the world's), and focus on those up and coming societies whose middle class still has at least a fighting chance. Full working group presentation
A Sudden Rumbling In The Repo-sphere Sends 10 Year Treasury Shorts Scrambling Submitted by Tyler Durden on 03/15/2013 15:10 -0400 10 Year Treasury Bank of New York Barclays Bond Consumer Sentiment Fail Federal Reserve Federal Reserve Bank Federal Reserve Bank of New York Lehman POMO POMO Shadow Banking Curious why Treasury yields have ground lower this morning, considerably more than would perhaps be expected given the consumer sentiment data, and in the process have prevented the intraday "rotation" out of bonds into stocks, pushing the DJIA higher for the 11th consecutive day? The answer comes from the Fed which tipped its hand earlier and scared a few big bond shorts by issuing a Large Positions Reports from those entities which own more than $2 billion of the 2% of February 2023 (CUSIP: 912828UN8 auctioned off in February and reopened on Wednesday). In an unexpected request, and on the back of a surge in fails to deliver earlier in the week and the huge apparent buyside demand in the latest 10Y auction (Primary Dealers getting only 22.3% of the takedown in the UN8 vs typical 40-60%) which settles today, MNI reports that the Fed is now inquiring who has large chunks of the bond: something it has not done since February 2012 . From MarketNews : The Treasury is calling for Large Position Reports from those entities whose reportable positions in the 2% Treasury Notes of February 2023 equaled or exceeded $2 billion as of close of business Monday, March 11, 2013. Entities with reportable positions in this note equal to or exceeding the $2 billion threshold must report these positions to the Federal Reserve Bank of New York. Entities with positions in this note below $2 billion are not required to file Large Position Reports. Reports must be received by the Government Securities Dealer Statistics Unit of the Federal Reserve Bank of New York before noon Eastern Time on Thursday, March 21, 2013, and must include the required position and administrative information. Large Position Reports may be faxed to (212) 720-5030 or delivered to the Bank at 33 Liberty Street, 4th floor. Details on Call for Large Position Reports Security Description: 2% Treasury Notes of February 2023, Series B-2023 CUSIP Number: 912828 UN 8 CUSIP Number of STRIPS Principal Component: 912820 B3 0 Maturity Date: February 15, 2023 Date for Which Information Must Be Reported: March 11, 2013 as of COB Large Position Reporting Threshold: $2 Billion (Par Value) Date Report Is Due: March 21, 2013, before noon Eastern Time More evidence of a sudden shortage of safe paper was today's $5.199 billion POMO in the 2017-2018 space, which was covered at a record low 2.54 times (with the previous record QE3-low of 2.67 occurring on February 13 in the 2036-2042 space), showing Primary Dealers are suddenly very leery of handing over their bonds to the Fed. Adding further mystery to what appears a sudden 10 Year collateral shortage, is that repo rates in the Tuesday-Thursday period have averaged between -2.543% and -2.838%, which have been abnormally low even accounting for the Wednesday UN8 reopening. While "it is not uncommon for the new issue to trade super rich in repo ahead of settlement," specialness has not exceeded -1.00% for current 10Y notes recently, Barclays strategist Joseph Abate said. As Bloomberg adds, repo specialness is effectively capped at -3.00%, equal to the 3% penalty that since 2009 has been assessed on cash lenders that fail to deliver borrowed securities. Feb-23 10Y, reopened for $13b, did trade at rates below 3.00% this week, presumably “because some desks did not want to be seen failing" though it would have been cheaper to do so, TD strategist Richard Gilhooly said. So while most (interested) people know that in a world in which real assets and collateral are becoming increasingly scarce, and only the tenuous connection between the unfunded shadow banking system and deposit-fed traditional liabilities is allowing the perception of a status quo to persist by keeping asset prices rising, what many may not know is that without the creation of real assets but merely through the injection of some $85 billion in claim-dilution courtesy of the Fed every month (and as a matched $85 billion in safe assets is pulled away by the same Fed), the market may be reaching its saturation point on how much securities the Fed may be buying. If the ongoing repo super-specialness persists, beware: as it will be the first time since Lehman that cracks have appeared in the very fragile shadow banking system. And shadow banking is perhaps the one key aspect of financial markets that has remained untouched since the great financial crisis, and also happens to be the critical nexus that allows Dealers to transform reserves into risk-asset purchasing dry powder. Should systemic weakness suddenly spread through repo, and thus shadow banking, run. Average: 4.833335 Your rating: None Average: 4.8 ( 6 votes)
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