April 2014 - Castles in the Air
A reminder comes by way of “Run, Run, Run, Was the Financial Crisis Panic over Institution Runs Justified?” by Vern McKinley. Published on April 10, 2014, by the Cato Institute, McKinley writes: “Countrywide’s [a premier sub-prime lender when the going was good - FJS] second-quarter 2007 financial results indicated no significant weaknesses and the major rating agencies assigned it strong ratings with a stable outlook. [Although, a MarketWatch headline on July 24, 2007: "U.S. Stocks Close Sharply Off on Credit Woes, Dow Slides 226 points; Countrywide Says Risks Extend Beyond Subprime." This is a reminder that "the market" quickly forgets what it does not want to know, as we see on May 1, 2014. - FJS]
Countrywide follows a pattern seen dozens of times over the past twenty years. The quality of loans had fallen off a cliff but the economists, the brokerage houses, and – of course – the Federal Reserve – were in the dark. The stock market played the schizophrenic, “Oh, No!” and “Good thing that’s Over!” game. It peaked in October 2007. The catalyst for collapse was “loan production had fallen by 14%.” Even the carpe diem frat boys on TV know the deteriorating quality of loans will not cause a ruckus as long as the percentage of missed payments and defaults does not rise. But, once Countrywide & friends could no longer feed the fast, rising rate of new loan production, the façade was near its end. The combination of more defaults and lower production is soon impossible to hide.
The FOMC (Federal Open Market Committee, where monetary policy is set) had talked about houses at its meeting on March 27-28, 2006. Federal Reserve Chairman Ben S. Bernanke reminded the anointed: “residential housing is, of course, only about 6 percent of GDP.” We can read, actually see, inside the professor’s mind, since it is so simple: He is looking at a pie chart of the GDP, with slices of red, magenta, honeydew, and fern. The residential housing slice is a thin one, and, as his sort is programmed to regurgitate, isolated from the others. Any ambitious student at Princeton or the FOMC knows “6%” is the “A” response. Lights out.
Bernanke went on in this vein through 2007, not taking the time to bone up on inevitable cross currents that accelerate when recognition and margin calls lead the man at the bank to declare “I want out.”
Aug. 15, 2007 (Bloomberg) POOLE SAYS “REAL ECONOMY”UNHURT BY SUBPRIME COLLAPSE
Aug. 16 (Bloomberg) – “Investors are scooping up U.S. Treasury bills like few times in history as an expanding credit crunch makes it hard for companies to roll over short-term debt. The yield on the three-month Treasury bill fell 0.54 percentage point yesterday to 4.09 percent, the lowest since 2005. It was the biggest single-day decline since Oct. 13, 1989, when the Dow Jones Industrial Average tumbled 6.9 percent….”
Aug. 16 (Thomson Financial) PAULSON SEES MARKET TURMOIL STALLING U.S. GROWTH, BUT NO RECESSION – “U.S. Treasury Secretary Henry Paulson said… the financial system and economy are ‘strong enough to absorb the losses…. ‘[L]ooking over periods of stress that I’ve seen, this is the strongest global economy we’ve had,’ he said.”
California Association of Realtors Chief Economist Leslie Appleton-Young recently warned: “Housing affordability is really taking a bite out of the market. We haven’t seen this issue since 2007.” This is a remarkable comparison, given that, just seven years earlier, California housing was collapsing faster than London during the Blitz. In October 2007, California Association of Realtors Chief Economist Leslie Appleton-Young announced: “The impact of the credit crunch spread throughout all tiers of the market in September.” California statewide median home prices had sunk $58,140 from September 2006 and statewide home sales fell 39% from the year before. The California Association of Realtors “Unsold Inventory Index” increased to 16.6 months, double the level in March 2007. It had been 6.4 months in September 2006. San Francisco Bay Area sales fell 46% over the past year; High Desert sales were 63% lower. (In December 2003, California Association of Realtors Chief Economist Leslie Appleton-Young told her audience the chronic shortage of homes for sale coupled with attractively low mortgage rates would keep the pressure on buyers: “The message is ‘Boy, this is the time,’ Young said. ‘It doesn’t look like the situation is going to change any time soon.’”)
At the July 1995 FOMC meeting, Greenspan expounded on mortgage growth and the GDP: “[M]ortgage applications for purchasing new and existing homes have been moving up….The home builders data clearly indicate that things are moving. This is important not only because of the importance of the residential construction sector, but also because history suggests that motor vehicle sales and some parts of the residential building industry move together. If there is firmness in the home building area it has to exert, if history is any guide, some upward movement in the motor vehicle area, which would be very useful.” Especially useful to a public servant whose annual review consists of the percentage increase to GDP.
The ownership rate of houses peaked at 69.2% in 2004. The mad rush into home mortgages was only possible through the Fed’s perpetual perversion of interest rates. When interest rates are too low, the riffraff banned from Vegas hangs a “Loans” shingle in the pool hall.
MURPHY: “The collapse of the housing bubble and resulting financial crisis devastated the global economy and cost Americans $17 trillion worth of wealth. Many of us assign responsibility for low interest rates and lax capital and leverage standards to the Federal Reserve and then Chairman Greenspan. While I do not believe the Fed caused the crisis, [Come on, Murph! Let it fly! - FJS] its policies certainly helped fuel the Bubble. In June 2009, you said that higher short-term interest rates might have slowed the unsustainable increase in housing prices. With the benefit of hindsight, would measures to slow the housing bubble have been appropriate?”
YELLEN: “…. [P]olicies to have addressed the factors that led to that Bubble would certainly have been desirable. I think a major failure there was in regulation and in supervision, and not just in monetary policy.”
The bureaucrat’s utopia. New and more regulation.
The housing market is not hitting a single cylinder. The Fed cut mortgage rates from 6.5% to 3.3% over five years. Around 80% of mortgage originations are refinancings, not money-purchase mortgages. And now, that has dried up, for the simple arithmetic Redfin described in the Riverside, California market.
House sales affirm life is good at the top. The bottom is getting worse. The National Association of Realtors (NAR) existing home sales data for March 2014 calculates number of houses sold for below $100,000 fell 17% year over year. Those between $100,000 and $250,000, fell 10%. House sales for prices above $1 million rose 14.8% in February 2014 and 7.8% in March 2014. Vacation home sales rose 30% in 2013, from 553,000 in 2012 to 717,000 in 2013.
Spending at the top must not slacken. Hermès has stationed a baseball glove in its window – with a sales tag of $14,100. To the question, “Why so expensive?” MarketWatch was reminded the mitt is “absolutely top-grade.” The Ritz-Carlton in Chicago offers a $100 grilled cheese sandwich, stuffed with 40-year-old aged Wisconsin cheddar that’s been “infused with 24K gold flakes.” New asset classes include old cars. Classic Auto Funds Limited (CAF) is “launching several investment partnerships using collectable cars as the hard asset.” Fund CAF/1 is already up and running, or, at least, in storage: with a 1971 Ferrari Dino 246 GT and a 1964 Maserati Mistral 3.5. The investment partners (conjecture comes from how this ended in 2007) will turn this asset into (discounted) collateral. The investors will then use the borrowed money to buy Facebook shares (passé as that may be) or to bid against Chinese businessman Liu Yiqian, who bought a fifteenth century porcelain cup at Southeby’s in Hong Kong for $36 million. Also recalling 2007: how will this collateral look to the lender in a panic? The larger point here is that collateral’s velocity cannot slow down, from fatigue or concern. The imaginary value behind assets must keep rising, or all will fall. Federal Reserve Chairman Janet Yellen came to the job touted as a “great labor economist.” She betrayed an untutored knowledge of labor data during a speech in Chicago on March 31, 2014: “Since the unemployment rate peaked at 10 percent in October 2009, the economy has added more than 7-1/2 million jobs and the unemployment rate has fallen more than 3 percentage points to 6.7 percent. That progress has been gradual but remarkably steady–February was the 41st consecutive month of payroll growth, one of the longest stretches ever.” What jobs have been created during those 41 months? Not the sort that can pay for a house. Before looking at the poor quality, the quantity is absent. Yellen is looking for a renaissance when there are fewer payroll (NFP: non-farm payroll) workers than in 2007.
In ”The Born Again Jobs Scam: The Ugly Truth Behind ‘Jobs Friday,‘” David Stockman writes on his ContraCorner website there were 138.4 million NFP jobs in December 2007. In March 2014, the total was 137.9 million. There are 500,000 fewer payroll workers today.
The span from December 2007 to March 2014 is 75 months. Seventy-five months after jobs peaked in 1990 (as we entered the 1900-1991 recession), there were 10 million net new jobs. Seventy-five months after the post-2000 job peak, there were five million net new jobs. In March 2014, we are still half-a-million jobs south of the zero bound.
Ben Bernanke’s “six percent” also failed because his approach was wholly abstract. Construction and its financing had lost its mind. Today, again, grandiosity is the rule.
Hudson Yards, on New York’s West Side, is the largest such development in Manhattan since Rockefeller Center in the 1930s. Residential towers at 15 Hudson Yards and 35 Hudson Yards will rise 910 feet, with 70 floors of “unobstructed views of the of the city and Hudson River…. 15 Hudson Yards will be the ideal place for New York’s creative visionaries to live.” A search for a perfect resident at 35 Hudson Yards was unavailing. The 52-story South Tower will be the first to soar. That in itself is commonplace. It is when one reads “it is to become the home of the luxury handbag maker Coach,” tentatively named “Coach Tower,” that securitization of vintage cars looks relatively sane. The Masterplan, on Hudson Yards’ promotion website, expects 17,440,000 square feet of office, residential, hotels, shops on 28 acres. When Mayor Bloomberg launched the Hudson Yards initiative, he compared it to Canary Wharf’s influence in London. This may not be the most encouraging comparison, at least for the builders, since Canary Wharf crushed the Reichmann Family (Olympia & York), and its creditors, with $20 billion of unpaid bills when it filed for bankruptcy.
Another cautionary comparison lies partially built but wholly insolvent in Seoul, South Korea. “Dream Hub,” a proposed 138-acre building project, midwifed by former Seoul Mayor Oh Se-Hoon (this was to be his ticket to the presidency), has entered bankruptcy. Sparing the details reported by the Wall Street Journal (which published “just the tip of the iceberg”), six years after groundbreaking, the anticipated 150-story, 2,181-foot-tall skyscraper is stillborn, and Oh Se-Hoon will not comment on his foregone objective to turn Seoul “into a center of global commerce.” Boston Properties has acquired the groundbreaking (on March 27, 2013) Salesforce Tower in San Francisco. The 1,070 foot, 61-floor tower (expected completion in 2017) will rise 200 feet above Transamerica Pyramid, currently the tallest building in San Francisco, and the west coast. It will “eventually be eclipsed in height by the 73-story Wilshire Grand in Los Angeles.” Originally contracted on “spec,” meaning the builder did not have a substantial tenant at the outset, Salesforce will rent 700,000 square feet in its namesake skyscraper. Mayor Lee of San Francisco commented: “It’s not just about an expanding company. It’s about a company that has faith in our city and is demonstrating that. And has faith in the kind of values we try to teach our kids about giving back.” These mayors. (“Boston Mayor Martin Walsh said [in late April] he wants to make his city the tech capital of the world…. And he’s “not afraid to build a skyscraper for [high-tech] workforce housing.”) What does that mean? A case might be made that Boston Properties is the model of faith and charity. Salesforce “had operating losses of $35 million, $111 million, and $286 million the past 3 years? (Yes, the losses are increasing in size.) On top of that, CRM has net debt of over $1 billion on their balance sheet.” (Thank you, Kevin Duffy at Bearing Asset Management) San Francisco as a whole is grossly overrun by social media operations at unsustainable rents that have a whiff of Webvan, the San Francisco Internet grocer that went public in 2000, broke in 2001, after placing a $1 billion order with Bechtel to build grocery warehouses.
Source: http://aucontrarian.blogspot.com/2014/05/april-2014-castles-in-air.html
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