Gas Taxes Set To Surge In Roughly A Dozen States

Nearly 20 states have raised gas taxes or recalculated gas-tax formulas in recent years to generate additional revenues.  Which, of course, is an extremely politically expedient way to raise taxes on the unsuspecting masses since when gas prices soar later those price increases can simply be blamed on those evil oil corporations.

As the Wall Street Journal points out, the ease with which higher gas taxes have been passed through state governments over the past two years have emboldened at least a dozen more states, all of which are now actively considering additional gas taxes.

Tennessee Gov. Bill Haslam is putting his fellow Republican lawmakers to the test, with a plan to raise the state’s gas taxes for the first time in nearly three decades.

 

In Alaska, Gov. Bill Walker, an independent, proposed tripling the state’s gas tax to 24 cents a gallon by 2018. The state has the lowest gas tax in the country and hasn’t raised it since 1970. In his recent state of the state address, Mr. Walker said he is trying to deal with a $3 billion fiscal gap, after state revenues collapsed by more than 80% from four years ago due in large part to the drop in oil and natural-gas prices.

 

New Jersey’s Republican Gov. Chris Christie raised the state’s gasoline tax last year by 23 cents a gallon, his first tax hike in two terms as governor, which he offset with some other tax reductions.

 

On Thursday, the Republican-dominated Indiana House voted 61 to 36 in favor of increasing the state gas tax from 18 cents a gallon to 28 cents with annual adjustment increases possible through 2024. The bill now goes to the state Senate.

In yet another map that looks eerily similar to the 2016 electoral college map, here is where states currently stand on gas taxes.  Of course, the irony here is that the ultra-liberal states of the Northeast and West coast have the highest gas taxes…and while that might play well with their global warming narrative, gas taxes are among the most regressive forms of tax as they disproportionately impact lower-income families.  And unfortunately, unlike the cost of other goods and services that are driven to artificially high levels by misinformed government policies (did someone say Obamacare?), we suspect you’ll never see the leftist states of America subsidizing gasoline for poor people.

Gas Taxes

 

Despite serving as an easy scapegoat, as the U.S. Energy Information Administration notes, only 48% of the price that Americans pay at the pump actually goes to the evil oil companies for crude production.  Meanwhile, on average, nearly 20% of gas costs get sent to various federal, state and local government entities with the highest taxed states like PA, WA, NY and CA collecting even more.

Gas Tax

 

But, higher gas problems aren’t a significant long-term threat because everyone will just buy an $80,000 Tesla, right?  And, for those reading this post from the state of California please continue to ignore the fact that your Tesla is fueled by coal…

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Boston Dynamics Unveils Its Latest “Nightmare-Inducing” Robot

One year ago, when we showed readers the SkyNet-like robots produced by Boston Dynamics, a company acquired by Google in 2013 (which then tried to flip it to Toyota last year but reportedly failed)  we called the robotic creations “terrifying.” Little did we know that compared to Boston Dynamics’ next spawn, that particular batch was downright Johnny 5-friendly by comparison. Because after being briefly shown off at an event early this month, the robotic designed has officially revealed its latest creation, “Handle,” which the company’s founder previously described as “nightmare-inducing.”

Four weeks ago, Boston Dynamics – which is best known for its bipedal and quadrupedal robots – revealed it had been experimenting with some radical new tech: the wheel. The company named its new wheeled, upright robot is named Handle (“because it’s supposed to handle objects”) and looks like a cross between a Segway and the two-legged Atlas bot according to the Verge. Handle, which had not been officially unviled yet, was shown off by company founder Marc Raibert in a presentation to investors. Footage of the presentation was uploaded to YouTube by venture capitalist Steve Jurvetson.

Creating a more efficient robot that can, pardon the pun, handle basic tasks like moving objects around a warehouse would certainly be of benefit for Boston Dynamics. Although the company has consistently wowed the public with its robots, it’s struggled to produce a commercial product that’s ready for the real world. That may soon change.

Raibert described Handle as an “experiment in combining wheels with legs, with a very dynamic system that is balancing itself all the time and has a lot of knowledge of how to throw its weight around.” He added that using wheels is more efficient than legs, although there’s obviously a trade-off in terms of maneuvering over uneven ground.

“This is the debut presentation of what I think will be a nightmare-inducing robot,” said Raibert.

He wasn’t kidding: as the video below reveals, Handle is officially about 6 foot 5, weights about 100lbs, and can roll around at around 9 mph, while preserving perfect balance and even engaging in complex aerial acrobatics: Handle can keep its balance over rough terrain, and can even jump 4 feet in the air, as well as going down stairs without an issue.

While we are confident Amazon will promptly order a few thousands of these to bring even more streamline automation and efficiency to its behemoth warehouses while putting countless part-time workers out of work, we don’t know if to dread or yearn for the moment when RoboHandle emerges in a quiet patrol of your neighborhood street, armed and ready to use lethal force, and gradually replacing the local police force around the country.

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Trump To States With Recreational Pot: Drop Dead

Via Ryan McMaken of The Mises Institute,

In the days following the 2016 election, there were already worrying signs that the Trump administration didn't merely view the War on Drugs as a useful source of rhetoric to please some Conservatives. With the appointment of Jeff Sessions — who appears to be a true believer in the War on Drugs — the threat to federalism, states's rights, and local control was all too real. 

The fears continue to be stoked by the administration itself, and yesterday White House spokesman Sean Spicer announcing that "I do believe that you'll see greater enforcement of [federal law against marijuana]." 

So, in an administration where Trump's promised health care reforms are anything but a done deal — and which is plagued with leaks and conflict with the US intelligence establishment — Spicer suggests the administration has enough extra time to ramp up prosecutions of American citizens for smoking a joint. The fact that 81 percent of all drug arrests are for simple possession means that yes, increasing federal enforcement is about arresting and prosecuting small-time users. 

Spicer justifies this with the well-worn claim often made by Conservatives that "There is still a federal law that we need to abide by … when it comes to recreational marijuana and other drugs of that nature."

At the core of this statement is the same hypocrisy that infects much of the right wing on the Drug War issue. 

Conservatives like to talk a good game about states's rights and local control when it comes to issues like gun laws and Obamacare, but federalism and the Constitution go right out the window on the drug issue. 

This has long been obvious, and was solidified in federal court when Trump's nominee to head the EPA, Scott Pruitt, sued Colorado in federal court when he was attorney general of Oklahoma. Pruitt and the GOP attorney general from Nebraska both attempted to get the federal court to render Colorado's drug laws null and void — which would have essentially destroyed what's left of federalism and states's rights down to its foundations. Pruitt, however, was making this same argument at the very same time he was arguing that the states had the right to override Obamacare mandates. 

But the hypocrisy does not stop there. Conservatives love to talk about following the "original intent" of the US Constitution and demanding the federal government do nothing that is not authorized by the Constitution. That, of course, is then conveniently forgotten on the drug issue. 

Although Sean Spicer certainly won't admit it, the "federal law we need to abide by" is not some federal statute passed by Congress about drugs. The law we need to abide by is found in the US Constitution — specifically the Tenth Amendment — where it clearly states that "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people."

So does the Constitution delegate to the United States government the power to regulate what sort of plants people eat, smoke, or grow? Here's a hint: No, it doesn't. 

This refrain of Drug Warriors that those who don't like the Drug War need to "change the law" before they can complain requires a willful ignorance of the law contained in the US Constitution itself. 

Indeed, in more honest times, everyone knew the Constitution did not allow federal control of such matters which is why most everyone accepted that a Constitutional amendment was necessary to authorize federal prohibition of alcohol. It was only later that politicians realized they could just forget about all that Constitution stuff and pass federal statutes banning various substances at will. 

Of course even if the Constitution did authorize such things, it would be worthy of being ignored, just as federal laws and Constitutional provisions protecting slavery were always worthless and should have been ignored by everyone everywhere.

Spicer then went on to make other fact-free claims in his attempt to connect marijuana use to recent surges in opioid deaths. Lizzy Acker in The Oregonian reports

"I think that when you see something like the opioid addiction crisis blossoming in so many states around this country," Spicer said, "the last thing that we should be doing is encouraging people."

 

Though Spicer drew a connection between opioid use and marijuana, there is no known connection between the two. According to the Centers for Disease Control, in 2015 more than 33,000 people died from opioid overdoses, which includes both heroin and prescription painkillers, "more than any year on record."

The CDC reported that "nearly half of all opioid overdose deaths involve a prescription opioid."

 

Marijuana overdoses account for no deaths, according to the Drug Enforcement Administration. In fact, a study reported in "Time" in 2016, said that "when states legalized medical marijuana, prescriptions dropped significantly for painkillers."

As Mark Thornton shows, the problem of opioid deaths can be traced back to the mainstream medical profession's frequent use of prescription painkillers, and has nothing at all to do with marijuana: 

One class of prescription drugs is directly related to the heroin epidemic, on which I have recently reported. To recap, drug companies that make opiate pain killers have influenced the American Academy of Pain Medicine to change their guidelines for prescribing pain killers. The changes in the guidelines have made it much more likely for doctors to prescribe pain killing opiate drugs such as Oxycontin and Vicodin for things like ordinary injuries and surgeries. The DEA, FDA, and the AMA monitor prescribing behavior of doctors, so they are more likely to follow such guidelines to avoid risk of sanction.

 

These drugs are highly effective for pain, but can be addictive and deadly themselves (16,000 deaths in 2015 alone). When the injuries heal, addicted patients can no longer get refills for the drugs. For those who have become addicted their choices are going cold turkey, enter an addiction treatment program, or obtain the drugs on the black market. In other words, they have no good choices.

And, while Spicer suggests arresting some pot users might somehow miraculously do something to cut down opioid use, the FDA is approving opioid use for 11 to 16 year olds, thus encouraging greater use on children. If the Trump administration is in the mood to crack down on somebody connected to the opioid addiction problem, there's no need to go out to Colorado or Oregon to do it. Trump can just drive over to the FDA headquarters in Maryland. 

And finally, this is just the latest indication that the Trump administration's priorities are not where they need to be. Earlier this month, David Stockman complained that Trump is letting himself get sidetracked from the important business of freeing up the economy. Stockman was apparently more right than he knew. 

When asked about drug issues in far-off states that have legalized recreational marijuana, Spicer could have simply said "we're concentrating on repealing Obamacare right now" or "we're really focused on helping small business people make a living" or "we're focused on finding peaceful solutions to pressing international issues right now, as in Syria." All of those issues require immense focus, time and effort from Trump himself and his advisors. But no, the administration decided to declare war on seven US states instead. 

There are only so many hours in the day. Trump might want to take a closer look at how he uses them.

*  *  *

Update: This afternoon, AG Sessions noted:  THERE'S 'VIOLENCE' AROUND POT SMOKING

 

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China Accounts For Half Of All Global Debt Created Since 2005: Here Are The Implications

Over three years ago, in November 2013, when the world's attention was still largely focused on what the "Big 4" central banks would do with QE and/or interest rates, we wrote an article showing in one simple chart  "How In Five Short Years, China Humiliated The World's Central Banks", and noted that in just the brief period since the financial crisis "Chinese bank assets (and by implication liabilities) have grown by an astounding $15 trillion, bringing the total to over $24 trillion. In other words, China has expanded its financial balance sheet by 50% more than the assets of all global central banks combined."

Fast forward to today, when not only is China's debt the biggest wildcard for the stability of the global financial system (recall last week UBS observated that for the first time in years, the global credit impulse had tumbled to negative largely as a result of a slowdown in Chinese credit creation), but even central banks openly admit that China's relentless debt-issuance spree is a major risk factor for global financial stability. One such bank is the NY Fed, which earlier today issued a report titled "China’s Continuing Credit Boom", which while containing nothing that regular readers don't already know, provides a handy snapshot of the full extent of China's debt problems.

Here are some of the higlights:

  • Debt in China has increased dramatically in recent years, accounting for roughly one-half of all new credit created globally since 2005.
  • The country’s share of total global credit is nearly 25 percent, up from 5 percent ten years ago. By some measures (as documented below), China’s credit boom has reached the point where countries typically encounter financial stress, which could spill over to international markets given the size of the Chinese economy.
  • Nonfinancial debt in China has increased from roughly $3 trillion at the end of 2005 to nearly $22 trillion, while banking system assets have increased sixfold over the same period to over 300 percent of GDP.
  • In 2016 alone, credit outstanding increased by more than $3 trillion, with the pace of growth still roughly twice that of nominal GDP. As a result, the “credit-to-GDP gap”—the difference between the debt-to-GDP ratio and its long-run trend—has reached almost 30 percentage points. The international experience suggests that such a rapid buildup is often followed by stress in domestic banking systems. Roughly one-third of boom cases end up in financial crises and another third precede extended periods of below-trend economic growth.

Drivers of China’s Credit Growth

As seen in the chart below, rising nonfinancial sector debt was driven initially by a surge in corporate borrowing in response to the global financial crisis. This additional debt was comprised mostly of medium- and long-term corporate loans related to infrastructure and property projects.

Shadow Banking

The chart below shows that while bank lending is the largest component of China’s credit boom, nontraditional or “shadow” credit has also grown rapidly. Nonbanks, often in cooperation with banks, have found ways around authorities’ efforts to restrict lending to certain sectors (such as real estate and industries with excess capacity like steel and cement) following the initial surge in credit in 2009. This shadow credit (in the form of trust loans, entrusted lending, and undiscounted bankers’ acceptances) is included in official data and accounts for about 15 percent of total credit—31 percent of GDP—compared with 5 percent ten years ago. Authorities have slowed the growth in reported shadow lending since 2013 through macroprudential measures, although this may have caused credit to migrate to other lending channels.

More recently, rapid mortgage lending has been a key driver of credit growth, with residential mortgage loans increasing by 35 percent year over year at the end of December 2016. Mortgages account for roughly 18 percent of bank loans in China (compared to 30 percent in South Korea, 23 percent in Japan, and 25 percent in the United States). The pace of mortgage lending appears likely to slow going forward as Chinese authorities tighten macroprudential policy on property-related lending.

The increasing complexity of China’s financial system has made it difficult to estimate the true level and growth rate of credit. Official data put nonfinancial debt at roughly 205 percent of GDP. However, adjustments for additional sources of credit not fully captured in the official data suggest total credit could be higher. As shown in the chart below, the pace of total credit growth is higher when swaps of local government-related bank loans for municipal bonds are included. China’s credit measure excludes swapped bank loans but does not add back the municipal bonds they were exchanged for.

A Nation of Banking Behemoths, Especially The Small Ones

Chinese banks have become global behemoths. The country is home to four of the five largest banks in the world by asset size. Yet, China’s credit expansion has been driven by relatively small banks, which have been growing their total assets at two to three times the pace of the largest commercial banks.

Joint stock commercial banks (JSBs), city commercial banks (CCBs), and other smaller-scale institutions have increasingly used less stable funding sources to finance their balance sheet expansion, primarily by tapping the interbank market and issuing wealth management products (WMP), as seen in the chart below. WMPs are predominantly short-term investment products sold by banks and nonbank financial institutions that provide investors with higher rates of return than bank deposit rates. WMPs can have a range of underlying assets, including bonds, money market funds, and even a limited amount of bank loans. Official data on banks’ WMPs show an almost sixfold increase since 2011, to the equivalent of about $4 trillion or 37 percent of GDP. The growing reliance of Chinese banks on this type of funding has increased concerns over potential shocks to market-based funding, a risk highlighted by the International Monetary Fund in its October 2016 Global Financial Stability Report.

Credit Offers Less Boost to Growth

An interesting development is that credit appears to be providing less of a boost to Chinese GDP growth than it used to. As shown in the chart below, the credit impulse—the change in the flow of new credit as a percentage of GDP—appears to be providing less bang to output for each additional yuan of credit, underscoring questions over how much lending is going to unproductive “zombie” companies. Improving credit efficiency going forward will require reforms, such as hardening budget constraints at state-owned enterprises and local governments, reducing implicit and explicit guarantees in the financial system, and slowing aggressive balance sheet growth at smaller financial institutions.

That's the bad news.  Below are the four features which offset some of the concerns laid out above:

Despite its vulnerabilities, China’s financial system has several features that reduce the associated risks.

  • Unlike many emerging-market credit booms that have ended in busts, China’s credit growth has been funded primarily by high domestic saving, of which bank deposits are the vast majority.
  • Chinese authorities have ample liquidity tools, including high required reserve ratios, the ability to extend short-term liquidity via an array of facilities, and a financial sector dominated by state-owned lenders and borrowers.
  • By some measures, the Chinese financial system has a smaller nonbank segment than its counterparts in advanced economies do.
  • China has substantial fiscal resources to address losses in its financial system and among troubled state-owned debtors. According to IMF projections, China’s total government gross debt (including off-balance-sheet borrowing implicitly guaranteed by the state) was around 60 percent of GDP at the end of 2016—lower than the level seen in most advanced economies. The government’s balance sheet is further bolstered by sizeable, albeit declining, foreign exchange reserves.

For now, the positive factors still are able to outweigh the negative, but it's only a matter of time before this changes. As we wrote last week, "People Are Suddenly Worried About China (Again)" and none more so than Goldman. Now that the ex-Goldman partner run NY Fed has also warned about the risk of a Chinese credit crisis, it suddenly feels that the positive will not be able to outweigh the negative for much longer.

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New Rules Force Banks To Charge For Research; Hedge Funds Push Back: “We Won’t Pay For Crap”

What if we were to tell you that for the bargain basement price of just $10,000 per hour you could buy yourself the privilege of a 1-hour conversation with an equity research analyst from a top-notch investment bank, would that be something that might interest you?

While we hate to be overly pessimistic, we’re gonna go out a limb and guess that most of you answered in the negative to our question posed above.  Unfortunately, at least for a bunch of research analysts in Europe who either (i) actually believe their time is a bargain at $10k per hour and/or (ii) simply require that much to justify their existence to their employers, that is exactly what investment banks in Europe are proposing to their buyside clients.

As the Financial Times points out, European investment banks are locked in a heated negotiation with their buyside clients at the moment over exactly how much they should be able to charge for equity research services.  The discussion has been prompted by a new regulation, known as Mifid II, which will go into effect in 2018 and require i-banks to break out the pricing of equity research charged to buyside clients, which up until now had been provided ‘free of charge’ but effectively covered by trading commissions.

The tense discussions over how much analyst research is worth have intensified since the start of the year as the investment industry readies itself for the introduction of new European rules, known as Mifid II, in 2018.

 

The rules will force fund companies to explain clearly to investors how much of their money is spent on research. Previously research was sent to fund managers for free in return for the business asset managers provided to banks and brokerages when they placed trades. The cost of the research was included in the price of trading.

Unfortunately, there seems to be a pretty wide bid/ask spread between what research analysts think their services are worth and what their buyside clients are willing to pay.  In fact, a recent survey of fund managers by consultancy Quinlan & Associates found that analyst headcounts at banks would have to fall by 30% by 2020 in order to eliminate all of the costs that funds simply wouldn’t be willing to absorb (a.k.a. the “crap” as one fund manager put it). 

“The figures are all over the place at the moment. Some [quotes] are fair and reasonable, and [with others] we thought: there is no way we are paying that — they will have to recalibrate their business models or part ways with us altogether.”

 

“This is the biggest problem,” he said. “It will cause a lot of problems in 2018 because no one has worked out how much the research is worth.

 

“There will be a lot of c**p that clients won’t pay for and that is when the big cuts [to the analyst workforce] at the global banks will come. The feedback from many [in asset management] is that the price of research is too high and not granular enough.”

ER

 

Meanwhile, with banks looking to charge each client $300,000 – $500,000 per year for their equity research alone, it’s the small asset management funds that will be shut out of the market. 

The head of a boutique fund company, which has a yearly research budget of £1.1m, said brokers were now asking for $300,000 for an annual subscription to their research. “As a global house covering emerging and global markets, you might need a dozen brokers. That’s a huge bill,” he said.

 

“For smaller managers this is a big problem. They just don’t have the scale to put a cheque of that size through. We had one broker say it might be $500,000 [to access their research annually], but that’s a nonsense starting negotiation position.”

 

Brijesh Malkan, a former Legal & General fund manager and senior consultant at BCA Research, an independent research provider, said some of his clients have been asked to pay up to $10,000 for phone calls with top bank analysts.

 

Banks have also requested a $30,000 annual fee to provide an individual with access to their research platforms, and up to $10m to provide a fund company with the same level of access across its workforce, according to Mr Malkan, who has more than 2,200 fund management clients.

But, while equity research analysts may like to think their time is invaluable, real life comps would seem to paint a slightly different picture with CLSA just announcing today they will be shutting down their U.S. equity research efforts “driven by declining revenue.”

Today, CLSA Americas CEO Rick Gould announced changes to CLSA’s equities platform in the US. Going forward, CLSA will pivot its US domestic equity broking business to focus on execution services and trading.

 

Driven by declining revenues in equity research and increasing investor demand for low-touch, best-execution strategies the changes announced today will impact US domestic research, sales, trading, corporate access and associated support staff.

 

CLSA Americas will continue to offer its current full suite of execution and trading services, including sector trading, ADR trading, portfolio trading, electronic execution and commission management to provide clients with best execution globally.

 

CLSA Americas has one of the largest Asia-sales teams of any brokerage operating in the United States and will continue to offer Asian research and global execution services to US clients. Asia sales and Asia trading teams located in the US will not be impacted.

 

Since 2009, CLSA Americas has built an outstanding equity research platform with some of the best analysts on the street. Our focus has always been to provide US and global investors differentiated insights on US stocks. While we succeeded in this regard, the economics of providing US equity research have become increasingly challenged. Our focus now, is to continue to provide our clients access to liquidity and best execution.

Of course, at least to us, this all seems like an awful lot of money to spend to have the same people give you the same advice over and over again, namely “buy more stocks, faster.”  There, we just summarized 90% of all equity research that will ever be written for the rest of history in 4 simple words and completely free of charge.  You’re welcome.

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Friendly Dinosaur Warren Buffett Thinks WSJ And NYT Have “Assured Future” Thanks To Digital Subscription Models

I know Warren Buffet is hallowed ground for some of you, but the Oracle from Omaha just cobbled together the weakest investment thesis since Yahoo! bought Broadcast.com, making Mark Cuban the luckiest son of a bitch on the face of the planet – even if he does consistently pick losing teams.

Get this – Buffet, who’s never sent a Tweet, thinks that Rupert Murdoch’s Wall St. Jounal (of recent failed PewDiePie hit-job fame) and Carlos Slim’s New York Times (of generally failing fame) are going to be the only two publications with an “assured future” thanks to their robust online models. Jeff Bezos’ Washington Post (of government mouthpiece fame) gets an honorable mention.

There are only two papers in the United States that I think have an assured future because they have a successful internet model to go with their print model, and that’s the Journal and the New York Times. They have developed an online presence that people will pay for.

 

Now the third that may do it, again going back to Bezos, is the Washington Post – and he’s improved dramatically their situation online, so it’s conceivable that their math works.

Sorry Warren – faith in the MSM is completely broken, and people are increasingly migrating to sites like ZeroHedge and iBankCoin to avoid corporate-globalist propaganda. Plus, anything in the WSJ / NYT is available from about a dozen sources for free.

Now let’s take a look at how WSJ and WaPo are actually doing in terms of internet traffic – the cornerstone of Warren’s rad thesis – especially since iBankCoin’s “clickgate” article showed how mystery internet traffic from China as measured by Alexa.com (which shares an owner with the Washington Post) appeared to be synthetically inflating their rankings. Interestingly, the Chinese traffic has suddenly disappeared from the Alexa metrics, painting a dramatically different picture of NYT and WaPo’s penetration in the digital space.

Sorry Warren – these papers all suck, they’re being exposed for sucking, and you’re on the wrong side of the trade.

Of hilarious note, Squawk Box’s Becky Quick asked Buffet about “assholes” at the end of the interview!

Becky: So, how often do you think “that guy’s an asshole” but not tell him

 

Buffet: Well I’ve certainly thought that over the years, but it hasn’t all been guys either!

Warren gets a few bonus points for handling that like a boss – even if he does need to fire whichever ivy league MBA told him digital subscriptions work.

  

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So Who’s Pumping Up This “New Normal” Housing Market?

Via Wolf Richter of WolfStreet.com,

America becomes “Landlord Land.”

“A housing recovery that is highly dependent on real estate investors is a bit of a double-edged sword,” explained Daren Blomquist, senior VP at ATTOM Data Solutions. “Rapidly rising home values have been good for homeowner equity, but also have caused an affordability crunch for the first-time homebuyers the housing market typically relies on for sustained, long-term growth.”

So the housing market is “starkly different than a decade ago,” said Alex Villacorta, VP of research and analytics at Clear Capital. “As such, it’s imperative for all market participants to understand the nuances of the New Normal Real Estate Market.”

They were both commenting on a joint white paper by ATTOM and Clear Capital, titled “Landlord Land,” that analyzes who is behind the US housing boom that drove home prices to new all-time highs, and in many markets far beyond the prior crazy bubble highs – even as homeownership has plunged and remains near its 50-year low.

First-time buyers are the crux to a healthy housing market, but they aren’t buying with enough enthusiasm. In 2012, buyers with FHA-insured mortgages – “who are typically first-time homebuyers with a low down payment,” according to the report – accounted for 25% of all home purchases. In 2013, their share dropped to about 20%, in 2014 to 18%. Then hope began rising, briefly:

However, in January 2015, FHA lowered its insurance premium 50 basis points, and there was a modest resurgence in FHA buyers – a trend perhaps indicative of loosening credit requirements or of a desire to re-enter the housing market for those displaced during the crash.

Their share of home purchases ticked up to 22.3%. Alas, “the FHA resurgence was short lived” and in 2016 eased down to 21.7%.

With first-time buyers twiddling their thumbs, who then is buying? Who is driving this housing market?

Institutional investors? Defined as those that buy at least 10 properties a year, they include the largest buy-to-rent Wall Street landlords, some with over 40,000 single-family homes, who’ve “picked up the low-hanging fruit of distressed properties available at a discount between 2009 and 2013,” as the report put it. That was during the foreclosure crisis, when they bought these properties from banks.

In Q3, 2010, institutional investors bought 7% of all homes. In Q1 2013, their share reached 9.5%. As home prices soared, fewer foreclosures were taking place. By 2014, when home prices reached levels where the large-scale buy-to-rent scheme with its heavy expense structure wasn’t working so well anymore, these large buyers began to pull back. In 2016, the share of institutional investors dropped to just 2% of all home sales.

But as institutional investors stepped back, smaller investors jumped into the fray in large numbers, “willing to purchase in a wider variety of market landscapes and operate on thinner margins.”

To approximate total investor purchases of homes, the report looks at the share of purchases where the home is afterwards occupied by non-owner residents. In 2009, according to this metric, 28% of all home purchases were investor-owned properties. In 2010, it rose to 30%. In 2011, 32%. Then as big investors pulled out, it fell back to 30%. But by 2015, small investors arrived in large numbers, and by 2016, investor purchases jumped to 37%, an all-time high in the ATTOM data series going back 21 years.

The chart shows the share of purchases in a given year. Note the declining share of first-time buyers (blue line), the declining share of institutional investors (gray bars), and the surging share of smaller investors (green line). In other words, smaller investors are now driving this housing boom:

The pie chart below shows the share of properties owned by investor size. Among investors in today’s housing market, small landlords that own one or two properties own in aggregate the largest slice of the rental housing pie – 79%:

However, Wall Street landlords are concentrated in just a few urban areas. For example, Invitation Homes, the 2012 buy-to-rent creature of private-equity firm Blackstone, which owns over 48,000 single-family homes and has nearly unlimited financial resources, including government guarantees on some of its debt, is concentrated in just 12 urban areas, where it has had an outsized impact.

Whereas small investors own properties across the entire country, in urban and rural areas, in cheap markets and ludicrously expensive markets. They own condos, detached houses, duplexes, and smaller multi-unit buildings.

So when the industry tells us about low inventories and strong demand in the housing market, it’s good to remember where a record 37% of that demand in 2016 came from: investors, most of them smaller investors. And when the financial equation no longer works for them, they’ll pull back, just like institutional investors have already done.

In what are now deemed the most expensive multifamily rental markets in the world – San Francisco and New York City – the commercial property bubble is already deflating. Read…  Here are the Top “Sell Markets” in an Overpriced World as “the Apartment Cycle Draws Closer and Closer to the End”

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GM Pickup Incentives Surge Over 80% As Auto Bubble Continues To Show Signs Of An Imminent Bust

For months we’ve argued that record auto sales have been propped up by low interest rates, a perpetual loosening of auto lending standards with terms being stretched to the max and a wave of leases, all of which have allowed the American consumer to trade up to more expensive vehicles while maintaining low monthly payments. 

And so far, this perfect alignment of the stars has propelled U.S. auto sales to record highs.

SAAR

 

That said, with rates recently on the rise and a flood of lease returns driving down used cars prices (see “Record High Lease Returns Set To Wreak Havoc On Used Car Prices“), the tailwinds that have propelling auto sales to record highs over the past several months look set to change course.

As we noted recently, a quick look at the 61+ day delinquencies in General Motors’ subprime securitization book would seem to support our rather negative thesis on future auto sales with January 2017 delinquency rates soaring to the highest levels since late 2009 / early 2010.

Autos

 

Meanwhile, looking at GM’s subprime data going back to 2001 implies that historical spikes in 2-month delinquency rates is a fairly decent indicator that all is not well.

autos

 

Unfortunately, at least for the auto OEMs and their investors, at this phase in the cycle the only way to ‘juice’ volume is through artificial market share gains courtesy of excessive incentive spending…which, as we all know, likely signals the beginning of the end of the auto cycle which will quickly be followed by a race to the bottom for OEM profits

And, right on cue, it looks as if General Motors has kicked off the “Incentive War” with massive YoY increases in incentive on the auto industry’s most profitable segment, pickup trucks.  Per Bloomberg:

General Motors Co. boosted incentives on its pickup models this month after its biggest foes gained ground, intensifying a price war within the U.S. auto market’s most hotly contested segment.

 

Discounts averaged about $6,996 for the Chevrolet Silverado and $5,315 for the GMC Sierra this month through Feb. 12, according to J.D. Power dealer data obtained by Bloomberg News. Incentives on GM’s models surged 56 percent and 82 percent, respectively, from a year earlier as Fiat Chrysler Automobiles NV and Ford Motor Co. dialed back their spending, according to the researcher.

 

“It’s taking a lot more incentives now to move the metal than it did last year or certainly the year before,” said Michelle Krebs, senior analyst with car-shopping website Autotrader.com. “Things are slowing.”

GM

 

Of course, the increased incentive spending from GM comes as they ceded market share to both Ford and Chrysler in 2016.

GM

 

Of course, we suspect that this kind of aggression will not be allowed to go unchecked and will inevitably be matched by Ford and Chrysler.

On your mark, get set, go….

Race to Bottom

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Anti-Immigration, Pro-Big Government National Front’s Le Pen Inching Up in Polls—At 44 Percent in Run-off Match-up

Marine Le Pen of the anti-immigration, pro-welfare state National Front, is improving her standing in some French presidential polls—she is expected based on her polling performance so far to make it through the first round of elections, while a corruption scandal that rocked the candidacy of Republican candidate Francois Fillon has reduced his lead in head-to-head polling with Le Pen to a 12 points. In the most recent poll of the most likely run-off scenario, Fillon topped Le Pen 56 to 44.

Le Pen’s father, Jean-Marie, made it into the run-off against the incumbent Jacques Chirac, where the challenger was trounced 82 percent to 18 percent. In the first round, Chirac led with 20 percent and Le Pen finished second with 17 percent. Chirac received nearly 20 million additional votes in the second round, while Le Pen gained only 700,000. Polling in the 2017 election suggests Fillon, or whoever else makes it into the second round with Le Pen, cannot expect support as broad as Chirac received.

Some French leaders are warning that a Le Pen win is far from impossible. She has a 27.7 percent chance of winning according to prediction markets aggregator ElectionBettingOdds.com—within the range of Trump’s chances of winning during much of the 2016 campaign.

“I think Madame Le Pen could be elected,” Jean-Pierre Raffarin, a former Republican prime minister, warned this month according to Euractiv, while another former prime minister, Socialist Manuel Valls, who ran unsuccessfully for the Socialist nomination for president this year, said it was dangerous to assume Le Pen could not win.

Le Pen has mixed a nationalist, Euroskeptic, Islamophobic and anti-immigration message with promises of increased social and welfare spending to expand the National Front’s appeal, particularly relative to her most likely second-round opponent, Fillon, who is campaigning on much needed civil and government services cuts as well as labor market deregulation. The Socialist Francois Hollande’s presidency failed in large part under the weight of unsuccessful efforts to get French government spending under control and to remove barriers to economic growth. Socialist voters, The Independent columnist Satyajit Das suggests, faced with the run-off choice of Le Pen and Fillon or a center-left candidate (the Socialist Benoit Hamon is not expected to make it into the second round in most scenarios), may choose Le Pen at a higher rate than French pundits are willing to admit. The center-left candidate, Emmanuel Macron, a former investment banker and founder of the En Marche! party, is, like Fillon, is also running on labor reforms and tax cuts, two policies critical to improving France’s economy but not popular with Socialist voters.

Le Pen has not been shy in trying to align herself with Donald Trump and with Brexit (she supports a French withdrawal from the European Union), and launched her campaign earlier this month with the slogan “France First.” In response to Macron rising in the polls, she has adopted a Trump-like attack on the French media, accusing it of campaigning “hysterically” for Macron. Last year she praised Russia President Vladimir Putin as a real leader and called the EU the real enemy, and earlier this year she denied that Russia invaded Crimea, which is under the control of Russia but recognized by most of the international community as still being part of Ukraine.

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