Month: July 2014

Submitted by Simon Black of Sovereign Man blog,

If you want to gather honey, don’t kick over the beehive.

This was how Dale Carnegie titled the first chapter of his 1936 personal development masterpiece—How to Win Friends and Influence People.

Carnegie had sensible advice: if you want to keep people on your team, first and foremost don’t piss them off. Duh. Seems pretty obvious.

I think the US government could use a little Dale Carnegie right about now (I actually just ordered a copy and had it sent to the President. You’re welcome, BO.)

Because based on the way they’re acting, you’d think they were test-driving an entirely different manuscript—How to Lose Friends and Alienate People.

Exhibit A: FATCA.

Four years ago, the US government passed this absurd law requiring every bank in the world to enter into an information-sharing agreement with the IRS.

Those who don’t will be subject to a 30% withholding tax on certain funds that get routed through the United States banking system.

What’s more, every bank on the planet is somehow supposed to simultaneously keep track of every other bank in the world and know precisely who is / is not in compliance with the law.

Banks that are in compliance are supposed to withhold the 30% tax on any funds transferred with banks that are not in compliance… otherwise they risk the withholding tax penalty themselves.

The whole thing is enough to make your head spin. Needless to say, the mere thought of complying with this law is enough to drive banks crazy.

This isn’t a way to treat friends. And today’s the day it comes into force.

Exhibit B: BNP Paribas.

Uncle Sam just slammed this French bank with a massive fee and threats of criminal penalties for doing business with a country they don’t like.

In doing so, the US has given BNP… and France… nine billion reasons to abandon America.  Again, this isn’t the way you treat friends.

I think politicians fail to realize how important the US banking system is to holding together the US economy.

Right now, the entire world uses the US banking system.

If a merchant in Angola wants to do business with a merchant in India, for example, that transaction is cleared through banks in New York.

This, by default, creates demand for people to hold dollars, giving the US billions of people to splay their inflation onto.

It’s the only reason why the Federal Reserve has been able to print $3.5 trillion over the last five years; nearly any other country does that and you get hyperinflation.

You’d think they would guard this dearly. You’d think the US government would treat their friends… their customers… respectfully.

But no. Instead they’ve dropped a steaming hunk of dung on the entire system, and everyone in it.

With law and behavior this dumb, they’ve gone and kicked over the beehive. No bankers want the hassle of dealing with America anymore, and everyone is looking for a better option.

It’s happening.

Chinese renminbi trade settlement is growing like a weed, constantly posting record levels. Everywhere you look there are countries and big companies looking to hold and conduct trade in renminbi.

Even Canada and the UK are now angling to become major centers of renminbi settlement. Everyone else seems to get it… everyone but the US.

With all of its debt and all of its money printing, the US banking system was one of America’s last economic competitive advantages.

But now we are going to see more and more foreigners curtailing their use of the US banking system… and by extension… the dollar.

Without that mass of people to export dollars to, inflation will really kick in back home.

It’s not going to happen overnight. But as yet another insane law comes into force today, it represents one of the final nails in the coffin for the US, and the end to one of its last remaining advantages.

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Goldman Sachs listened (and read) Janet Yellen’s remarks at The IMF and see them “generally in line.” Despite waffling on for minutes about risk management and monitoring, no one at The Fed has mentioned the total carnage in the repo market, spike in fails-to-deliver, and record reverse repo window-dressing that just occurred. The use of the term “reach for yield” twice and “bubble” 5 times, and admission that the Fed should never have popped the housing bubble, leaves us less sanguine than Goldman and wondering if this was Janet’s subtle and nervous ‘irrational exuberance” moment.

 

 

Goldman thinks…

BOTTOM LINE: Fed Chair Janet Yellen spoke this morning on the role of financial stability concerns in monetary policy. Her remarks were mostly in line with her previous commentary on the issue.

 

MAIN POINTS:

 

1. Chair Yellen’s speech today focused on the role of financial stability concerns in monetary policy. Yellen argued that regulatory and supervisory measures are better suited to address financial stability concerns, and that monetary policy has limitations as a tool for promoting financial stability. As a result, Yellen concluded, she does not “presently see a need for monetary policy to deviate from a primary focus on attaining price stability and maximum employment, in order to address financial stability concerns.”

 

2. Overall, Yellen argued, household debt growth has been moderate in recent years and leverage in the financial system has declined. However, she cautioned that she does see pockets of increased risk taking, such as in the leveraged loan market, which require continued monitoring. She also said that the Fed could consider other tools for promoting financial stability—“including adjustments to the stance of monetary policy”—as conditions change in the future.

 

3. Yellen also addressed the argument that the housing bubble could have been prevented by tighter monetary policy in the mid-2000s. She argued that monetary policy would have been an insufficient response and a “very blunt tool” for addressing rising house prices and leverage, while macroprudential policies would have been more direct and effective.

And we note Jante said…

terms and conditions in the leveraged-loan market, which provides credit to lower-rated companies, have eased significantly, reportedly as a result of a “reach for yield” in the face of persistently low interest rates.

…

Policymakers failed to anticipate that the reversal of the house price bubble would trigger the most significant financial crisis in the United States since the Great Depression because that reversal interacted with critical vulnerabilities in the financial system and in government regulation

…

efforts to promote financial stability through adjustments in interest rates would increase the volatility of inflation and employment

*  *  *

So Goldman loves it – but she warned of more vol and potential bubbles?

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Wolf Richter   http://ift.tt/NCxwUy   http://ift.tt/Wz5XCn

Private equity firms are the ultimate smart money on Wall Street; they know how to wring out the last dime from their own clients, such as pension funds and rich individuals, through hidden fees, obscure expenses, elaborate expense shifting, lackadaisical disclosure, and “zombie advisers,” to the point where SEC Inspection Chief Andrew Bowden singled them out in a speech in May. Now the lawyers are circling.

And these PE firms invented a whole new business: buying vacant homes out of foreclosure and from banks and renting them out. Flush with the Fed’s nearly free money, Blackstone Group ended up spending $8.6 billion in two years on 45,000 homes, spread helter-skelter across 14 cities. Another PE product, American Homes 4 Rent, which went public last summer as a highly leveraged REIT, bought 25,000 homes. Firms sprouted like mushrooms, spending $50 billion to acquire 386,000 homes.

And home prices soared. Year-over-year increases of over 20% suddenly appeared in the data. Housing Bubble 2 was born. That’s how the Fed “healed” the housing market. Yet numerous economists claimed that buying 386,000 homes over two years in a market where about 5 million existing homes change owners every year could not possibly have had much impact on price. Turns out, that meme is awfully close to propaganda.

The smart money on Wall Street had a goal.

And a system – aided and abetted by the banks. Homebuyers today are, literally, paying the price. The goal was to progressively drive up home prices to book near-instant paper profits on the units they had already bought. According to a source at one of the GSEs (Government Sponsored Enterprise), whose work is focused on residential real estate, they did it by constantly laddering their purchases. And in some markets, like Las Vegas, they achieved price increases of 100%. The multiplier effect. He explains:

A multiplier of roughly 60 times is placed on one sale in a market. In other words, one sale affects the value of 60 homes. So the 386,000 homes adjusted the price on roughly 23 million homes. There are 78 million homes in America with 35 million first-lien mortgages. This happened in about 8-12 markets nationwide. The West Coast was leading the charge back up.

Last fall, two investment houses announced they were going to sell out of their inventory and today three others announced the same. Reason: prices have more than met their goal. Since real estate is a commodity, the rule of price elasticity applies. A very small number of sales can have extreme consequences in price for the rest.

The problem with that strategy? It drove up prices so far and so fast that the business model of buying these homes, fixing them up, and renting them out at a profit has hit a wall. So the dynamics of the market are changing. From gobbling up and finding renters to…

Selling, securitizing, and consolidating.

But selling them to first-time buyers at these prices – well, forget it. So Waypoint Real Estate Group is trying to “quietly” unload half its inventory of 4,000 homes in California to another company. It also manages another 7,000 homes that an affiliated REIT owns. Och-Ziff Capital Management Group and Oaktree Capital Management have already started selling their homes. Other firms, including Blackstone Group and American Homes 4 Rent have pulled back from buying homes as prices have soared.

Instead of trying to sell their tens of thousands of homes, Blackstone and American Homes are selling synthetic structured securities that are backed, not by mortgages like the toxic waste that contributed to the financial crisis, but by something even worse: rental payments, based on the flimsy hope that these homes will stay rented out. The already sold $3 billion of this stuff. Wall Street is jubilating. The fees are going to be huge: the market for this type of synthetic concoction is estimated to be $1.5 trillion.

Now that they have to focus on making the business model work with what they’ve got, they have to do the grunt work of fixing up tens of thousands of far-flung homes and renting them out one at a time, and keep them rented out, and they have to come to grips with American mobility where strung-out renters wander in and out and are late paying their rent if they can pay at all, and it’s hard, tedious work.

With buying more homes in overheated markets no longer a priority, or even an option, American Homes is embarking on the next step: buying competitors. It just announced that it would acquire Beazer Pre-Owned Rental Homes, a REIT backed by Beazer Homes, PE firm KKR, and others. It now owns 1,300 homes. Everyone had jumped into this Fed-sponsored game, even home builders like Beazer. American Homes CEO David Singelyn put it this way during the earnings call in May: “We will be one of the players in the consolidation of this sector.”

The goal: manipulate the market to their liking. Through consolidation, the biggest players will try to raise valuations – or at least keep them from collapsing – and control the smaller players that are desperate to take their profits by dumping homes on the market and thereby opening the floodgates. All heck would re-break loose in the housing market. It would reverse the flow, and all the paper profits PE firms have already bragged about to their clients would suddenly evaporate. And that must not be allowed to happen.

Housing Bubble 2 has been accompanied by other bubbles. “Asset prices have reached stunning levels, obviously out of line with ‘fundamentals.’ But the “most dangerous” are housing bubbles; when they burst, they “wreck whole economies.” Read…. UBS: The Secret Reason The Fed Is ‘Tolerating’ Bubbles

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The Ukraine ceasefire is off, which means all those pro-Russian “separatist, terrorist” troops and/or civilians living in the breakaway East Ukraine, aka Novorossiya, region are again fair game. The video below, published Wednesday, and first reported by RT, shows a moment from the shelling that happened a day before. The shell hits right next to a one-story residential building, sending a blast-wave and a cloud of smoke and dust in all directions. 

Severodonetsk is a city of 110,000 residents in the Lugansk Region. Troops loyal to Kiev started bombarding it with heavy weapons as part of a major offensive launched by President Petro Poroshenko at midnight on Monday.

via Zero Hedge http://ift.tt/1lztSdK Tyler Durden

With GoPro up over 100% since its IPO (which the mainstream media decides indicates massive demand for the ‘future’ infrastructure monetization of camera-on-a-stick clips), it appears there is another much clearer reason for the surge. As WSJ reports, the utilization level – the percentage of shares available to loan that are actually being borrowed – is near 100%. As Astec Anaytics notes, it’s rare for a stock to have such a high utilization level as the cost of borrowing GoPro shares, a proxy for short-selling activity, has “immediately become one of the highest in our system.”

 

“Although sharp and strong moves are common in the first days of securities lending activity of a newly listed company, and often unrelated to short selling activity, these numbers are dramatic even by those standards,” Mr. Loomes said.

 

 

It appears the squeeze has come and gone and today’s 9% tumble may just be the start…

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Alongside that other canard of global monetary machinations, Christine Lagarde (who oddly declared earlier that “the global economy will not return to ‘pre-crisis’ world” and asked if central banks need a ‘financial stability goal’ -mandating a market “put” of sorts); Fed head Janet Yellen will be addressing her peers at The IMF this morning. We expect a lot of “noise” comments, “lower for longer”, “weather” excuses, and escape velocity is coming any minute as she desperately tries to keep the “don’t worry, you will be ok without all our money printing” meme alive.

 

• *YELLEN: `WE HAVE MUCH TO LEARN’ IN MACROPRUDENTIAL OVERSIGHT
• *YELLEN: POLICY MAKERS SHOULD COMMUNICATE CLEARLY ON STABILITY
• *YELLEN: POLICY AT TIMES MAY BE APPROPRIATE TO ADDRESS RISKS
• *YELLEN SAYS FINANCIAL STABILITY COMPLEMENTS FED’S DUAL MANDATE
• *YELLEN: MACROPRUDENTIAL RULES SHOULD BE MAIN STABILITY DEFENSE
• *YELLEN: STABILITY BEST PROMOTED BY MACROPRUDENTIAL OVERSIGHT

• *YELLEN ‘MINDFUL’ OF HOW LOW RATES CAN PROMPT ‘REACH FOR YIELD’
• *YELLEN SAYS RATE POLICY SHOULDN’T CHANGE OVER STABILITY CONCERN
• *YELLEN SAYS RATES SHOULDN’T BE MAIN TOOL ENSURING STABILITY

 

 

IMF Live Feed…Yellen due to start at 11ET (if embed is not working use Bloomberg below)

 

 

Bloomberg Feed (click image for feed – no embed)

 

Lagarde:

The world is continuing to change. Monetary policy, and central banking, will not go back to what they used to be once the crisis is finally behind us. This tumultuous period from which we are beginning to emerge has raised fundamental questions. It has pushed us outside of our comfort zone and forced us to learn.

Full Yellen Speech:

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To the Fed’s Janet Yellen, runaway inflation – at least that which can not be “hedonised” away by the BLS like iPad and LCD TV prices – may be simply “noise”, which probably explains why she doesn’t rent. But for the record number of Americans who are forced to rent as house prices are too high for the vast majority of the population while mortgage origination has tumbled to record lows (as banks can generate far higher returns on reserve by buying stocks than lending out said money), inflation is going from bad to worse. Case in point: as the WSJ shows, since 1990 asking rents – in real terms i.e., adjusted for inflation – have increased a whopping 15%. The change in median income over the same period? 0%.

This means that all else equal, the average American has 15% less disposable income after factoring rent compared to 24 years earlier.

And since the demand for rental properties will only go up as even parent basements are getting full, it means the already record high rent prices will duly follow, taking even bigger chunks out of US disposable income, and thus, that part of the US economy, some 70% of it, which depends on consumer spending. The beneficiary? The personal bank accounts of owners of rental properties… such as BlackStone – America’s largest landlord.

Sure enough, as WSJ confirms, “apartment landlords continued to push through hefty rent hikes in the second quarter, squeezing U.S. households that already are struggling financially after four years of steady increases.”

The average monthly rent for an apartment rose to $1,099 in the second quarter, up 0.8% from the first quarter, according to data to be released Wednesday by real-estate research firm Reis Inc. That was the 18th consecutive quarter of rent increases. For the 12-month period ended in June, rents rose 3.4%.

No, it’s not just a New York phenomenon. It’s everywhere:

Effective rents—which tend to be lower than asking rents—were up in all 79 U.S. metro areas tracked in the Reis report. West Coast cities that have been the model of recovery continued to top the list of highest rent growth for the quarter and over the past 12 months.

 

Rent growth exceeded 6% over the past year in San Francisco, San Jose and Seattle.

 

Even cities that aren’t normally associated with fast rent growth, such as Charleston, S.C., and Nashville, Tenn., posted strong growth over the year, up about 5% or more for the year.

To some, renting as the new owning is equivalent of a recovery: “You have definitely seen that recovery now spread to all of the major markets around the country, even if some of them were laggards,” said Ryan Severino, an economist at Reis. “It’s a very pervasive recovery.”

Actually, what it is, is a pervasive confirmation that the Old Normal American Dream is over. As for the new one, renting, even that will soon be out of the reach of most.

Economists said the growing demand for rental housing partly reflects changing preferences among younger renters, who tend to prefer urban areas. But the demand for rentals also reflects tight mortgage-lending standards that have shut out potential homeowners from the market.

 

“If you can’t get into a single-family house and you can’t get a mortgage, well, you don’t need a mortgage to get an apartment,” said Stephanie Karol, an economist at IHS.

 

But household incomes have stagnated, resulting in a financial squeeze for a growing number of renters. Median household income was $50,017 in 2012, below 2007’s peak level of $55,627, after adjusting for inflation, according to U.S. Census Bureau data.

So what is the alternative? Well, just “charge it”… as increasingly more Americans are doing, and as the subprime lending bubble of the 2007 period is meticulously recreated, one can say with 100% certainty that the consequences will be identical.

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