Month: April 2016

The Census Bureau released its quarterly update on residential vacancies and homeownership for Q1 which is closely watched for its update of how many Americans own versus rent. It shows that following a modest pickup in the homeownership rate in the prior two quarters, US homeowners once again posted a substantial decline, sliding from 63.8% to 63.5%, and just 0.1% higher than the 50 year low reported in Q2 2015.

 

And perhaps logically, while homeownership continues to stagnate, the number of renters has continued to soar. In fact, in the first quarter, the number of renter occupied houses rose by precisely double the amount, or 360,000, as the number of owner occupied houses, which was a modest increase of 180,000. This brings the total number of renter houses to 42.85 million while the number of homeowners is virtually unchanged at 74.66 million.

A stark representation of the divergence between renters and owners can be seen in the chart below. It shows that over the past decade, virtually all the housing growth has come thanks to renters while the number of homeowners hasn’t budged even a fraction and has in fact declined in absolute numbers. What is obvious is that around the time the housing bubble burst, many Americans appear to have lost faith in homeownership and decided to become renters instead.

 

An immediate consequence of the above is that as demand for rental units has soared, so have median asking rents, and sure enough, according to Census, in Q1  the median asking rent at the national level soared to an all time high $870.

 

Which brings us to the one chart showing where the “missing” runaway inflation in the US is hiding: if one shows the annual increase in asking rents, what one gets is the following stunning chart which shows that while rent inflation had been roughly in the 1-2% corridor for two decades, starting in 2013 something snapped, and rent inflation for some 43 million Americans has exploded and is currently printing at a blended four quarter average rate of just over 8%, the highest on record, and 4 times higher than Yellen’s inflationary target.

So the next time Janet Yellen laments the collapse of inflation, feel free to show her this chart which even she can easily recreate using the government’s own data (the sad reality is that rents are rising even faster than what the governmet repoirts) at the following link.

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Comfortably green, the VIX-smashing algos have lifted US equities non-stop since the NYSE machines were unleashed. While the Dow is lagging a little, Nasdaq and S&P futures have now made it all the way back up to Kuroda’s Kamikaze moment…

 

 

What happens next?

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The Sad Truth About the State of the Financial System Today

 

For seven years, the world has operated under a complete delusion that Central Banks somehow fixed the 2008 Crisis.

 

All of the arguments claiming this defied common sense. A 5^th grader would tell you that you cannot solve a debt problem by issuing more debt. If the below chart was a problem BEFORE 2008… there is no way that things are better now. After all, we’ve just added another $20 trillion in debt to the US system.

 

Similarly, anyone with a functioning brain could tell you that a bunch of academics with no real-world experience, none of whom have ever started a business or created a single job can’t “save” the economy.

 

However, there is an AWFUL lot of money at stake in believing these lies. So the media and the banks and the politicians were happy to promote them. Indeed, one could very easily argue that nearly all of the wealth and power held by those at the top of the economy stem from this fiction.

 

So it’s little surprise that no one would admit the facts: that the Fed and other Central Banks not only don’t have a clue how to fix the problem, but that they actually have almost no incentive to do so.

 

So here are the facts:

 

1)   The REAL problem for the financial system is the bond bubble. In 2008 when the crisis hit it was $80 trillion. It has since grown to over $100 trillion.

 

2)The derivatives market that uses this bond bubble as collateral is over $555 trillion in size.

 

3)Many of the large multinational corporations, sovereign governments, and even municipalities have used derivatives to fake earnings and hide debt. NO ONE knows to what degree this has been the case, but given that 20% of corporate CFOs have admitted to faking earnings in the past, it’s likely a significant amount.

 

4)   Corporations today are more leveraged than they were in 2007. As Stanley Druckenmiller noted recently, in 2007 corporate bonds were $3.5 trillion… today they are $7 trillion: an amount equal to nearly 50% of US GDP.

 

5)   The Central Banks are now all leveraged at levels greater than or equal to where Lehman Brothers was when it imploded. The Fed is leveraged at 78 to 1. The ECB is leveraged at over 26 to 1. Lehman Brothers was leveraged at 30 to 1.

 

6)   The Central Banks have no idea how to exit their strategies. Fed minutes released from 2009 show Janet Yellen was worried about how to exit when the Fed’s balance sheet was $1.3 trillion (back in 2009). Today it’s over $4.5 trillion.

 

We are heading for a crisis that will be exponentially worse than 2008. The global Central Banks have literally bet the financial system that their theories will work.  They haven’t. All they’ve done is set the stage for an even worse crisis in which entire countries will go bankrupt.

 

The situation is clear: the 2008 Crisis was the warm up. The next Crisis will be THE REAL Crisis. The Crisis in which Central Banking itself will fail.

 

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As we approach the mid point of earnings season (this is the busiest week of the Q1 earnings season with 39% of companies having already reported in the US, 33% in Europe and 17% in Japan), here is a quick summary of where we stand.

Here is a quick rundown courtesy of JPM:

In the US, 80% of S&P500 companies beat EPS estimates, surprising positively by 3%. The actual EPS is running at -8% yoy for the overall market and at -7% ex-Energy. The S&P500 blended Q1 EPS is tracking at $26.5, down from $29.1 at the start of the year. The proportion of US companies beating sales estimates, at 58%, is up from previous quarters but top-line growth remains soft, at -1% yoy.

 

In Europe, 57% of Stoxx600 companies beat EPS estimates, surprising positively by 4%. The actual Q1 EPS growth is coming out at -18% yoy, but it is flat ex-Energy and Financials. Only 43% of the companies beat sales expectations, down from previous quarters. Top-line growth is weak, too, at -7%. Ex-Energy and Financials, sales are running at -4% yoy.

 

In Eurozone, 59% of the companies that have reported beat estimates. Overall EPS growth is coming out at -6% yoy, and at +2% ex-Energy. So far, the Euro area is the only region delivering positive earnings growth ex-Energy. Revenue delivery is weaker with only 44% of companies beating sales estimate. Sales are down 5% yoy and 2% ex-Energy.

 

In Japan, the earnings season is at an earlier stage. So far, only 40% of companies beat EPS estimates, recording yoy growth of -11%. 40% of the companies beat revenue estimates with negative top-line growth of -2% yoy.

 

80% of US companies beating EPS estimates is above the historical average. However, we note that in the last 10 years, the proportion of EPS beats was always well above the 50% threshold, suggesting that companies typically do a good job at managing analysts’ expectations. The actual delivered EPS growth is a better indicator of the underlying earnings backdrop, in our view. At -8%, the S&P500 Q1 EPS growth is the worst since ’09.

Finally, this is what global earnings “growth” looks like.

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Submitted by Wall Street Examiner's Lee Adler via Contra Corner blog,

In March of 2005, 52,000 new homes were sold at prices of less than $200,000.

At the bottom of the crash in March 2009 that number had dropped to 14,000.

The Fed instituted ZIRP and QE around that time.  

Sales of homes under $200,000 totaled 9,000 units in March.

 

With sharp price rises builders have found it more profitable to build fewer but more expensive homes than selling more lower priced homes where profit margins have all but disappeared.

The Fed has promoted this distortion by enabling builders to finance their construction and holding costs of inventories at zero in real terms.

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With all the problems facing America – both at home and abroad – The House Armed Services Committee decided on Wednesday to solve one of the nation's crucial "problems" – a "sexist draft."

As Military.com reports on Wednesday the committee approved (by a narrow margin) an amendment to a defense bill to require women to register for the draft.

Rep. Duncan Hunter, a Republican from California, proposed the amendment to lift the restriction on women registering for the selective service at a committee-wide mark-up session of the proposed fiscal 2017 National Defense Authorization Act.

 

"Here is why I think this is important; it doesn't matter in this debate whether you think women should be in the infantry or be in special operations," Hunter said during the session on Wednesday night. "I personally don't. If we had that vote in committee today I would vote against women being in infantry and special operations.

 

"But this is not about women serving in the infantry. The administration has made that decision unilaterally disregarding what the Marine Corps and special operations communities have said. But that's not what this is about. Right now the draft is sexist. Right now the draft only drafts young men. Women are excluded."

Ironically, Hunter then went on to explain that his generation has not seen the kind of warfare that requires a draft… and so why waste time on this? Unless they think something is coming?

"That is what a draft is for," he added. "A draft is because people started dying in the infantry and you need more bodies in infantry, that is what a draft if for. The administration would like to make this decision on its own. I think we should make this decision."

Hunter, who requested a roll-call vote on the measure, ended up voting against his own amendment.

The amendment passed 32 votes to 30 votes, with strong support from female committee members.

Read more here…

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US stocks may have already forgotten about the dramatic collapse in Japanese equities and the surge in the Yen which wiped out months of profits from macro funds (and certainly the latest GDP miss) with the S&P wiping out some 15 points in losses in 36 minutes, but for Japan the hangover from Kuroda’s lack of action last night remains, because according to Mark Cudmore, former FX trader who currently writes for Bloomberg, the BOJ made a massive misstep. Here’s why.

The BOJ’s Massive Misstep

 

It’s hard to avoid the conclusion, confirmed by the price action, that the Bank of Japan messed up today. The magnitude of the surprise means there’ll be follow-through in asset reaction, including yen strength, but ultimately this makes the long-term prognosis for the currency even more negative.

 

Even if keeping policy unchanged might once have been the correct decision, it’s not now. The failure to deliver, especially after Governor Kuroda’s comments about currency appreciation had driven hopes for further easing so high, is terrible news for the Japanese economy. Not to mention a further blow to the BOJ’s credibility.

 

The immediate surge in the yen and the panicked sell-off in equities were the most obvious examples of trader disappointment. And the currency’s rally will put further downward pressure on both growth and inflation.

 

It’s important to distinguish between the short-term surprise, which is bullish yen, and the longer-term consequences of the “mistake.”

 

Short-term, the lack of easing is currency supportive. However, the bigger picture is that the BOJ is extending the Japanese economic slump. And, eventually, that will either directly feed through to currency weakness or compel the central bank to deliver a much bigger policy surprise.

 

Japan’s government debt pile is roughly 250% of GDP. About 41% of tax revenue goes to debt servicing. The country needs inflation desperately. The BOJ today said it’s going to take longer to arrive. That means consensus 2016 growth and inflation forecasts, of 0.5% and 0.3% respectively, are likely to be revised down further.

 

Don’t fight the yen rally today. The 18-month low in USD/JPY, of 107.63, may now be vulnerable, especially in the context of last night’s dovish Fed statement. But don’t confuse momentum with fundamental strength.

Then again, all the algos need to hear to fight the yen rally is to be told not to fight it and sure enough that’s precisely what they have been doing since the open today, and as of moments ago we are already nearly 100 pips off the lows because of “hope.”

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