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Housing Recovery Lessons From Japan (In One Chart)

When real estate prices made a vertiginous ascent in the 1980s Japan the bullish refrain was that there wasn’t enough land. However, Japanese real estate prices, and even those of crowded Tokyo, have glided downwards over the subsequent two decades, accompanied by rents – interrupted by the Karate-Kid-esque ‘recovery-on; recovery-off’ hope that we have also started to witness in the US. Very low economic growth and a demographic headwind, despite reasonably high employment, have led to a depressed real estate market. Is this a harbinger for the West? And what defines recovery – price, volume, net equity?



Via Goldman Sachs

The value chain for housing, as for so many industries, is broader than you might think (see the chart below), ranging from architects and mortgage providers before a house is built to utilities and insurance once it is completed. But even though the constituents of the chain all share something there are big differences in exposure. For example, some of these business benefit more from a rise in house prices (real estate agents) rather than housing volumes (cement). Similarly, some of them are exposed to basic, mass urban housing (elevators, cranes, lavatories) rather than the more expensive single family properties (landscaping). Some of them enjoy high barriers to entry (commodities), while other sectors are quite fragmented (furnishing).



And while some have to remain local by nature (developers), others find it easier to seek growth in foreign markets (chemicals). Looking at the value chain this way helps us to identify the few pockets of growth in the developing markets, and to broaden the universe we look at to include opportunities in the emerging markets, where the drivers are marginally different.

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Behold The Fed's Takeover Of The Bond Market

The must see time lapse video below courtesy of Stone McCarthy shows the distribution across the entire curve of the US marketable debt, as it was held by either the Fed, or the private sector over the past three unconventional monetary policy programs: starting in 2003 and concluding yesterday. In one short minute, this clip demonstrates very vividly how the Fed effectively took over the US bond market.

Some things to note:

  • The reason why the Fed no longer holds any debt with a maturity under ~3 years is because of the “ZIRP through late-2014” language which means there is no point for the Fed to hold that debt. For all intents and purposes it is the equivalent of cash. Debt maturing between now and 2014 amounts to just under $5 trillion.  Which means the Fed only has about $5.5 trillion in marketable debt with a maturity over 3 years to work with, and already owns about a third of it. It also means that as all the Fed’s holdings in the under 3 year category are sold, Twist will have to be extended, and with it the ZIRP language to beyond 3 years – most likely 5 or so.
  • What is very visible is how the Fed had no choice but to expand its SOMA limit holdings per CUSIP from 35% to 70%. Soon, once the Fed owns 70% of every longer-dated Cusip, it will have no choice but to again extend the maximum permitted holdings, this time to 100% as it gradually become the entire market.

If after watching this clip anyone still believes that the biggest bond market in the world resembles anything even close to fair and efficient or which would have clearing prices anywhere near to where they transact now, they may want to double down on the FaceBook IPO allocation now.

Initial marketable debt distribution by holders starting back in2003 when the first Fed monetary policy started:

And most recent.

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Proof Positive that Government's "Homeowner Relief" Programs Are Disguised Bank Bailouts … Not Even AIMED at Helping Homeowner


We pointed out last year:

Huffington Post notes, in a story entitled “New Obama Foreclosure Plan Helps Banks At Taxpayers’ Expense “:

A key new condition in the plan would shift the financial liability for refinanced loans from Wall Street banks to the American taxpayer.




The newly expanded program would expunge legal liabilities associated with mortgages refinanced through the program for the original lenders of the mortgages. Each time a bank sent a loan to Fannie and Freddie, it certified that the loan met Fannie and Freddie’s safe lending criteria. But many loans sent to the mortgage giants did not, in fact, meet those criteria. Currently, when borrowers default on those ineligible loans, the mortgage giants can “put back” the resulting losses onto the banks that pushed the loans.


Under the modified plan, “put back” liability at banks will be erased for any underwater mortgage that is refinanced through HARP, eliminating Fannie and Freddie’s ability to sack lenders with losses in the event that the mortgage does not pan out.


If borrowers go through HARP, but decide after several months that the modest monthly savings do not outweigh owing tens of thousands of dollars more than their home is worth, taxpayer-owned Fannie and Freddie will have to take the full loss. Even if the original loan was sent to Fannie and Freddie with false or fraudulent guarantees from the bank — promises that may directly be tied to the borrower’s current financial problems — banks will be immune from liability. Fannie and Freddie plan to charge banks “a modest fee” to extinguish this liability, but the administration has yet to determine what that fee will be.


“In most cases people would probably be better off walking,” said economist Dean Baker, co-director of the Center for Economic Policy and Research.

While this is outrageous, it’s nothing new. PhD economists John Hussman and Dean Baker, fund manager and financial writer Barry Ritholtz and New York Times’ writer Gretchen Morgenson say that the only reason the government keeps giving billions to Fannie and Freddie is that it is really a huge, ongoing, back-door bailout of the big banks.

Many also accuse Obama’s foreclosure relief programs as being backdoor bailouts for the banks. (See this, this, this and this).

We noted in February:

The 50-state settlement with the banks … over mortgage fraud is a stealth bank bailout, according to many top observers. See this, this, this, this, this, this, this and this.


This is par for the course … All of Obama’s previous “mortgage relief” programs have really been stealth bank bailouts which screwed the homeowner. And see this.

We reported in April that the current overseer of the Tarp bailout program – the special inspector general for TARP, Christy L. Romero – said that the Tarp funds haven't been paid to homeowners, but have gone to banks:

A fund to support homeowners in the communities hit hardest by the collapse of the housing bubble has disbursed just 3 percent of its budget and aided only 30,640 homeowners in the two years since its creation, according to a report released on Thursday by a federal watchdog office.The Hardest Hit Fund, which was created in the spring of 2010, grants money to state housing finance agencies for efforts to help families that are facing foreclosure. It has “experienced significant delay” because of “a lack of comprehensive planning” by the Treasury Department and limited participation by Fannie Mae, Freddie Mac and the large mortgage servicers, said the report by the special inspector general for the Troubled Asset Relief Program.

“Look at the TARP money that goes out to the banks,” said [Romero] “That goes out in a matter of days. This has been two years and only 3 percent of these funds have trickled out to homeowners.”

And last month, the former Tarp overseer – Neil Barofsky – noted last month:

The truth is that the administration – whether through principal reduction or otherwise – has never prioritized coming up with an effective approach to helping homeowners and reviving the housing market, even when it had a multi-hundred-billion-dollar TARP war chest at its disposal.

More dramatically, in his must-read book Bailout, Barofsky says the Obama Administration never cared if the HAMP mortgage modification program actually saved homeowners from foreclosure, and that Treasury Secretary Geithner said that the program was simply aimed at spreading out foreclosures over time to “foam the runway” for the giant banks so that a high number of simultaneous foreclosures would not jeopardize their balance sheets. See this 45-second video clip:

Remember that the entire Tarp bailout was initially sold as a solution to the housing meltdown, but was switched – before it was even approved – to a bailout for Wall Street.

This is in addition to all of the government's other stealth bailouts to the big banks.

By choosing the big banks over the little guy, the government is dooming both.

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Will Bernanke Bail Out An Incompetent Congress Once More

The vital question of the moment is whether of not The Bernank will signal an intention of moving towards QE3 in his much-anticipated ‘Jackson Hole’ conference in two weeks. Citi’s Tom Fitzpatrick believes “it would be irresponsible to do so and that we need a more ‘responsible fiscal policy’ which will not materialize as long as we have an ‘irresponsible monetary policy’ bailing policymakers out”. However, what we think in this regard is totally irrelevant to this discussion for it is what we think the Fed thinks that is critical. Recent data seems to have been a little more supportive of the economy (on the face of it) and may lead the Fed to stay on hold in the near term (September meeting). This will almost certainly raise the bar extremely high for further easing as we head into the Presidential race proper. If this window closes then a move before December will be extremely unlikely barring a major financial/market/economic shock, since after the 9/13 meeting, there are no more meetings until 12/12. However this increases the danger of the Fed getting ‘caught behind the curve’ which must be balanced with the ‘mistake’ of one-monetary-step-too-far with very real inflationary consequences.

10 year yields today compared to the summer of 1993


and Gold resembles 2006 – after Gold corrected down from $730 to $542 – when the market consolidated but utlimatley rallied to new trend highs…


and Brent is breaking to new highs…


Tom Fitzpatrick, Citigroup: To QE Or Not QE:

from a Fed perspective

Recent data seems to have been a little more supportive of the economy (on the face of it) and may lead the Fed to stay on hold in the near term (September meeting). This will almost certainly raise the bar to moving extremely high as we head into the Presidential race proper. If this window closes then a move before December will be extremely unlikely barring a major financial/market/economic shock. There is no Fed meeting in November so after the 13 Sept meeting the window likely closes until Dec 12 without an “event risk” scenario materializing.

However this increases the danger of the Fed getting “caught behind the curve” in their objectives as:

  • Small business indicators (the backbone of the U.S. economy) are deteriorating again (Bad sign for employment)
  • Overall employment is not following a traditional recovery path and we are seeing
    • Poor household survey
    • Continued dropping participation rate
    • Flattening out for initial claims
    • 3 consecutive monthly rises in the underemployment rate
  • A housing market recovery that still dramatically lags other recoveries at this point in the cycle is keeping the consumer (70% of the economy) suppressed
  • Consumer confidence appears to be rolling over again. Historically this has had negative leading indications for the Equity markets in the months following.
  • Consumer credit is starting to soften again
  • Core inflation indicators (their mandate) are softening
  • Food and energy rising on supply concerns are creating a negative “fiscal drag” feedback loop
  • US yields starting to rise as people now start to believe that we will not get a move from the Fed in the near term adding a potential monetary drag to the “fiscal drag” (Double whammy as we get de facto fiscal and monetary tightening)
  • A Middle East “tinderbox” that is very susceptible to a food price shock and a likely cause of an Oil price shock (as we saw in 1973-1974 and again in 1978-1979)
  • ISM back below 50 again where Fed “normally” eases
  • Negative short-term yields in core Europe and elevated peripheral yields still in place suggesting that strains are still just below the surface. Despite this the ECB made no accommodative moves at the last meeting but just “kicked the can” again. More Eurozone stresses are therefore likely “around the corner.” In addition the weaker EUR will exacerbate the Food and Energy price rises in Europe.
  • Slowing China economic data and rising food inflation is a bad mix.
  • A Presidential election that has now become a clearly defined “policy battle” with one side of the fence clearly not supportive of the present Fed approach if elected therefore becomes one of the only catalysts for an early move but would likely be perceived as way too political.

They are some of the reasons for moving. The reason for not moving is that it could be a mistake, one step too far. What is the consequence of being wrong to move – the likelihood of inflation in a debt laden economy.

While as in the 1970’s this would be painful and likely create a “stagflationary” economic dynamic it is an acceptable outcome in a “debt laden economy” (the lesser of two evils argument)

From a Fed perspective this decision process looks to becoming less linear and more in favour of renewed balance sheet expansion.

Do we believe this is the right way to go? Probably not.

Do we think it will ultimately be inflationary? Yes.

However what we think does not matter.

What we think the Fed thinks is what matters and we are starting to think that a move is becoming more , not less likely, just as the market and possibly even the Fed seems to be thinking otherwise. A move in September now certainly looks less likely but ironically the lack of a move may see the Fed once again “behind their curve” and scrambling to catch up again in late 2012/early 2013.


Succinctly summarized thus:

1. What we have to pay for is rising in price (oil and food)
2. What we choose to pay for is falling in price reflecting stresses on the consumer and businesses alike.


This is not a positive dynamic in a very uncertain environment.


The most concerning chart is Oil which we fear will break higher and ultimately create a negative feedback loop that could at some stage become a negative backdrop for equities.


Europe will suffer most given their economic fragility and currency weakness.

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Guest Post: Financialization's Self-Destruct Sequence

Submitted by Charles Hugh Smith from Of Two Minds

Financialization’s Self-Destruct Sequence

We are in the latter stages of financialization’s self-destruct sequence.

Like all systems that follow an S-curve of growth and decay, financialization cannot return to its growth phase. I addressed the impossibility of reflating asset and credit bubbles in Let’s Pretend Financialization Hasn’t Killed the Economy (March 8, 2012).

But there is another dynamic at play: a self-destruct sequence triggered by central bank and Central State efforts to reflate asset and credit/leverage bubbles. All central bank and State policies aimed at driving capital into risk assets boil down to reflating phantom assets purchased with debt by issuing more debt that is based on newly issued phantom assets.

Phantom assets purchased with debt cannot be reflated by issuing more debt that is based on newly issued phantom assets. Piling more debt/leverage on a sandpile of phantom assets (CDS, bonds that cannot possibly be paid back, empty condos in the middle of nowhere, etc.) only heightens the probability that the unstable pile will collapse.

The implicit Central Planning campaign to trigger “mild” inflation is part of the self-destruct sequence. Central planners metaphorically fight the last war, or at best the last two wars, and so they remain blind to any dynamics that did not exist in their case studies.

In the 1970s, central bank easing and Central State stimulus sparked a nasty bout of accelerating inflation. This reduced the weight of debt because wages inflated along with goods and services.

Now that labor is in surplus globally, wages are not keeping pace with inflation. This completely changes the dynamic of “mild” (3%) inflation: as the purchasing power of earned income declines, servicing debt becomes more burdensome. Inflation only renders debt less burdensome if wages rise at the same rate as the cost of goods and services.

In a decade of “mild” inflation and stagnant wages, households will experience a very real-world 30+% decline in their income. Meanwhile, their debt payments remain unchanged.

Mild” inflation in an era of stagnant earned income will crush households, forcing liquidation or renunciation of debt. What happens as debt service costs rise as a percentage of real net income? There is less cash for consumption, and so the consumer-dependent economy spirals down. Credit is poured into the banking sector, but little trickles down to high-debt, stagnant-income households. This is deleveraging writ large.

What happens when central bank financial repression–lowering the yield on cash to near-zero–causes pension plans to fail and savings to earn negative real returns? Households must save more income to compensate for the destruction of yield by Central Planners.

These mutually reinforcing dynamics feed the self-destruct sequence’s inevitability. Add up the self-destructive forces: declining purchasing power, negative real returns on savings, rising debt based on newly issued phantom assets, and promises unbacked by real assets or based on declining national surpluses.

As Central Planning reflation of phantom assets fails, the credibility of the Status Quo institutions that promised success will crumble. I have described the dynamics of Heightened Expectations and the Collapse of Credibility and discussed The Keys To Understanding the Collapse of the Status Quo: Credibility and Expectations.

In the euphoric blow-off top phase of financialization, expectations of security and wealth were raised by political Elites anxious to mask the systemic looting of national wealth by financial/political Elites. Promises were even easier to issue than paper money.

But issuing promises, credit and leverage did nothing to expand the national surplus or the resources that ultimately back the promises and credit.

We can characterize the sudden, explosive convergence of fantasy (phantom assets and promises) and reality as Snapback! (October 9, 2008). The entire project of Central Planning (central banks and States) is to “extend and pretend” the Status Quo in the hopes that the gargantuan divergence between fantasy and reality will magically close as the result of “aggregate demand” or a new business cycle, or some other version of renewed “animal spirits.”

But “animal spirits” require trust in the transparency and fairness of markets and Status Quo institutions. As markets are rigged and manipulated to manage perceptions and enable vast skimming operations to continue, the credibility of the markets, politicos, State oversight agencies and the financial sector is eroded.

As central bank/State reflation of phantom assets fail, the credibility of the entire political/financial Elite and the institutions they control will be irrevocably lost.

Financialization’s self-destruct sequence has been triggered, and there is nothing anyone can do to stop it. The workings of the machine are opaque, and the interactions complex. We cannot know when the sandpile will collapse, or what the proximate cause of the collapse will be, but we can know that the unstable pile will collapse under the weight of the system’s illusory assets, fraud, collusion, embezzlement, corruption and corrosive dependence on artifice and lies.

We also know that self-serving vested interests will continue their pillaging until the destruct sequence’s final implosion brings the entire rotten edifice down in heap of empty promises.

In a word: Snapback!

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