Argentina Freezes Supermarket Prices To Halt Soaring Inflation; Chaos To Follow

Up until now, Argentina’s descent into a hyperinflationary basket case, with a crashing currency and loss of outside funding was relatively moderate and controlled. All this is about to change. Today, in a futile attempt to halt inflation, the government of Cristina Kirchner announced a two-month price freeze on supermarket products. The price freeze applies to every product in all of the nation’s largest supermarkets — a group including Walmart, Carrefour, Coto, Jumbo, Disco and other large chains. The companies’ trade group, representing 70 percent of the Argentine supermarket sector, reached the accord with Commerce Secretary Guillermo Moreno, the government’s news agency Telam reported. As AP reports, “The commerce ministry wants consumers to keep receipts and complain to a hotline about any price hikes they see before April 1.”

Perhaps they will. What consumers will certainly do is scramble into local stores to take advantage of artificially-controlled prices knowing very well they have two short months to stock up on perishable goods at today’s prices, before the country’s inflation comes soaring back, only this time many of the local stores will not be around as their profit margins implode and as owners, especially of foreign-based chains, make the prudent decision to get out of Dodge while the getting’s good and before the next steps, including such measures as nationalization, in the escalation into a full out hyperinflationary collapse, are taken by Argentina’s female ruler.

As such expect photos of empty shelves from Buenos Aires to start popping up in a few days, comparable to how threats of a gun and weapon ban by the US government did more for the top and bottom line of US arms dealers than any military conflict ever could.

Sure enough:

Economist Soledad Perez Duhalde of the consulting firm predicted on Monday that the price freeze will have only a very short term effect, and noted that similar moves in Argentina had failed to control inflation. Consumers shouldn’t be surprised if the supermarkets are slow to restock their shelves and offer fewer products for sale, she added.

In other news Argentina, just like the rest of the “developed” world, appears to have a slight inflation tracking problem:

Polls show Argentines worry most about inflation, which private economists estimate could reach 30 percent this year. The government says it’s trying to hold the next union wage hikes to 20 percent, a figure that suggests how little anyone believes the official index that pegs annual inflation at just 10 percent.

The BLS has the solution: just exclude any product whose price is rising from your CPI calculation, and voila. For everything else there is a hedonic adjustment.

The ironic comparison to the US does not end there however:

A more effective way to contain inflation would be to “reduce government spending, which is financing an expansion of the money supply, and to have a credible price index.”

Wait, are they still talking about Argentina or the US?

The government announced the price freeze on the first business day after the International Monetary Fund formally censured Argentina for putting out inaccurate economic data. The IMF has given Argentina until September to bring its inflation and economic growth statistics up to international standards. If Argentina doesn’t comply, it could face expulsion from the world body in November.

Well good thing the US complies with the IMF’s stringent “seasonally adjusted” data reporting quality control. Or else, the US may have been expelled from the IMF too. And then who would fund the creeping bailout of Europe (aside from Germany of course)?

The IMF censure “is not just a new error … it’s also a clear example of the organization’s unequal treatment and double standards in regard to certain member countries,” Lorenzino said. “Argentina, just as it agreed with the IMF to do, will keep working to improve its statistical procedures in accordance with good international standards.”

So to summarize: first capital controls, then a currency crisis, then expectations of sovereign default, then a rise in military tensions, and finally – price controls, after which all out chaos usually follows.

Study this sequence well: it is coming to every “developed” country near you in the months and years ahead.

But, as with every other hyperinflationary implosion, there is a silver lining: the stock market is soaring…

… at least in Peso terms. When priced in USD, the 360% stock market “rise” is more like -9% in the past 21 years. But luckily, the general public has a gene that prevents it from grasping the difference between nominal and real – something Ben Bernanke is very well aware of.

CMBS Cash Flow Crunch Looms As 'Retail' Mall Vacancies Set To Surge

In the same way as any and every risk-asset in the world, the price of yield-providing CMBS (commercial mortgage backed securities) have risen to post-crisis highs in the last few months. These are some of the epicentric deals from the crisis that now trade close to par once again. However, the last month or so has not seen CMBS prices push higher with stocks and it appears, as the FT notes, that the reason is becoming clear in the post-holiday-shopping period.

CMBX prices flat since 2013 began…


CMBS cash-flow streams are set to drop considerably as up to 15 per cent of the country’s suburban retail centres forecast to close over the next five years in the face of online competition.

The US’s more than 1,300 regional malls, defined as centres larger than 450,000 sq. ft., are being threatened by the boom in internet shopping and tougher competition and as they add, the prospects for second-tier malls are dimming.

Retail is regarded as an especially risky component of CMBS as a mall can go downhill if an important tenant shuts its store because other tenants are usually able to renegotiate their leases if a traffic-driving anchor tenant leaves. That can have severe consequences for CMBS exposed to the mortgage on the property.


FT: Online sales threat to American malls

By Stephen Foley and Barney Jopson in New York

Credit market investors are falling out of love with US shopping malls as up to 15 per cent of the country’s suburban retail centres are forecast to close over the next five years in the face of online competition.


The proportion of retail properties being put into commercial mortgage-backed securities (CMBS) deals has slumped in the past three years because of concerns about the sector.


The US’s more than 1,300 regional malls, defined as centres larger than 450,000 square feet, are being threatened by the boom in internet shopping and tougher competition.


“I think 200 are going out of business,” said Gerry Mason, executive managing director at property group Savills. “We’re 15-20 per cent overbuilt. There are just too many stores.”


The future of megamalls, which include cinemas, bowling alleys and restaurants designed to lure consumers, appear safe but the prospects for second-tier malls are dimming.


Traders are watching the health of stores such as Sears and JC Penney, where sales are falling, and announcements from retailers such as bookseller Barnes & Noble last week, which said it would shut a third of its outlets over the next decade .


CMBS are bonds backed by a pool of mortgages on commercial property, ranging from office towers to apartment blocks. Retail property accounted for 56 per cent of the pools coming to market in 2010, according to RBS, but that fell to 42 per cent in the second half of 2011 and dropped to 36 per cent last year. In CMBS deals so far this year, the average is down to 30 per cent.


“Investors expressed concern about retail exposure in the long term,” said Richard Hill, CMBS strategist at RBS. Analysts say the market appears to be dividing between mega and second-tier malls, with mortgages on megamalls increasingly being securitised separately in single-property CMBS.


Simon Property Group, the largest US mall owner, reported strong earnings on Monday, boosted by higher rents and sales at its high-end malls.


Retail is regarded as an ­especially risky component of CMBS because a mall can go downhill if an important tenant shuts its store. Other tenants are usually able to renegotiate their leases if a traffic-driving anchor tenant leaves. That can have severe consequences for CMBS exposed to the mortgage on the property.


Ecommerce accounts for roughly $1 in every $10 spent by US shoppers and its market share continues to rise. In last year’s end-of-year shopping season, online sales increased 14 per cent while sales overall were up by just 3 per cent, according to ComScore and the National Retail Federation.


Ecommerce has already contributed to the demise of Circuit City, an electronics chain, and Borders, a bookstore. Sears and JC Penney, who often serve as mall anchor tenants have announced store closures in the past 18 months, as have Gap, the fashion chain, and Best Buy, another electronics chain.

(h/t Manal Mehta)

Guest Post: It’s About Time – JP Morgan To Enter The Housing Slumlord Trade

Via Michael Krieger of Liberty Blitzkrieg blog,

It was just a matter of time before the most powerful crony capitalist bank in America decided to join the housing trade.  Making money running the food stamp program just wasn’t enough for Your Crony Highness Jamie Dimon and company, it’s time to join his financial oligarch brothers in the bidding war to corner the housing market and become your overlord.  That way they can control how you eat (food stamps) and where you sleep.  It’s become very clear what the large financial interests in these United States are attempting.  Funnel all the low interest crony American money, with a dash of Chinese laundered money, into the “housing recovery.”  From Bloomberg:

JPMorgan Chase & Co. (JPM) is giving its wealthiest clients the chance to invest in the single-family rental market after other investments linked to the U.S. housing recovery jumped in value.


The firm’s unit that caters to individuals and families with more than $5 million, put client money in a partnership that bought more than 5,000 single family homes to rent in Florida, Arizona, Nevada and California, said David Lyon, a managing director and investment specialist at J.P. Morgan Private Bank. Investors can expect returns of as much as 8 percent annually from rental income as well as part of the profits when the homes are sold, he said.


The bank’s wealthy clients are joining a growing number of private-equity firms and individuals buying rental homes in the regions hardest hit by the U.S. housing crash. Blackstone Group LP (BX) has spent $2.7 billion, and said last month it accelerated purchases as home prices rise faster than anticipated. Even after home values in November gained by the most in six years, investors are wagering on rental properties as an alternative to housing-related stocks and mortgage debt that’s already soared.


The strategy is similar to institutional buyers including Blackstone, the world’s largest buyout firm, Thomas Barrack’s Colony Capital LLC, and Oaktree Capital Group LLC. (OAK) They’re aiming to profit from low prices on distressed properties, often those in foreclosure and sold at auction — and the demand for rentals from people who don’t want to own a home or can’t qualify for a mortgage.

Now here’s where the article gets really interesting.

“It’s hard to find a private-equity firm on the planet that doesn’t have a strategy in this space,” Gary Beasley, chief executive officer at Waypoint Homes, said last week at the American Securitization Forum’s annual conference in Las Vegas. The Oakland, California-based company has bought homes in California, Arizona, Illinois and Georgia.

Sure seems like the right time to buy housing.  You know, after every single pool of aggressive private capital in the nation and abroad is already bidding.

Now take a look at how poor the returns are.  This is what happens when things get too crowded.

“If you look at some of the really beaten down areas — Miami, Orlando, Vegas, Tampa — we do think the return on that asset, if you just buy a home, collect the rent and do whatever you need to do on the cost side, you’re getting a return of somewhere between 6 percent and 8 percent,” Bordia said. Non- agency mortgage-backed securities are generally yielding 4 percent to 6 percent, he said.


Even as the housing market probably will do well across the nation, areas where property prices already are high such as San Diego, Los Angeles, Denver and San Francisco, will see lower rental yields, of 4 percent to 5 percent, Bordia said.

Are you kidding me?  A 6%-8% yield is all you get for taking on all the responsibilities of upkeep, rent collection as well as the risk of capital depreciation.  I’ll take the check please.

Finally, just when you thought the lunacy couldn’t get any more extreme…

While buying single-family homes to rent is among “the smarter ways to invest going forward,” Pastolove advises wealthy clients to buy the properties to rent themselves if they are able. Morgan Stanley isn’t purchasing homes or managing them; instead it’s making loans to high-net-worth customers at rates lower than a typical mortgage, and using their investment portfolios as collateral. That provides people the capital to purchase investment properties, he said.

This. Will. Not. End. Well.

Full article here.

Spain: No Mas


The accusations of corruption against senior Popular Party officials, including Spanish Prime Minister Rajoy would not have necessarily been market move.   The accusations raise more questions than they answer.  However, Rajoy’s denial may have deterred Asian traders early Monday, but European investors were more skeptical.  


Confidence in the Rajoy government has been eroding as the economy deteriorates.  The fourth quarter contraction was deeper than the Bank of Spain expected.  News on Monday included the largest jump in unemployment since January 2013.   In addition, Spain’s three largest banks, Santander, BBVA and CaixaBank announced large write downs in recent days, in part due to large real estate provisions, reminding investors a key source of Spain’s vulnerability.


Calls for Rajoy’s resignation from opposition forces were given more credence by the financial press than they deserve.  Nevertheless, the political fragility is palatable.  The one thing that could bolster the government’s support is not German Chancellor Merkel’s best wishes, but an substantial improvement in the Spanish economy.  This does not look to be forthcoming for at least several months.   


The decline in sovereign yields over the past six months has been a powerful tonic.  Spanish financial institutions are large holders of government bonds.  Their access to the capital markets also improved.  This is part of the positive contagion.  


Spanish bonds sold off sharply on Monday.  It seemed to trigger a slide in the euro after new multi-month highs were set before the weekend above $1.37.  The last part of the euro’s rally took place even as Spanish yields were rising in absolute terms and relative to Germany.  


The Spanish-German 2-year spread bottomed on Jan 11 near 200 bp.  It finished last month at 230 bp and is now just above 260 bp.  The Spain’s 2-year yield bottomed on Jan 10 at about 2.11% and had risen to 2.50% by the end of of Jan and was near 2.88% on Monday.   


A similar story is told by the performance of the 10-year bonds.  Spanish 10-year bond yields have been rising and driving the premium over Germany has been rising for a few weeks.   Spain’s premium fell to 330 bp on Jan 11 and has been trending higher since.  The premium stood at 355 bp at the end of Jan and 382 bp on Monday.   The Spanish 10-year yield bottomed the same day just below 4.90% and is now at 5.43%


The review of the recent action illustrates that the euro has been able to rally in the face of the increase in Spanish bond yields and widening premium over Germany.    The key question now is whether this phase is over and the the risk emanating from the periphery will again be a driver of the foreign exchange market and the capital markets more broadly.    


It is coming too amid increased political fallout of the third bailout of Italy’s third largest bank, Monte Dei Paschi.   The center-left PD has suffered the most in the polls three weeks ahead of the election.  Although it is still ahead, the margin over Berlusconi’s PDL has narrowed.  Berlusconi, the consummate politician is running circles around this rivals, appealing the basest populist instincts.


As an aggregator of information, the market generates noise and a signal.  We suspect the flare up in political tensions is noise and that the underlying signal generated by the OMT backstop (which is the inducement cited by some of the world’s largest money managers for returning to the European debt market) and the more recent passive tightening of monetary conditions in Europe will continue to underpin the euro.  


The latter is taking place at the same time the Federal Reserve renewed its commitment to buying $85 bln a month in long-term assets.  Although US job creation has accelerated, the economy is downshifting.  Over the past four quarters, the economy has posted average annualized growth of 1.6%.  Over the past three year, quarterly average has been 2.0%.  Moreover, the impact of the end of the payroll savings tax holiday and the sequester warns of a couple more quarters of weak growth.


We anticipate that new euro buying will emerge on this pullback. Investors may rightfully be cautious ahead of the ECB meeting.   Sharp sell-offs, like the one seen Monday, are rarely one-day phenomenons.   Technically, there seems to be scope for euro losses toward $1.34.  

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