duminică, 13 decembrie 2015

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis


"War Games" Show Fed Worried About Commercial Real Estate, Interest Rates; Fed Weighs Consequences of "Macroprudential Tools"

Posted: 13 Dec 2015 06:43 PM PST

War Games

Inquiring minds may wish to take a peek inside a Fed 'War Games' Exercise conducted this past summer, just recently reported on by the Wall Street Journal.
Commercial real-estate prices have continued to rise and are projected to far exceed levels they reached before the 2007-09 financial crisis, adjusted for inflation. Debt is building up at companies through the issuance of junk bonds and loans to low-rated firms. Small banks, money-market funds, mutual funds and government-sponsored enterprises have become big players feeding the financial system with credit. However, the large banks subject to heavy regulatory oversight aren't big providers of credit. Borrowers are increasingly reliant upon short-term loans, which could dry up quickly in a downturn. The economy could tumble into recession if a new financial bubble bursts.

What should the Fed do?

The question was posed to five regional Fed bank presidents in early June in a "war games" exercise. The presidents—the Boston Fed's Eric Rosengren, Kansas City's Esther George, New York's William Dudley, Cleveland's Loretta Mester and Minneapolis's Narayana Kocherlakota, had to devise a response. They met at a regional Fed branch in Charlotte, N.C., and worked over three hours, with a whiteboard, briefing papers and lots of coffee. They emerged with a list of the pros and cons of various approaches, but no concrete road map for how to proceed.

Fed officials also looked at whether they could demand that banks require larger down payments on loans to ensure borrowers weren't as exposed to a large drop in real-estate prices. These "loan-to-value" rules also would have required agreement among several slow-moving regulatory agencies. Another problem was that in this scenario, large banks weren't at the root of the problem.

In addition, Fed officials looked closely at a little-used power the central bank has under the 1934 Securities Exchange Act to set so-called margin requirements on securities transactions, which could limit how much borrowed money banks, brokers and others can use in securities transactions.

Perhaps the most challenging part of the discussion related to monetary policy. Former Fed governor Jeremy Stein once argued that the most effective way to stop a bubble from building might be to raise interest rates, because that approach "gets in all of the cracks" of the financial system. Some of the Fed officials in Charlotte gravitated toward raising rates for that reason, and because they thought they could use it quickly and without consultation with other bank regulators.

Mr. Rosengren said he emerged from the exercise sympathetic to these arguments, but others disagreed. Among them was Ms. George, who said rates weren't the right tool to address bubbles. She argued the best approach was to ensure the banks at the core of the financial system are required to have larger amounts of capital.

It was an odd turnabout. During most of this expansion, Mr. Rosengren has been a policy "dove" who supported the use of low interest rates to promote economic growth and reduce unemployment. Ms. George was a "hawk" who wanted rates higher because she thought low rates were causing bubbles.

Mr. Rosengren, in an interview, said low rates in this hypothetical scenario were less justified than they were in the years after the financial crisis because the economy in the scenario was back to a normal footing. Ms. George, in an interview, said she didn't support low rates in the first place, but that didn't mean that raising them was the best solution to a bubble after it had already been set in motion.

The disagreement was another sign that six years since the last financial crisis, Fed officials still don't have an answer for dealing with the next boom-bust cycle.
War Games Joke

Shouldn't central banks worry about bubbles before they blow them?

Raising interest rates much stronger mush faster than they did may have prevented some of the housing lunacy that escalated between 2005-2007.

It may also have taken some steam out of the idiotic dotcom bubble. But Neither Greenspan nor Bernanke saw the real estate bubble until it was too late.

But in 1999, Greenspan was worried about Y2K problems and stepped on the gas. Right as the economy was about to crash, Fed minutes showed the Fed became concerned about inflation.

Clueless Fed Weighs Consequences

In further discussion of the "War Games" scenario, the Wall Street Journal reports As Commercial Real-Estate Prices Soar, Fed Weighs Consequences.
Federal Reserve officials participating in a "war game" exercise this year came to a disturbing conclusion: Six years after the financial crisis ended, the central bank remained ill-equipped to quell the kind of dangerous asset bubbles that destabilized the savings-and-loan industry during the late 1980s, tech stocks in the 1990s and housing in the mid-2000s.

The five officials—gathered at a conference table in Charlotte, N. C.—had to determine if hypothetical booms in commercial real estate and corporate borrowing risked collapse and damaging fallout for the broader economy.

The group was asked what to do about it. Fed officials said afterward they saw they lacked clear-cut tools or a proper road map of regulatory measures to help stem the simulated booms. They also disagreed on whether to use higher interest rates to stop bubbles, a blunt instrument affecting the entire economy.

"I walked away more sure about the discomfort I originally had," said Esther George, president of the Federal Reserve Bank of Kansas City and a participant in the June exercise. She and others believe the Fed's low-rate policies might have played a role in booming asset prices.

"Signs of valuation pressures are emerging in commercial real-estate markets, where prices have been rising at a solid clip and lending standards have deteriorated, although debt growth has not yet accelerated notably," Stanley Fischer, vice chairman of the Fed, said in a speech Thursday.

Commercial real estate is a relatively small segment of the overall economy, and unsustainable debt hasn't emerged as a problem. But financial bubbles have been root causes of the past three recessions and is a consideration as the Fed nears a decision on interest rates.

Mr. Rosengren arranged the war-game exercise, joined by New York Fed President William Dudley, Cleveland Fed President Loretta Mester and Minneapolis Fed President Narayana Kocherlakota and Ms. George. Some of them, including Ms. George, said rates weren't the right instrument to use against bubbles. She favored demanding banks hold more capital.

Mr. Rosengren had noticed more building cranes in Boston. It conjured memories of the New England real estate boom in the late 1980s, which led to a regional banking crisis that played a role in the U.S. recession that followed.

"Given our low interest rates, given that it is an interest-sensitive sector, it is probably worthwhile to start thinking about at what point do we become concerned that is growing too rapidly," he said. "And if it were to reverse course at some point in the future what would be the consequences of that?"

U.S. commercial real-estate prices are up 93% from a low in 2010 and 16% above the previous peak in 2007, according to Moody's Investors Service. Among the hottest properties are apartment buildings, which have more than doubled in price since their November 2009 low and are 34% above their 2007 peak.

Such rapid price increases sometimes signal trouble. Another important measure is how investors and buyers use debt. Booms fueled by heavy borrowing can backfire on investors and their lenders.

Bank commercial real-estate loan portfolios are up 10% from a year earlier to $1.76 trillion in late November, a record high, according to Fed data. Nearly two-thirds of these loans are on the books of smaller banks, Fed data show, and foreign banks hold a growing proportion. Private-equity funds and real-estate investment trusts also have jumped in the game, reaching for high-yield returns.

Even though many Fed officials favor using regulatory powers over interest rates to stop bubbles, the U.S. was a "long way" from establishing a regulatory system that could achieve that, Mr. Dudley said in September.

"These tools are not things you just pull off the shelf and say, 'Now I'm going to use them,'" Ms. George said. "They tend to be things that require policy analysis, discussion with other agencies or politicians even. By the time you identify the issue you are already too late in many respects."
Fed Already Too Late, Again!

Now that the Fed realizes it has blown another bubble, it cannot figure out what to do about it.

Moreover, the Fed missed even bigger bubbles in the stock market as well as a bubble in corporate bonds in which companies have gone into debt to buy back their own shares at obscene prices.

And what about the bubble in junk bonds, now imploding? But let's return to the commercial real estate theme for a moment since that is what's on the Fed's mind.

Demise of Malls Coming Up?

Supply Chain ponders the Demise of Malls and Traditional Distribution.
E-commerce and omni-channel fulfillment are the main drivers of transformational change in retail supply chains.

However, there are two other trends also illustrate how retail supply chain networks are changing:

1. the declining role of shopping malls, and;
2. the type of distribution facilities retailers and third-party logistics providers are investing in today compared to just a few years ago.

According to CoStar Group, a provider of commercial real estate information, the number of malls with vacancy rates greater than 40 percent - which generally means the mall is in "a death spiral" - has increased from less than 0.5 percent in 2006 to 3.4 percent in 2014.

And according to real estate research and consulting firm Green Street Advisors, "Since 2010, more than 24 enclosed shopping malls have closed, and 60 more are on the brink of closure."

"About 15% of U.S. malls will fail or be converted into non-retail space within the next 10 years."
Eyes on Wrong Problem?

Since the Fed has its eyes on commercial real estate, it's highly likely a major problem surfaces elsewhere first. Perhaps it already has, in junk bonds.

William Dudley, president of the New York Fed asked in an October speech, Is the Active Use of Macroprudential Tools Institutionally Realistic?
Support for using macroprudential tools in the United States has also been bolstered by our experience during the financial crisis. The U.S. housing boom and subsequent bust might have been less severe had a set of macroprudential measures been in place at the time to limit the degree of leverage and speculative activity in the housing sector. The housing boom was fueled by optimistic expectations for house price appreciation, combined with lax underwriting standards embodied in such practices as no-doc mortgages and widespread speculative activity by investors. I remember, for example, the website, Condoflip.com, which says it all in terms of the degree of speculative fervor that was evident at the time.

[Mish Comment: And although it was indeed obvious, the Fed not only did not spot the problem, it denied existence of the problem when others pointed it out.]

My own view is that while the use of macroprudential tools holds promise, we are a long way from being able to successfully use such tools in the United States.

There is also the problem of responding to an emerging financial stability risk in a timely manner. First, the emerging problem needs to be identified. Then alternative policy responses need to be analyzed and debated. And, there is an understandable bias to start small and to escalate only as needed given the lack of understanding about how big an impact a particular tool may have on the economy.
Lack of Understanding About Tools

Note the irony here. The Fed has absolutely no problem whatsoever using "Macroprudential Tools" such a QE and zero interest rates to blow bubbles, but claims such tools cannot be done to prevent speculative booms in the first place.

And note the second big irony regarding "lack of understanding about how big an impact a particular tool may have on the economy".

  1. Like keeping interest rates too low too long creating a housing bubble? And not even seeing it?
  2. Like blowing the biggest stock and corporate bond bubbles ever with round after round of QE? And not seeing those problems either?

And what will the Fed do if stock prices collapse? Retail spending sputters? Housing dramatically slows? All of the above at once?

The Fed seems oblivious to the strong possibility that multiple problems might hit at once. And it still doesn't know what the hell to do about the obvious problems that it is looking at, created by its own macroprudential tool set that it says it cannot really use.

Mike "Mish" Shedlock

Le Pen Fizzles in Second Round

Posted: 13 Dec 2015 12:22 PM PST

French exit polls show Marine Le Pen's National Front Behind in Local Elections, so much so that Le Pen may not even win her own region.

I had expected she would win 2-4 French regions in the second round of voting. It appears now she may win none, despite winning 6 of 13 regions in the first round. In the first round of voting, FN topped 40% of the vote in two regions, nearly winning those regions outright.

In French regional elections, any candidate with 10% of the vote or more goes on to round two, unless someone gets more than 50% in the first round.

Five Things Doomed Le Pen

  1. When socialists came in third place in the first round of elections, they dropped out of the race.
  2. A massive fear-mongering campaign ensued when Manuel Valls, the French Prime Minister Warned of "Civil War" if Le Pen Won.
  3. Socialists openly campaigned for candidates in the Republican party, the party of former president Nicholas Sarkozy.
  4. Disenfranchised socialists turned out heavily, apparently heeding the warnings of Valls, Hollande, and Sarkozy.
  5. Voter turnout is estimated to be 59% in the second round vs. 50% in the first.

There are 13 regions in France. Le Pen won 6 in the first round, Sarkozy's center-right Republicans won 4, and Hollande's socialists just 3.

The socialists hold all the regions now, but following these elections Sarkozy's Republicans will hold the vast majority.

These elections represent quite a change, and quite a trouncing of the Socialists, just not what Le Pen envisioned.

Mike "Mish" Shedlock

Seth's Blog : Centered and complete



Centered and complete

These are not the conditions for creativity.

Creative people ship remarkable work because they seek to complete something, to heal something, to change something for the better. To move from where they are now to a more centered, more complete place.

You don't get creative once everything is okay. In fact, we are creative because everything isn't okay (yet).

       

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sâmbătă, 12 decembrie 2015

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis


Reader, Citing Hayek, Asks Me to Reconsider My Stance Against Finland's Free Money Proposal

Posted: 12 Dec 2015 07:35 PM PST

On December 7, I strongly criticized Finland's decision to give every citizen $870 each month, tax free.

For an outline of the proposed deal, and my response, please see Bernanke's "Helicopter Drop" Hits Finland; Prime Minister and 70% of Finnish Support "Free Money"; Dauphin Canada Revisited.

Wealth Redistribution

In response to my post, reader "MH" sent two emails, the first asking question about wealth redistribution and the second citing Hayek. Here is the first email.
Hi Mish,

I was hoping you would blog on the Finnish proposal and almost emailed to ask your opinion, so thanks for the post.

Over the years I have learned an awful lot from you, and these days I defer to your judgement on most things. However, are you sure you have this right?

Isn't this a very much simplified and therefore efficient taxation/welfare system compared to anything existing today. And crucially it overcomes the increasing problem of what to do with those who can't or won't work, especially given the rise of robotics.

Libertarianism is a hard sell in the 21st century ... and I speak as a libertarian. Democratic populations will never elect a government which is OK with people damn-near starving when they simply can't find work.

I agree with the vast majority of what you write, but it seems to me that your views need to cater for an age of ubiquitous automation when human labour might become increasingly obsolete. How does Austrian economics deal with this if not via a 'basic permanent income' allied to free-market economics plus the rule of law?

Regards,
MH
On Guaranteed Wages

For starters, the idea of a guaranteed "living wage" type of proposal, in a wealth redistribution scheme of sorts is about as far away from libertarian as one can get.

So yes, I am sure I have this correct.

Before I replied, "MH" next sent a link to a Telegraph article by Jeremy Warner who writes Paying all UK citizens £155 a week may be an idea whose time has come. It was Warner who cited a Hayek reference.
And just in case you are tempted to dismiss the idea as socialist nonsense, this is what Friedrich Hayek, intellectual godfather to the Thatcher revolution, had to say about it in Law, Legislation and Liberty.

"The assurance of a certain minimum income for everyone, or a sort of floor below which nobody need fall even when he is unable to provide for himself, appears not only to be wholly legitimate protection against a risk common to all, but a necessary part of the Great Society in which the individual no longer has specific claims on the members of the particular small group into which he was born".

Amen to that.
An Idea Whose Time Should Never Come

Amen to this: Guaranteed living wages are a time whose time should never come.

In response to the second email, I replied "It will never stop where you suggest. Anyone who gets less than they do now will want more. And resentment will build that the rich get as much as the poor. The guaranteed minimum will be seen as not enough by proponents of a 'living wage. Once started, people will vote for more and more and more. Taxes will rise and the wealthy will flee. It cannot possibly work."

And to that I now wonder about immigrants. Does it apply to them to? If it does, expect to see an onslaught of immigration that is orders of magnitude greater than what's happening in Germany right now.

And what about birth rates? Does one really want to give everyone the same amount of money as Finland proposed?

I am quite sure I am missing things, and likely many things. But this is precisely the kinds of mishaps that will occur when one goes willingly and blindly against free market ideas.

No legislation of this sort in history, regardless of good intention, has ever worked out. Please don't tell me about Dauphin, Canada, as I rebutted that silliness in my first post.

Mises or Hayek?

After I responded to MH, I pinged my response to Pater Tenebrarum at the Acting Man blog. He responded "I agree. And by the way, Hayek was severely criticized by other Austrians for the stance he took in that particular book."

Tenebrarum referred me to Why Mises (and not Hayek)? by Hans-Hermann Hoppe.

It turns out that not only did Hayek go off the deep end with guaranteed living wage nonsense, he also went off the deep end on military conscription!

Hoppe writes ...
According to Hayek, government is "necessary" to fulfill the following tasks: not merely for "law enforcement" and "defense against external enemies" but "in an advanced society government ought to use its power of raising funds by taxation to provide a number of services which for various reasons cannot be provided, or cannot be provided adequately, by the market." (Because at all times an infinite number of goods and services exist that the market does not provide, Hayek hands government a blank check.)

In addition, Hayek insists we recognize that it is irrelevant how big government is or if and how fast it grows. What alone is important is that government actions fulfill certain formal requirements. "It is the character rather than the volume of government activity that is important." Taxes as such and the absolute height of taxation are not a problem for Hayek. Taxes — and likewise compulsory military service — lose their character as coercive measures.

I could go on and on, citing Hayek's muddled and contradictory definitions of freedom and coercion, but that shall suffice to make my point. I am simply asking: what socialist and what green could have any difficulties with all this?
Freedom and Coercion

On forced servitude, Hayek had this to say "If the known necessity of paying a certain amount of taxes becomes the basis of all my plans, if a period of military service is a foreseeable part of my career, then I can follow a general plan of life of my own making and am as independent of the will of another person as men have learned to be in society."

Supposedly it's OK to involuntarily forced into servitude to fight wars in which you do not believe, if only it's for a "period of time".

No libertarian on the planet would agree with that. Indeed, no one should agree. Forced conscription to fight wars is nothing but slavery.

Hayek went off the deep end in more ways than one. Is it any wonder that it's Hayek and not Mises who gets any mention?

Mike "Mish" Shedlock

Back in the Saddle, Just in the Nick of Time

Posted: 12 Dec 2015 11:18 AM PST

For those looking for a bit of humor this weekend, here's an article for the "just in the nick of time" bucket.

Back in the Saddle

Bloomberg reports writes Ally Returns to Mortgage Business Two Years After Total Exit.
Ally, whose defunct GMAC Mortgage unit was one of the biggest lenders of subprime mortgages in the run-up to the 2008 housing bust, will inch back into direct home loan originations next year, the bank's Chief Executive Officer Jeffrey Brown said this week at a Goldman Sachs Group Inc. financial conference in New York.

"Don't think of this as Ally going down the road of the old GMAC," Brown said, referring to the home lending unit that brought Ally to the brink of collapse.

The bank has no plans to securitize its originations, and it won't keep any servicing rights or build out a servicing operation, Ally spokeswoman Gina Proia said in an e-mail.

Ally isn't expected to start offering risky products the way GMAC did, according to Jeff Davis at Mercer Capital. "But they've got to do something, because they won't make a decent return if the business is limited to making car loans," he said.
Timeline of Ally's Actions

Housing wire presents an interesting timeline of Ally's actions in Ally Financial Getting Back Into Mortgage Business.

  • GMAC's ResCap was once of the nation's top subprime lenders, but eventually GMAC and ResCap began dragging down Ally's business, with ResCap eventually falling into bankruptcy.
  • In 2012, Ally announced that it was going to shutter its mortgage business after the conclusion of ResCap's bankruptcy proceedings.
  • In May 2012, Ally executives said they planned to sell off $1.3 billion in mortgage servicing rights owned by Ally Bank as part of the wind down. "You can live in your car if you don't pay your mortgage," then-Ally CEO Michael Carpenter said in 2012. "I don't mean to be cute, but the fact is people make their car payment before they pay their mortgage."
  • In 2013, Ally agreed to contribute $1.95 billion in cash to the ResCap estate, as well as the first $150 million of the insurance recoveries expected in connection with additional mortgage-related losses.
  • As of June 30, 2013, Ally ceased new mortgage loan originations, the company said at the time. The company also sold off the last of its mortgage servicing rights in the second quarter of 2013.
  • "Ally closed the chapter on its legacy mortgage issues, sold substantially all of its international operations, reduced its higher cost unsecured debt and achieved financial holding company status," Carpenter said in Feb. 2014. "Today, Ally has a pristine balance sheet and is focused on its strengths with its leading domestic automotive services and direct banking franchises."

Just in the Nick of Time

Just in the nick of time, with housing prices recovered and the global economy slowing, and therefore risk is the highest in years, Ally hopped back in the saddle.

Don't worry, they won't securitize the loans, and they won't service them either. Instead they will hold all of the default risk themselves just as home prices have slowed if not stalled.

That people walk away from mortgages but not car loans is no longer a concern. From here on out, home prices will only go up.

By the way, people will walk away from car loans if they lose their job.

Need to Do Something

"But they've got to do something, because they won't make a decent return if the business is limited to making car loans," said Jeff Davis at Mercer Capital.

Ah yes, let's take on more risk now, just as home prices have recovered, the Fed is hiking, numerous warning signals on the global economy abound, and losses on subprime autos are poised to mount.

Fate

Ally's timing for the next downturn could not possibly be better.

I pinged the above articles to Pater Tenebrarum at the Acting Man blog under the email title "Just in the Nick of Time" and he pinged me back with "The fates have a strange sense of humor".

Mike "Mish" Shedlock

Damn Cool Pics

Damn Cool Pics


This Cat And Mouse Have A Relationship That Will Surprise You

Posted: 09 Nov 2015 05:59 PM PST

Cats and mice are supposed to be eternal enemies, but that doesn't seem to be the case between these two friends.















Seth's Blog : When things go wrong



When things go wrong

A protocol for moving forward:

0. Double check the work to make sure that there are no other problems within it.

1. Alert the relevant parties

2. Take responsibility for what went wrong. This doesn't mean that you intentionally did it wrong, or that doing it right was part of your job description. It means that you know something went wrong, you're unhappy about it, and you accept responsibility for letting it get by you and you accept responsibility for making sure it won't happen again.

 3. Apologize. Not because it's your fault, but because the incident cost other people time or money or upset them, and you're sorry that they have to deal with that.

4. Come up with a plan to ameliorate the impact of the problem. If you can't come up with a plan, say so and ask for suggestions.

5. Come up with a plan to avoid the problem in the future.

6. Gather feedback.

7. Thank everyone for their patience and goodwill.

Either that, or you could hide, dissemble, blame, shuffle along, scowl, depersonalize and then move on.

       

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