Late Night Linkage

Postings have been light due to some business related demands.  Here's some links to my recent reads from the last few days.

Humor
Vuvuzela -- Will it blend? Youtube

Gold
Telegraph - did BIS gold swap spook the markets?

China
From Chinadaily - Property restrictions continue.
Chinadaily - Home price appreciation slows.
Chinadaily - Rate of lending slows in China.

Residential
From CalculatedRisk - A Chapter 13 bankruptcy can wipe away a 2nd lien.

Commodities
From FT -- The financialization of commodities.

LNG
From Hellenicshipping - A lot of spare LNG ships standing idle.

Lumber
Globe and Mail - Canada exporting lumber to China.

Sovereign debt
CalculatedRisk - How much debt is there and what is the probability of default?  It's a multi part series. Good stuff.
GMO - White paper on defaults in history. Very good. Intend to write longer blog post about this.

BP / Oill spill
WSJ - BP has replaced old cap, trying new one in an attempt to stop leak.  (This is at least 24 hours old.)

Euro
Telegraph - Legal challenges to bailout of Greece.
WSJ - Moody's downgrades Portugal.

Debt
Annaly - The debt deleveraging continues.

Unemployement claims and Google Trends. Not much clarity.

Ok call that a whiff. . .  Initial unemployment claims were released today and showed a decline.  I'm going to keep my eye on these series and see if the two continue to diverge  . . .

Google Unemployment Trends rising. Will initial claims follow suit?

I recently mentioned the correlation between Google Trends data on unemployment and initial unemployment claims data published by the government.  As you can see, in the short period of time since that last post the Google Trends data has risen dramatically.

I do not know if this is due to all the newly unemployed Census workers re-entering the ranks of the unemployed or if it is actually due to an 'unexpected' jump in initial claims.  We'll have more clarity in a few hours.

Either way the trend is not positive . . .

Source:
Federal Reserve, Google

Late Night Linkage

Some links of stuff I've been reading recently:

http://alephblog.com/2010/07/05/watch-the-state-of-the-states/

Canadian home sales falling.  Prices next?
http://globaleconomicanalysis.blogspot.com/2010/07/vancouver-home-sales-drop-30-percent.html

A different look at Dr. Copper
http://humblestudentofthemarkets.blogspot.com/2010/07/dr-copper-teeters-over-abyss.html

China home prices
http://www.telegraph.co.uk/finance/china-business/7875713/Chinas-property-market-braced-for-30pc-drop.html

Payroll number may take a header next month due to birth death model
http://jessescrossroadscafe.blogspot.com/2010/07/note-to-mish-bls-added-145897-imaginary.html

Greece -- Default now or later? Good reads.
http://www.nakedcapitalism.com/2010/07/greece-is-restructuring-debt-now.html
http://mpettis.com/2010/06/what-might-history-tell-us-about-the-greek-crisis/


Iran discovers large gas fields
http://www.hellenicshippingnews.com/index.php?option=com_content&task=view&id=109332&Itemid=79

More oil found in North Sea
http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/7873355/North-Sea-oil-hopes-rise-of-the-biggest-discovery-in-a-decade.html

Libya eyes purchasing stake in BP.  Cue irony.
http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/7873702/Libya-eyes-stake-in-bargain-BP.html

China building more nukes
http://www.chinadaily.com.cn/business/2010-07/06/content_10069093.htm

BP considering selling assets to pay fines
http://www.bloomberg.com/news/2010-07-05/bp-said-to-consider-selling-colombia-venezuela-fields-to-pay-spill-costs.html
http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/7866766/China-seeks-9bn-of-BP-assets-in-Argentina.html


Ozzie mine tax revised
http://seekingalpha.com/article/212933-miners-win-as-australian-government-revises-mining-tax

ECRI predicts more frequent recessions in future
http://www.businesscycle.com/news/press/1887/

Steven Keen gets some more press on his Minsky model predicting what will happen next.
http://www.nakedcapitalism.com/2010/07/steve-keens-scary-minsky-model.html

http://www.creditwritedowns.com/2010/07/mandelbrot-fractals-and-the-art-of-roughness.html

Recent jobs report was not good
http://www.thereformedbroker.com/2010/07/03/the-truth-about-those-job-numbers

Review and backstory of the book "This Time is Different" by NYT

I have previously brought up the book 'This Time is Different" and how the history of sovereign defaults is very instructive considering our current situation in history.  The New York Times recently had a long review of the book and the authors. They started working on the book in 2003 and it was published last September.  Great timing!

Some great quotes :

Their handiwork is contained in their recent best seller, “This Time Is Different,” a quantitative reconstruction of hundreds of historical episodes in which perfectly smart people made perfectly disastrous decisions. It is a panoramic opus, both geographically and temporally, covering crises from 66 countries over the last 800 years. “
There is so much inbredness in this profession,” says Ms. Reinhart. “They all read the same sources. They all use the same data sets. They all talk to the same people. There is endless extrapolation on extrapolation on extrapolation, and for years that is what has been rewarded.”

One interesting point in the book and the article is how often we forget the past with respect to country defaults:

Mr. Rogoff says a senior official in the Japanese finance ministry was offended at the suggestion in “This Time Is Different” that Japan had once defaulted on its debt and sent him an angry letter demanding a retraction.

Mr. Rogoff sent him a 1942 front-page article in The Times documenting the forgotten default. “Thank you,” the official wrote in apology, “for teaching the Japanese something about our own country.”

If you are at all interested in finding a great historical context for what is going on right now throughout the world I strongly suggest you read the book.

Is Google Trends providing a sneak peak into the employment situation?

The employment report was released today and the results were weaker than expected.  From Bloomberg the consensus was for +105,000 private sector jobs while the number was actually 83,000.  Here's a little insight on who was not surprised.

Google Trends provides very interesting data regarding search terms over time.  One of the data series reported daily is the unemployment index consisting of search terms such as 'unemployment' and 'unemployment benefits'.   As you can see from this Google chart the growth of the unemployment index peaked in early 2009 and until very recently was consistently declining.

Comparing the year over year percent change in the 30 day smoothed Google Trends unemployment index to the Four Week Initial Claims as reported by the government is very instructive.  While there is noise it is very impressive how similar the trends and turning points are for each data series.

The recent 'unexpected increases' in Initial Claims coincides with the Google data basing and again turning upwards.  If you want to handicap future unemployment and initial claims reports starting with Google Trends will improve your odds. 

Other Google Trends reports are available on a plethora of topics and you'd be amazed at what you'll find.

Additional reading:
Voxeu.org

Predicting Initial Claims for Unemployment Benefits -- Hyunyoung Choi, Hal Varian

China's property 'boom'

Patrick Chovanec has a good post on several topics but one passage really jumped out at me:

Even before my plane landed in Changchun, I could tell from just looking at the city out my window that it was in the midst of an incredible building boom. Row upon row of high-end villas and apartment towers were sprouting like crops all along the outskirts of the city. The same image greeted us on our approach to Jilin City by bus — I couldn’t even count the number of cranes rising over half-completed projects. It’s not any one development, it’s a cumulative impression made by dozens of projects, one after another, on a scale that’s overwhelming. Remember, despite the booming auto industry, this is still a relatively depressed and out-of-the-way part of China. I don’t like to use the Dubai comparison — China is not just a dream in the desert — but I was in Dubai two years ago, and the resemblance is creepy.

We visited one luxury residential development up close. I won’t name the developer, not only because they were our hosts, and I don’t want to be ungracious, but also because they don’t really deserve to be singled out. They’re just doing what dozens of other developers are doing, all around them. This particular project, we were told, had 100 buildings (although I only saw about 40 or so on the display model), the last of which had just been completed. Over the past two years, prices had risen from RMB 3,000 per square meter to RMB 6,000. The entire project was 90% sold out. It was clear, though, that it was also completely unoccupied. Row upon row of buildings stood in pristine luxuriousness, with not a resident in sight.

I suggest you read the whole post.
The anecdotal evidence of residential overbuilding keeps piling up . . .

China PMI comes in below expectations. Overnight stock futures down.

The Chinese Purchasing Managers Index (PMI) came in at 52.1 as reported by Chinadaily and looking at the market reaction it was below expectation.

SP 500 overnight futures are down ~0.8%
Gold down
Copper down
Bonds up
You can see delayed CME futures quotes if you want to watch the action tonight.

Clarity on debt levels in China. They are high.

Getting precise numbers out of China is always challenging but data is slowly coming out. . .  From the Telegraph

Chinese provinces are, in some cases, equivalent in size to major European countries and run with a degree of fiscal autonomy. The southern province of Guangdong, for example, has the same population size as Germany. However, provincial budgets have been classified as state secrets until now and this is the first time that China has disclosed the level of local government debt.
Mr Liu said the ratio of debt to disposable revenues at some local governments was over 100pc and in the highest case it was 365pc. . .
Victor Shih, a professor at Northwestern University in the United States, believes the sum in 2009 was 11.4 trillion yuan, equivalent to 71pc of China's nominal GDP.
Mr Shih has warned that local governments have also succeeded in rapidly funnelling large amounts of debt off their balance sheet and into public-private investment vehicles.

ht Metalminer

No one is talking much about deflation . . . yet.

US Treasury rates have dropped recently and it appears to me they may continue declining.   How low can they go?  I have no idea but I thought it would be interesting to look at when 'deflation' was a popular search term on Google.  Click on the screen capture at the right and you'll see searches spiked around the same time long term US Treasury bond yields dropped very quickly.

I wonder if we'll get another spike in search traffic for deflation if bond yields fall again . . .

A head and shoulders on the stock market?

The market action today did some technical damage.  As you can see from the chart below (provided by Stockcharts.com) a classic 'head and shoulder's' pattern appears to be forming in the S&P 500.  If the market goes down much further the technicians may consider the pattern formed and they'll sell sell sell.

Overall it was an ugly day for risk assets with stocks, energy and base metals falling.  The dollar, gold and US Treasuries were all positive.   The quarter ends tomorrow so the exciting market action may be not be over with.

I was only joking about Greece selling islands!

I was only kidding!
When I joked (here and here) about Greece selling off some islands it was entirely in jest.

Evidently Greece is now putting numerous islands up for sale in an attempt to pay down some of their debt. From the Guardian:

Now Greece is making it easier for the rich and famous to fulfill their dreams by preparing to sell, or offering long-term leases on, some of its 6,000 sunkissed islands in a desperate attempt to repay its mountainous debts.

Only 227 Greek islands are populated and the decision to press ahead with potential sales has also been driven by the inability of the state to develop basic infrastructure, or police most of its islands. The hope is that the sale or long-term lease of some islands will attract investment that will generate jobs and taxable income.

ht: BusinessInsider

Hugh Hendry takes on . . . . Everyone

Mr. Hugh Hendry is always fun to watch and even more so in this interview:





He discusses the euro, china, George Soros and the 'axis of financial evil'. 

ht: Zerohedge

Is a steep yield curve leading us astray?

Does a steep yield curve guarantee future economic growth?  Usually but maybe not this time.

A recent article on BusinessInsider got me thinking about the yield curve and its power to predict when a recession is NOT likely. 

The article title and copy was interesting:  Unless 'This Time It's Different', There's Now Zero Chance Of A U.S. Double Dip

Substantial research suggests that the difference between interest rates for 10-year and 3-month U.S. treasuries is a reliable leading indicator for the U.S. economy, so much so that the New York Federal Reserve even creates charts using this metric, boldly titled "Probability of a U.S. Recession".
Let's hope the science holds, since according to the New York Fed's latest chart there's almost zero chance of a U.S. recession now. In April, the treasury-spread-based probability of recession collapsed to 0.04%.
We're not going to claim we're completely sold on this metric, but have to concede that historically it has worked and it's also hard to imagine why the U.S. would fall back into recession in the near-term given the rebound already in place. Things would have to start deteriorating first, and we haven't seen that yet. Should this time be different? That's not a rhetorical question. You can read the New York Fed's justification for this metric here and decide for yourself.

Here's the chart produced by the NY Fed as of June 21, 2010 which BusinessInsider refers to. As you can see it is saying there's effectively NO chance of a recession anytime soon. 

This relationship is considered so solid the yield curve is part of the leading economic indicators published by the Conference Board where the yield curve is 10% of the LEI index.

Even Krugman of the NYT has commented on how a steep curve implies positive future growth.

Now, this spread could be fairly small if people expected the economy to remain in the dumps for a long time; see Japan. What the large spread now tells us is that the US economy is in the dumps now, but that investors see a reasonably good chance of a strong recovery in the not-too-distant future. That’s good news, not bad news.

Both the Fed and Pimco have web sections devoted to discussing the yield curve and its predictive powers.

Substantial research from the Federal Reserve on the yield curve shows it is a good predictor of future economic growth.
From Federal Reserve: July/August 2006 - Current Issues:

Conceptual Considerations
The literature on the use of the yield curve to predict recessions has been predominantly empirical, documenting correlations rather than building theories to explain such correlations. This focus on the empirical may have created the unfortunate impression that no good explanation for the relationship exists—in other words, that the relationship is a fluke. In fact, there is no shortage of reasonable explanations, many of which date back to the early literature on this topic and have now been extended in various directions. For the most part, these explanations are mutually compatible and, viewed in their totality, suggest that the relationships between the yield curve and recessions are likely to be very robust indeed. We give two examples that emphasize monetary policy and investor expectations, respectively. . . .

Here's the important part . . .

A rise in short-term interest rates induced by monetary policy could be expected to lead to a future slowdown in real economic activity and demand for credit, putting downward pressure on future real interest rates.

So an inverted yield curve chokes lending which then slows economic growth.  Conversly a steep yield curve induces lending which stimulates economic growth.  Lets look at some data provided by the Federal Reserve from 1974 onward comparing yield curves and recessions.  As you can see there is a strong relationship between the two. In all cases an inverted curve preceeded or coincided with recessions as shown by the gray recession bars. Furthermore no recessions occurred without a yield curve inversion (or nearly so) happening beforehand.  Also note how steep the yield curve is now as compared to recent history.  Rarely has the curve exceed 4%

It's no wonder the steep yield curve is considered such a reliable indicator.

Let's take it one step further and look at the relationship between a steep yield curve and economic activity through the mechanism of lending growth. This graphic adds bank loans and leases at commercial banks.  Looking at the graphs you can see in each case an inverted yield curve resulted in a recession and a slowdown in lending.  Once the yield curve returned to 'normal' with higher long term rates bank lending resumed growing and the country exited a recession  . . . except this time. Bank lending continues to decline which is exceptional.  (Before you get excited about what appears to be a sudden spike in the rate of lending you should know that is due to off balance sheet lending vehicles being brought back onto bank balance sheets.  Annaly's blog has the details.) 

Annaly's recent blog post on debt and GDP growth reinforces the previous picture.  Real credit market growth is strongly linked to real GDP growth. 

My contention is the steep yield curve is no longer an accurate predictor of future economic growth due to the lack of credit growth.

Has there been another time when a steep yield curve has led us astray?  Yes.  Robert Shiller provides some excellent long term historical data going back to the 19th century.  Let us examine some data from 1928 through World War II. While the data fields are not precisely similar they are close enough to provide analogs to modern data sets on this topic. 

Here the difference between 1year and 10 year rates is shown as compared to real earnings on the Standard and Poors equity index. 

While this does not show lending activity it does show what one would hope results from increased lending namely earnings growth.

Some interesting relationships can be observed:

The yield curve was very inverted in 1929 and returned to a 'normal' curve in 1930. Earnings did rebound from their lows but did not exceed their 1929 peak until after World War II.

More importantly a serious fall in earnings in 1937 coincided with a non-inverted yield curve.

The rarely mentioned mechanism (credit growth) between a steep yield curve and economic growth is not working.  It is my contention until credit growth at least stops falling the steep yield curve rule of thumb should be ignored and one should be concerned with very tepid (if at all) real GDP growth.

If my thesis is correct and this rule is broken it could come to quite a shock to those who consider it dogma. Considering the yield curve is part of the Leading Economic Indicators from the Conference Board it may well be used by many in portfolio allocation decisions.   If you hear in the future how the steep yield curve is showing how we can't go into a recession remember the yield curve alone does not create economic growth but creates the opportunity for increased credit growth which then causes economic growth.

This Time It's Different.

Sources:

Federal Reserve FRED data
Federal Reserve section on steep yield curve

Robert Shiller

edit 01/28/11: As has been pointed out to me in other conversations Japan has had a few recessions over the last 15-20 years while their yield curve has not been inverted.

Another short term money market indicator

I recently posted about the TED spread and how it had been marching higher (Murphy's law struck of course and it promptly reversed course right after I mentioned it.)

Zerohedge recently posted about a similiar money market stress indicator in the Chinese banking sector that bears watching.  If you want to look at the 1 month Chinese interbank lending rate in there future, here's the direct Bloomberg link

Total consumer debt continues falling

The Federal Reserve recently published the updated total consumer debt statistics.  Total consumer debt continues contracting and shows no sign of slowing its rate of decline.

As I have implied throughout my posts I believe we are in a debt deleveraging cycle right now.  (Look at the second graph for evidence)  Longer term this is healthy for the country to 'flush out' the excessive credit built up over time.  Unfortunately debt deleveraging means reducing ones current spending to repay all the previous spending (or defaulting on your debts)  Either way it detracts from current growth.

In previous posts and comments I have mentioned the difficulty of determining how much of the decline in consumer credit (a subset of consumer debt. Don't blame me for the lack of clearer descriptions) is due to lower spending versus higher charge offs.  Fortunately the Federal Reserve has done a little work on this very topic:

Notably, year-over-year growth in consumer loans adjusted for charge-offs has remained positive, which contrasts the negative growth in the as-reported series. That is, the net growth in new loans and loan repayments shows a positive (albeit slowing) growth rate once charge-offs are factored in. Over 2009, this estimate of charge-offs totaled about $27 billion while banks' average consumer loan balances declined by about $25 billion. Thus, a significant portion of the recent decline in consumer loan balances is the result of charge-offs.

This may explain consumer spending being more robust than the consumer credit numbers were showing.  The consumers are still buying, they are just unable to pay for it :) 

Just one reason I'm staying out of the equity playground right now.

The equity markets are always inundated with economic news and indicators.  One of those indicators that 'doesn't really matter until it does' is the TED (Treasury / EuroDollar) spread or the difference between short term US Treasury rates (Treasury) and short term dollar denominated debt in Europe (Eurodollar)  It is a good indicatior of distress in the short term money markets and before the crisis of fall 2008 the TED spread was flashing a warning signal. 

As you can see from the chart above the TED spread has started to turn upwards after spending all of 2009 in a steady decline.  You can play with the graph at stockcharts.com if you want to zoom in or change the indicators.  While the TED spread is currently below the elevated levels of early 2008 it has been consistently rising since late April 2010.    This rise also lends credence to the feeling many have (including myself) that this correction is different than all the others we've had since the March 2009 lows.

Until the TED spread takes a rest from its ascent I'll most likely be watching the stock market from the sidelines.

edit: stockcharts.com does not show the TED spread in real time. You can watch it real time here:  http://www.bloomberg.com/apps/quote?ticker=.TED%3AIND

Timberrrrr! -- Lumber prices hitting the ground.

A few months ago I commented on rising lumber prices and how in my opinion they were due to short term supply problems instead of demand.   It appears now that between winter rains ending and the home buyers tax credit expiring, the supply/demand situation has reversed itself.   Lumber futures prices peaked in mid April and are now below when I first posted on Feb 8, 2010.

The full impact of the tax credit's expiration is not yet known but home mortgage purchase application data is not promising.  Calculatedrisk (2010 June 9) states:

Purchase and refinance applications dropped this week, even after an adjustment for the Memorial Day holiday. Purchase applications are now 35 percent below their level of four weeks ago, as home buyers have not yet returned to the market following the expiration of the home buyer tax credit at the end of April.

A longer term graph from Calculatedrisk does not show any sort of bottoming in the trend either.

The elevated level of mortgage delinquencies and real estate owned by the GSE's provides a very clear glimpse at 'shadow' inventory that may appear in the comings months.  (Data from May 12 posting) Add it all up and existing housing supply looks to increase and demand continues dropping.  

Disclosure: Short PCL (Plum Creek Timber)

A final update on the Greek 'bailout'

I'm closing the running commentary on the upper right corner of the blog regarding the Greek financial situation.  Below is a copy of the text and links. 

The Greek drama has moved from the front page back a few sections and is on a 'slow burn'  I don't expect the situation to be resolved with the monstrous bailout package and as you can see from the chart Greek 10 year yields have started to slowly creep upwards.   In my opinion this will hit the front pages again and it won't be good news.  When? That's the big question. . . .
-----
Wondering how long the Greek drama will play out . . . Just because the EU promises some cash doesn't mean it is going to happen. The German constitutional court may have something to say about violating the Lisbon Treaty.
A Telegraph article lays out the details (13 April, 2010)

How much are the Irish and Italians going to contribute?

p. s. 10 year Greek bond spreads expanded on April 13th. I guess 40 billion euros is only good for one day.

April 20: Bond spreads hit new extremes last night again.

April 21: 8.11% -- spreads widened further.

April 22: 8.84

April 23: Greece pulls the rip cord and officially asks for aid. Want to guess how many days until this wears off?

April 26: 9.56% -- Aid request good for one day.

Some video of Marc Faber

Here's two somewhat lengthy videos of Marc Faber.  I suggest you watch both and see what one man thinks about the past and future.  While I think it likely his prediction central banks will keep printing it is not assured. 

The second video is a debate between him and Arthur Kroeber of Gavekal Dragonomics regarding the 'bubble' in China.  One item to note is how many people in the room think China will overheat. 




Reuters link for debate

ht: Wildebeests
ht: Business Insider

China home sales decline

If the results from Vanke (A Chinese property developer) are indicative of the entire nation, home sales are declining rapidly.   The property developers can hold on for a while but eventually their pipeline of developments are going to cause some 'indigestion' and they will be forced to cut prices, reduce the pace of new home construction, or a mixture of both.  This bears watching in the future.

From China Daily:

China Vanke Co, the country's largest property developer by market value, announced on Sunday that its sales revenue in May decreased 20.2 percent from a year earlier amid the government's tightening moves.

Mexican police crack union skulls at Cananea Mine. More copper supply by end of year.

Reuters reports today that Mexican federal police broke up the cordon around the Cananea mine.

Grupo Mexico retook control of Mexico's biggest copper mine after hundreds of federal police dislodged protesting workers on strike for nearly three years, the government and the company said on Monday.  Hundreds of police backed by helicopters arrived Sunday evening, surprising miners guarding the entrance. A company source said the Cananea mine, which once produced 40 percent of Mexico's copper but has been closed since July 2007, could be running again as soon as the end of this year.

Grupo Mexico hopes to get the mine back up to full production (estimated at 160k tons) by the end of the year.

Keynesians start to discover the power of excessive debt

Just a little clip from one of my favorite sci fi movies The Fifth Element.  Replace the unknown evil sphere with excessive debt.




Greece, Hungary, California, New York, etc.  I wonder who is next to realize what happens when you borrow too much money.  China perhaps?

Another China data dump

Been a bit busy this last month with various stuff so the posts have been a bit light.

Here's a dump of China information from the last month. Something for you to chew on while I ready the next wave of postings.

I posted some video a while ago about the empty city of Ordos China. Someone recently went there and took some pictures.  Time magazine no less. Go over to Randomroger and get all the details.

Intelligent speculator has some more video on Chanos and how and where to invest in China, both up and down.  Please notice the name of the web site. Be careful investing in China whether bullish or bearish.

In a previous post I mentioned the idea of a property tax had been floated by the local officials in Shanghai.  The Chinese Feds came in and squashed the idea, stating it was a federal matter. Looks like the back and forth will continue.  From Caixin online on 05/18/2010:

(Beijing) - China's tax agency said that the authority to levy property taxes lies in the central government rather than local governments.

Niu Xinwen, the spokesperson for the State Administration of Taxation, said that local governments have no right to interpret property tax policy, either.
The Shanghai government was quoted by Xinhua as saying that it was determined to curb housing prices with "harsh measures." However, the scope of taxable residential properties has yet to be determined.
Individually-owned, non-business real estate is taxed in Provisional Regulations on Property Taxes issued in 1986. In order to curb surging housing prices, local governments are considering a residential property tax in order to tamp down demand.

Then again 4 days earlier a pilot project for property taxes was announced.  From Caixin online (05/14/2010)

(Beijing) - Living a life of ease in an upscale Chongqing villa soon may cost a lot more.In April, the Chongqing municipal government announced a plan to tax high-end apartment owners as part of a nationwide push to curb surging housing prices. Under the municipality's pilot proposal, the owner of a villa worth around 3 million yuan would pay about 10,000 yuan in property taxes every year. Chongqing Mayor Huang Qifan unveiled the plan on a government website just three days after the central government's cabinet, the State Council, announced April 17 new measures designed to cool real estate sales.

The preferred method of stimulus in China appears to be ordering the banks to LEND.  The banks then ask 'how much'  This may not work again if the Chinese deem another boost is needed.  The banks have run out of excess capital.  Don't be suprised if you see some serious secondary offerings from Chinese banks soon. From Caixin online -- 04/29/10

(Beijing) - First quarter reports by five joint-stock banks, the second rung of China's bank industry ladder after the five biggest state-owned banks, have revealed that behind the rapid growth in net profits, capital adequacy ratios have fallen. Some banks have dipped below the regulatory capital requirement.

Just a few days ago Shanghai announced stricter measures to cut down on home 'speculation'  From Chinadaily 05/29/2010

"Shanghai will take more strict measures in line with the central government policy," Chen said, adding that more efforts will be made in building economically affordable houses and cracking down on speculative house purchasing.

The Economist jumps into the fray with their own opinion of the Chinese property market.  They are of the opinion China will survive the upcoming property bust.  From The Economist 05/27/2010

If mortgages did turn sour, how badly would China’s banks suffer? China Merchants Bank’s mortgage book grew by 70% in 2009. But mortgages still amounted to only 23% of its total loans. In China’s other big banks, the share is less than 20%. Loans to property developers account for another 8% or so, according to Mr Rothman.

Local governments may be more exposed. They suffer from a chronic shortfall of tax revenues, which they partly fill by expropriating land from farmers and selling it to developers at a hefty markup. Their dependence on property for income is often overstated, however. They are counting on land sales and property taxes for less than 17% of their revenues this year, according to Vincent Chan of Credit Suisse, once fiscal transfers from the central government are taken into account.

You know it's serious when officials sitting on the equivalent of the Federal Reserve board acknowledges the problem.  From Naked Capitalism 06/01/10

“The housing market problem in China is actually much, much more fundamental, much bigger than the housing market problem in the US and UK before your financial crisis,” he said in an interview. “It is more than [just] a bubble problem.”…

Mr Li said the high cost of housing could hamper future growth by slowing urbanisation. Rising prices were also a potential political flashpoint, especially among younger people who felt locked out of the property market.
“When prices go up, many people, especially young people, become very anxious,” he said. “It is a social problem.”

Money Money + Money -- Money supply update

Money supply figures supplied by the Federal Reserve (as of 2010-05-27) continue to decline.  The data shown is the sum of M2 and Institutional Money Market Funds (the only subset of M3 still reported)  As you can see money supply tends to drop during / after recessions and recovers as economic activity increases.  We are in uncharted territory as this data set has not shown negative growth for the entire data series.

Considering the growth rate is decidedly negative and shows no inclination of slowing down this is worrisome for future economic growth. 

Bank lending update

It has been a while since I last discussed the decline in bank lending.  Total loans and leases continues to decline while bank's holdings of US Treasury securities continues to climb (Source: Federal Reserve, 2010-05-24)

You may notice the spike in loans and leases but don't get excited, this is due to FASB 166 & 167 requiring banks to bring off balance sheet items back into the sunlight.  This will screw up the year over year data for a while but even after this 'increase', lending is down year over year.  Annaly's blog has the details

Austerity in Europe, it's so fashionable right now!

As I mentioned recently the austerity would be coming with the bailout packages.  It didn't take even a week and the cutbacks have already started.

Today - Telegraph

Premier Jose Luis Zapatero told a stunned nation that public sector pay will be reduced by 5pc this year and frozen in 2011. "We must make an extraordinary effort," he said.

Pension rises will be shelved. The country’s €2,500 baby bonus will be cancelled. Aid to the regions will be slashed and infrastructure projects will be put on ice. Mr Zapatero’s own monthly pay will fall 15pc to €6,515.

more from the Telegraph today in another article

Jose Luis Rodriguez Zapatero, the prime minister, on Wednesday outlined a series of measures that will include a suspension in automatic increases to retirement pensions, a drop in overseas aid and a reduction in government investment.
He said 13,000 civil service jobs would be cut in 2010, with public sector wages frozen in 2011.

Spanish citizens will not be too happy about this and the austerity packages will tilt yet another country towards recession.

Shanghai consides levying annual property tax on 2nd homes -- This is important!

This is big folks. 
Up until now there has not been any sort of annual property tax on housing so there was no annual cost (beyond a loan) to owning a home.  IF this proposal becomes law I predict a massive change in the perception of housing in China as well as a large number of 2nd (and 3rd, 4th, 5th?) homes behind dumped on the market.

May 12 - China Daily

Shanghai will reveal the details of its tightening real estate policies as early as the end of this month, including its long-debated property-ownership tax on multiple homes, Shanghai Securities News reported today.

The property ownership tax is a tax on property based on its ownership and is usually charged yearly based on the estimated value or rental income of the property. In China, the tax currently targets only commercial properties.
In the draft plan, Shanghai will say that multiple residential properties owned by one household will be regarded as commercial properties, and thus subject to property ownership tax, the paper reported.

[edit: It looks like this will not happen, look at a more recent post of mine for the details.  ]

Another update on China housing -- price and transaction volume falling

The Chinese government continues clamping down on housing rules and regulations.  If the final new article in this post is accurate the results are quite impressive.

May 6 - China Daily

Chinese developer Evergrande Real Estate Group on Thursday started to offer a 15 percent discount on prices of its 40 property projects across the country to promote sales amid government tightening measures to cool down the red-hot sector, Shanghai Securities News reported.

May 5 - China Daily

Average daily transactions of completed apartments in Beijing dropped to two units during the three-day holiday, down 96 percent year-on-year, and that of homes yet to be constructed fell 35 percent to 205 units, according to Beijing Real Estate Transaction website. Compared with April, the transaction volume decreased more than 80 percent.

May 7 - Imarketnews

BEIJING (MNI) - China's housing market is reeling from a government effort designed to clamp down on rampant speculation and surging house prices, with potential buyers running to the sidelines as the level of uncertainty rises.
The sales center for C-King Towers should have been teeming with life last Sunday, with potential buyers cramming the room to snap up units in the mid-to-high end residential development on the north side of Beijing's Third Ring Road. That would certainly have been the case before the middle of last month.
But on Sunday it was a virtual ghost town; two receptionists chatted above the hum of the rap music being pumped into the room to entice non-existent buyers. Rows of tables draped in brown velvet, which should have been the setting for dealmaking, stood unoccupied.

And finally, after volume slows to a stop prices start falling:
May 11 - China Daily

According to Yahao Real Estate, a Beijing-based property brokerage firm, the city's residential housing cost averaged 16,898 yuan per square meter from May 3 to 9, fell 9.60 percent from a week earlier and declined 31.43 percent from the week ( April 4 to 11) before the policy has been taken, the newspaper said.

While this is only 'anecdotal' evidence on a certain level it certainly is powerful reading if accurate.  As my previous posts have alluded to the Chinese government wants to clamp down on housing speculation.  Considering their capabilities it is going to happen.  Whether in an elegant or destructive manner is yet to be determined. 

I'm starting to watch rebar and wire rod prices in China.  I'll give you an update once I have enough data.

Delinquent home loan update -- Still grinding higher

The percentage of delinquent home loans appears to be close to finally cresting.  Well, hopefully. 

There are some lags to the data and while the growth of seriously delinquent loans at Fannie Mae are slowing down the bad inventory is moving into foreclosure (and then back onto the market)

I'll be a little less pessimestic about the housing business and home prices after both of these graphs start moving downwards.

ht Paper Economy

ht Calculated Risk

More on Strategic Defaults

The blogosphere has been discussing strategic defaults for a while now.  It appears the concept is hitting the major media outlets now which will only increase the percentage of strategic defaulters out there.


Watch CBS News Videos Online

(ht Creditwritedowns)

As I have mentioned before this may be one reason consumer spending appears higher than it 'should be'

We're from the IMF and we are here to help you.

Before the PIIGS (Portugal, Italy, Ireland, Greece, Spain) of Europe breathe a deep sigh of relief as their funding problems are 'fixed' there's a few items to mention:

Assuming the money arrives you still have to deal with the IMF which has a usual gameplan of:

• Devalue the currency
• Raise taxes
• Cut government spending

Item 1 is out the door as countries use the Euro
Raising taxes and cutting government spending is not a mix that encourages GDP growth.  Consider that when making your investments.   Don't forget that during this period of IMF induced austerity debt / GDP levels will continue to rise.  This is the mother of all 'kicking the cans down the road'.

The wad of money (nearly a $US Trillion!) will be used to allow countries to roll their debts, not stimulus.  The French banks are breathing a deep sigh of relief right now.  Everyone else should rethink what this all means.

Here's a video with my favorite hedge fund agitator explaining the situation.  This interview occured before the announcement but it still holds true.



(ht Zerohedge)

Well that was exciting. What's next?

I'm certain you already know by now but the markets took a serious hammering today.  While some are claiming a trade error took us down nearly 1000 points on the Dow before recovering the proximal causes of this recent selloff are still with us:

Greece is on a slow downward spiral towards default or a very severe recession / depression.  After the most recent bailout announcement the markets calmed down for one day before continuing to de-risk.  The contagion has spread and now Spain, Portugal and Italy are possibly next.  Who and when is next I don't know.

China continues tightening and is determined to stamp out rising property prices.  I have some more information that I intended to post on this but I've been a bit busy.  Fortunately I was finishing up de-risking a few portfolios yesterday.

The Fed's purchase of mortgage backed securities ended March 31 so from now on the money supply will start to contract.  The Fed is effectively tightening right now.

The home buyer tax credit deadline ended a few days ago so the housing bounce is over with.

Bank lending continues to contract for both households and small companies.

I've gone over these items before but the Greek situation started the ball rolling downhill.  Until several of the above items are resolved what happened today was not a 'one time event'.

Some more China property news -- Speculation at a turning point?

I'm not talking about Greece for now as the situation is so fluid and even if they get IMF/Euroland funding it is going to still be a nasty long haul for the Greeks . . . . On to China.

A good article regarding property speculation occurring in the 'boonies' of China, not only the main cities. From Chovanec:

I’ve heard experts insist that it’s purely a top-tier phenomenon, but the evidence of my eyes and ears tells me that similar market dynamics have taking hold all across China . . .
Note several familiar trends I’ve been mentioning all along: people buying multiple apartments they have no intention of occupying; up-front cash purchases; funds channeled into real estate due to lack of investment alternatives; a property market that far outstrips the local economy in size and energy; reliance on construction as a job-generator; and buyer psychology approaching obsession.

The recent clampdown on property speculation appears to have already tamped down prices and reduced the enthusiasm of some buyers.  From Chinadaily:

As new policies released by the Chinese government are effectively cooling down the real estate market, a rush to return purchased properties are emerging in many major cities, mainly led by speculators, the National Business Daily reported on Thursday.

Finally something that is a bit more opaque but possibly as powerful.  The state's rhetoric against property hoarding and speculation by officials (corruption) appears to be heating up.  This is much harder to determine as I'm not an expert China watcher. As such I don't know how important this is but reading the tea leaves it may be part of a larger strategy. From BusinessInsider:

In the commentary, entitled “To Solve The Populace’s Housing Difficulties We Must Root Out Self-Enrichment By The Powerful”, the author attacks corruption as the root cause of the failure to provide enough affordable, subsidized housing. And without a massive increase in the supply of affordable, subsidized housing, the government will not succeed in cooling down housing-related tensions that now threaten social stability. . .
The central government has staked a huge amount of credibility on cooling the real estate market and resolving housing difficulties for the masses. Skeptics will rightly say that Beijing has tried this before, several times, and never successfully reined in the web of interests and corruption that distort China’s real estate market. This time I think will be different, as the central government likely believes that housing related issues are the biggest threat to social stability in China.

 
If China decides to institute an annual property tax, like we have in America, the rush to the exits will be massive.  Until then it will be hard to precisely determine if / when the top is in.

Chinese property prices already falling?

I've previously mentioned the new restrictions on property purchases in China. It appears they are already deflating prices.

From China Daily

The average price of second-hand houses in Beijing's Tongzhou district has dropped from 21,500 to 18,500 yuan per square meter, a decrease of 13.4 percent since the government issued stricter rules to curb speculation, the Beijing Times reported Wednesday.

Prices of some projects even plunged 25 percent, the report said.
Beijing Centaline Property predicted that housing prices in Tongzhou district will continue the downward trend and fall below 16,500 yuan per square meter by May.

It's only one bit of data but interesting nonetheless . . .

China getting smacked tonight

At the end of Shanghai's morning session the main index is down 2.1+%

Shanghai 300

It appears the recent rules designed to curb property price speculation have bitten hard, from ChinaDaily:

According to real estate research institute China Index Academy, among the 35 cities it monitors, 21 experienced a fall in transactions last week, with Hangzhou suffering the biggest drop of 72.6 percent. Property sales in Beijing, Shanghai and Shenzhen fell 45.5 percent, 32.9 percent and 63.9 percent respectively over the previous week.

It will be interesting to note if this is just a pause that refreshes or if the Chinese consumer realizes the gov't will keep twisting the screws tighter until they get home prices to calm down. 

The Shanghai property index can be a useful indicator to watch.  If you notice it lead (or coincided with) all the previous major up and down trends from the last 3 years.

[edit: now down 3+% and breached low of Feb 3, 2010.  This is not a good technical sign ]

Greece -- The government subprime bomb continues smoldering

Bond yields continuing blowing out in Greece.  The question becomes what will trigger the explosion or defuse this situation???  Here's a synopsis from the articles mentioned below. I suggest you read both.

German Chancellor Angela Merkel is trying to wait on any decision until after the May 9 regional elections.  If the elections go poorly this could make it worse for Greece.

There are court challenges prepared for the bailout from Germany to Greece readied and it appears there may be a ruling from the German constitutional court in early May as well.

While I haven't found any news reports, I wonder how the Italians, Portuguese, and Irish think about bailing out the Greeks?  Their economies are a total mess as well and any resistance from these countries will also fan the fires.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7632366/Maastricht-madhouse-fuels-EMU-wide-contagion-from-Greece.html

http://www.ft.com/cms/s/0/47b429f4-5091-11df-bc86-00144feab49a.html

As I mentioned on the comment bar to the right, the official declaration for aid by Greece only helped their bond market for one day.

More base metal linkage

Some more base metal background information:

New Aluminum capacity coming online in the gulf, which makes sense. Considering electricity costs are a large part of the cost structure, getting close to low price energy makes sense.  Pity the high cost AL producer.
http://www.thenational.ae/apps/pbcs.dll/article?AID=/20100412/BUSINESS/704129895/1005

Substitution effect for copper, aluminum and plastic.  High prices in copper create demand destruction as other products are used.
http://www.indiainfoline.com/Discuss/Blogs/Copper-mania-redux/544390

Zambia copper production update:
http://www.reuters.com/article/idUSLDE62F11Y20100316

General copper overview as compared to CRB, industrial production, and the BDI
http://www.datadiary.com.au/2010/03/26/commodity-markets-going-up-or-down/

China importing copper
http://agmetalminer.com/2010/04/09/copper-prices-strong-despite-china-subdued-buying/

Have a good weekend.

Some evening linkage

Glad to see Mr. Faber is coming around to my opinion on China's coming bubble popping. :)

http://www.creditwritedowns.com/2010/04/marc-faber-symptoms-of-a-bubble-building-in-china.html


A video on strategic defaults from pbs.org



HT  -- http://www.ritholtz.com/blog/2010/04/strategic-defaulters/

Greek rates go crazy
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/7621289/Escalating-Greek-default-fears-rock-Europes-debt-markets.html

Money Money + Money --> Money supply update

Money supply figures continue their decline on an abolute and/or relative basis depending upon how you measure it.  M2 + Institutional Money Market Funds (the only series left from M3) continues declining on a year over year basis, M2 on its own continues to decelerate.  Once the MBS purchases by the Fed finally settle I think the first derivative will continue to decline on both series.

Copper data dump

I've been building up some copper related links.  Here it is:

Majority of Chile's export currency comes from copper
http://www.businessweek.com/news/2010-02-15/chile-copper-exports-doubled-in-january-on-price-gain-update1-.html

LME is rasing storage rates on inventory.  Why do this if there is a paucity of material?  High demand raises prices, low demand lowers prices
http://agmetalminer.com/2010/02/12/lme-rent-increases-could-prompt-flood-of-metal-taken-off-market/

Good overview of Copper fundamentals
http://www.wildebeests.net/2010/03/02/investing-in-copper-what-you-need-to-know/

Commodities as a financial asset.  While the article is about Aluminum the same mechanism is under way in copper, oil, etc.
http://seekingalpha.com/article/190993-a-slow-motion-cornering-of-global-commodities-markets


From March 2,  2010 Fast Money
The folks on the desk suddenly noticed copper inventories in China surging.  I'll have more on this later but the trend has reversed declining and is starting to work back up again . . .  Copper discussion starts around 5:25 and goes to 10:40

Copper inventories going up in China. 

A good article and reference on cancelled warrants:
http://agmetalminer.com/2010/03/18/when-cancelled-copper-warrants-aren%e2%80%99t-what-they-seem/


Copper mine strike in Mexico deemed illegal, the cops may be brought in to bust the strike.
Mine is partially owned by Southern Copper, produced 166k tonnes in 2006
http://www.reuters.com/article/idUSN113373720100212
http://en.wikipedia.org/wiki/Cananea_mine#Economy

China tightening rules on home purchases

Recently China has tightened rules regarding home sales:

Banks can refuse loans on 3rd homes.  (wow, THIRD HOMES)
Down payments on second homes have been increased from 40 to 50 percent.
Mortgage rates have been increased.
Developers can no longer take deposits on unfinished homes without proper approval and other rules designed to mitigate keeping housing supply off the market.

China Daily article  2010 April 19

Bloomberg article 2010 April 20


Let's see if this works  . . .

A contrary opinion on HELOC's and banks

I recently posted an article about the concern HELOC's may have on bank capital positions. Here's a contrary opinion from another blog I follow, Calculatedrisk

The following report is from housing economist Tom Lawler:
In a House Financial Services Committee meeting today on “Second Liens and Other Barriers to Principal Reduction as an Effective Foreclosure Mitigation Program, spokespersons from BoA, Citi, JPMorgan Chase, and Wells Fargo explained the potential dangers of broad principal reductions, as well as tried to dismiss the silly claim that many second mortgages have “virtually no value” because so many borrowers with seconds have total mortgage balances at or exceeding the value of the home collateralizing those mortgages. Below are some observations on BoA’s and Chase’s testimony.

I'd read the whole article as it provides some counter points to my previous post.