From a small northwestern observatory…

Finance and economics generally focused on real estate

Archive for April 12th, 2011

Second quickie from the WSJ

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On the same page (C-1), Nick Timiraos contributes “Critical Signs in Foreclosure Talks”. This is the followup to issues I discussed a few months ago regarding the botched foreclosure processes at many banks. Regulators had hoped to put in place a far-reaching settlement, to forestall many state Attorneys General from filing state suits which would put all of this in a variety of courtrooms (probably ultimately in a multi-district litigation in the Federal Courts, and from there… no one knows…). The regulators and the AG’s are on opposite sides, although both seem to agree that the banks need to be taken out back of the woodshed and given a good spanking.

I have zero sympathy for the banks — it’s one thing to create a high-speed mortgage assembly line, but even the auto makers have figured out how to keep track of the documentation on each car they make. Bankers (and the thousands of lawyers they employ) are supposed to be good at this stuff. If they can’t keep track of a $100,000 mortgage, how exactly do they keep track of a $100 checking account balance? (They do seem to be great at keeping track of every $1 I owe on my visa card.)

However, from a market perspective, this all has extremely serious implications. As I discussed some weeks ago, if the foreclosure log-jam isn’t fixed, the home credit market won’t get fixed either. Housing starts, existing home sales, and millions of jobs depend on straightening out this problem. Hence, this is not just a trivial argument about who gets to spank the bankers.

Written by johnkilpatrick

April 12, 2011 at 2:42 pm

Two quickies from the WSJ

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Page C1 today has two important articles that caught our eyes. I’ll write about the first right now, and follow up with the other one later today. First, Kelly Evans contributes “Overlooked Inflation Cue: Follow the Money.” It shouldn’t come as a surprise to anyone that money supply growth in the western economies was rampant during the run-up to the current recession. In the U.S. and the U.K., M-2 growth peaked in late ’07 to early ’08 (you don’t have to be a monetarist to figure that out). The Eurozone kept pumping money at faster rates right up to mid ’09

Where money supply growth went from there, though, was a bit of a mixed bag. In the U.S., the annual growth in M-2 fell from a peak of about 12% right before the recession to a low of about 1.5% in early ’10, and has stayed below 3% since. (This basically supports my contention that the sturm-and-drang over QE-2 was all politics.) The U.K.’s growth rate peaked at about 9%, fell earlier than ours, and hit its bottom (about 2%) in mid ’09. Intriguingly, the U.K. money supply growth rate bounced back immediately, with the virtual money presses running full-speed to get the money supply growth rate back up to about 6% in early ’10, but then falling off to about 4% today.

In the Eurozone, the money supply growth tracked very closely with the U.S., bottoming with ours in mid ’10, but since then, the European bankers have started pumping money back into the system, with their M-2 growth rate headed continuously back upwards (at about 4% today).

There are two important implications for all of this (plus my afore-mentioned observation about QE-2). First, the three big western currencies are on decidedly different tacks. The idea of opposing viewpoints among the big western central bankers is not well explored in today’s decidedly multi-polar world economy. (Back when western banking was a closed system, everyone else in the world could only sit back and watch. Now that the Chinese — and even the Japanese with all their other troubles — are more than sidelines spectators, one can only wonder how disagreements among the western bankers will play out.)

Second, though, the really significant point is that despite all of the different paths of M-2 since 2009, all of the growth rates are decidedly down from the earlier peaks. From a real estate perspective, this has major implications. As investors diversify away from stocks, real estate and bonds have a certain equivalency. In a no- or low-inflation scenario, bonds are viewed as the more secure investment. In a higher-inflation world, real estate is viewed as a bond with a built-in inflation hedge. Hence, lower inflation portends well for bonds but poorly for real estate.

One might argue that healthy bonds means low interest rates for real estate, but this ignores the fact that interest rates are already at historic lows. Hence, what real estate needs today is a nice raison d’ĂȘtre, which a tiny bit of inflation would give it. I’m NOT pro-hyper-inflation, mind you, and inflation flat-lines are overall healthy for the economy. However, if real estate investors are hoping for an inflation kick, it doesn’t look like they’re going to get it.

A last minute edit — Later in the day, I noticed that yesterday’s USA Today had a “snapshot” (a little graphic in the lower left corner of the front page) titled “Which Investment Will Perform the Best”, taken from a survey recently conducted by Edward Jones. Topping the list was Technology (33%), follwed by Gold (31%), Blue-chip stocks (10%), Real Estate (9%) and International stocks (9%). Given that gold and real estate are both thought to be inflation hedges, it appears that the market still worries in that direction.

Written by johnkilpatrick

April 12, 2011 at 5:00 am

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