Why DFA International Real Estate Securities I Fund (DFITX) Worth Another Look?
Something highly unusual is happening in the mortgage market however. Recently jumbo mortgage rates have been lower than conforming rates. This is one of those market dislocations that most would have never thought possible. Yet here we are.The most in-depth research and analysis is on Credit Writedowns Pro. Distortions are evident in the U.S. mortgage market originally appeared on Credit Writedowns Links: RSS - Daily - Weekly - Twitter - Facebook - Contact Credit Writedowns Feed # abf0d081857b85fe6be494728740a4f1 Related posts:Mortgage REITs’ leverage poses significant risks to the overall mortgage market When will the rise in US mortgage rates hit consumer demand? Fed’s securities purchases blunt the impact of convexity hedging
"Hope is a wonderful thing. But we also need to remember that changes in the stock market, the housing market and the overall economy have relatively little to do with one another over years or decades. (We economists would say that they are only slightly correlated.) Furthermore, all three are subject to sharp turns. The economy is a complicated system, with many moving parts." Robert Shiller “Yes, We’re Confident, but Who Knows Why” The New York Times http://www.nytimes.com/2013/03/10/business/confidence-and-its-effects-on... A safe and happy holiday to all. Watching the events in Cyprus, one is reminded of the definition of systemic risk coined by the “Counterparty Risk Management Group” spawned by former Fed of New York chief E. Gerald Corrigan. When the markets are surprised, so the thinking went in August of 2008, a systemic event may occur. http://www.crmpolicygroup.org/ The retail depositors of Europe were certainly surprised when that long convenient offshore banking haven known as Cyprus almost became a test ground for fiscal stringency. Until now, most of the worst losses in banks have been quietly papered over to spare Europeans the distress of having to admit that their economies are largely de-capitalized. Cyprus was especially offensive because its wealth – or, at least, liquidity – came from Russia, Europe’s energy provider. But now it seems that the Russians may have already moved most of their money out of Cyprus, making the bank closures moot. http://www.zerohedge.com/news/2013-03-25/have-russians-already-quietly-w... With the fiasco in Cyprus, the Europeans have confirmed that they have not the slightest idea how to deal with a real banking crisis – especially on the periphery of what is now considered Europe. Did EU banking officials really believe that haircutting depositors would be sufficient to restore confidence in Cypriot banks? The infantile quality of the actions of EU officialdom is mind boggling. Compare the purposeful, serious approach that the FDIC and other regulators in the US have taken to selling hundreds of failed banks with the tomfoolery in the EU. But more than anything else, events in Cyprus should remind us all that the supposed economic stability in the US and EU is about an inch deep. Since every policy aspiration at the Fed is about confidence and virtually all of the major economic relationships we pretended to understand have shifted, the only tangible basis for policy is hope, as per Bob Shiller above. This past couple weeks, in fact, we could discern a subtle shift in the Matrix, a change in the narrative coming from some of the more savvy observers on Wall Street. There is no connection between the real economy and the upward movement of certain asset markets, so goes the thread, markets such as residential real estate. As a result, goes the narrative, the Fed will continue to buy securities indefinitely via QE, raising the possibility of a further rally in bonds. The fact that BB rated corporates have rallied more than three quarters of a point in yield over the past several years should not daunt the true believers at the Fed. Even those members of the Sanhedrin who admit that there is no longer a causal link between home price appreciation (HPA) and the US jobs sector adamantly believe in the power of Quantitative Easing to restore economic prosperity. It is a matter of faith, you understand, not empirical scientific proofs. Fed of New York President William Dudley, a former Goldman Sachs economist, is out saying that the US economy could be galloping by the end of 2013, perhaps 50% above current consensus estimates. Dallas Fed President Richard Fisher has likewise called a 3% GDP growth rate by the end of the year. What is the driver of optimism at the Fed? A rebound in residential real estate prices. No matter that this housing rally is driven by short supply and a growing pile of cash from Wall Street. The wealth effect, Fed officials and members of the Big media call it. But wait. To convert higher home prices into cash consumption, consumers will need to either sell their homes or borrow. Q: Is this why all of the larger banks are focused on growing credit card volumes? Hmmm. But of course it would be wrong to blame “institutional capital” for the expanding prices in the US residential housing sector. Truth to tell, the well-springs of irrational exuberance in, say, Phoenix and the giddy gyrations of Nicosia are identical. For example, Mom and Pop and smaller players drove the AZ and NV markets higher three years ago. If you were buying homes at or near retail in Pheonix in 2012, you were two years too late. What will investors say, the Fed really should wonder, when those nine-ish gross yields promised by late arrivals to the rent trade get cut in half a couple quarters from now. Reading IPO filings for the REITs that have come to market over the past six months, a sense of wonder results regarding the operating efficiency of some of the newer players in the rent trade. Truly amazing. And as noted earlier, there is virtually no net US bank lending to 1-4 family real estate, this despite the almost 10% rise in HPA over the past year. Yet so powerful is the word of Bernanke that the mere mention of further policy moves by the central bank sends private equity funds into paroxysms of ecstasy. Jeff Pintar was quoted in the WSJ this week to the effect that nearly every home listed for less than $400K in Orange County, CA "is being pursued by institutional investor capital." But rents in many communities are now well above what it would cost to buy the home. Yet another success for Chairman Bernanke and the Federal Open Market Committee. Next month at American Enterprise Institute, I will be talking about the impact of the Fed’s quantitative easing on the US real estate market. But the events in Cyprus stem from precisely the same source as the surge in US home prices, namely monetary expansion by the Fed. http://www.aei.org/events/2013/04/09/bubble-bubble-is-the-housing-toil-a... The excessive monetary emissions of the US have covered the world in greenback paper dollars. This sea of paper money has grown much faster than the underlying economy, putting great pressure on asset returns. Financial repression predates Chairman Bernanke. Our allies have been forced to allow their own money fiat supplies to expand as well. The Fed celebrates the end-effect of its pro-inflationary policy as a “success,” but never admits to being the source of the problem. And you can forget about selling the Fed’s portfolio. This is a permanent liquidity “add.” Bubbles made of fiat paper dollars must inevitably create new asset bubbles. Just remember that when Abraham Lincoln created the greenback to finance the Civil War, the dollar bore interest like a T-bond. Americans understood that paper money was really a form of debt. Net, net, there is far too much bad paper money chasing too few real economic opportunities, forcing “leakage” via offshore havens such as Cyprus. Russian cash found a ready entry point into the EU and far higher rates of interest than are available in the US. As Andrew Ross Sorkin noted last week in the New York Times: “If you had 100,000 euros in a Cypriot bank account over the last five years, where the interest rate has averaged about 5 percent, you would have about 127,600 euros today. Even after the bailout, which would require you to give up 10 percent of your deposit — 12,760 euros — you would be left with 114,840 euros. The American bank? The $100,000 you deposited at Bank of America five years ago is about $105,100, at the going rate of about 1 percent interest a year.” So let’s not cry for the people of Cyprus or even Europe for being upset over the clumsy handling of this debacle. At least the Europeans still have a sense of indignation and, more important, a positive real interest rate. Cry more for the Americans, a nation of sheep who live like socialists, but talk about democracy and free market capitalism as the national creed. We may take comfort from the fact that we are all united by the fact of drowning in a bitter sea of fiat paper dollars. Like professions of faith or hope, paper money is cheap and makes everything it touches cheaper as well. The difference between Cyprus and America is that the Cypriots are angry and offended by the idea of taking a loss, but Americans are mute because they expect to be bailed out by the Fed. As and when economic reality rears its ugly head in the US and, like the people of Cyprus and the EU, Americans start to doubt the inevitable bailout, look out. www.rcwhalen.com
The bull run has continued on Wall Street as upbeat economic data makes it hard for investors to take profits surrounded by all of the optimism. The Dow Jones Industrial Average kept its multi-week winning streak going on Wednesday after retail sales blew past analyst estimates; this figure posted growth of 1.1% in February, marking a hefty improvement over last month’s reading of 0.2%. Global X and iPath rolled out new products earlier this week that should gain some traction amid all of the euphoria in the stock market [see 101 ETF Lessons Every Financial Advisor Should Learn]. Meet the Dividend ETF Competition Global X, perhaps best known for their lineup of niche offerings, rolled out the SuperDividend U.S. ETF (DIV) earlier this week on March 12, 2013. The new ETF charges 0.45% in expenses and is linked to the INDXX SuperDividend U.S. Low Volatility Index, which tracks the performance of 50 equally-weighted common stocks, MLPs and REITs [...]Click here to read the original article on ETFdb.com.Related Posts:Highlighting Seven Unique Dividend ETFsLeveraged Dividend ETFs: Too Good To Be True?Tax Reform And Dividend ETFs: Cause For Concern?The Best Dividend ETFs Aren’t Dividend ETFs At AllDifferentiating Dividend ETFs
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Via Wei Yao of Societe Generale, ...and what it means for the rest of the world Following on from our earlier discussion of how a Chinese hard landing would evolve, SocGen now examines how a Chinese hard landing would impact the global economy. They see the contagion in several ways: mechanically (since China is part of the global economy) and through trade, financial and market channels. Mechanically, a slump in Chinese GDP growth to just 3% would cut our global GDP growth forecast by 0.6pp. Add to that the channels of transmission to the global economy, and our expectation is that a Chinese hard landing would result in 1.5pp being slashed from global GDP growth in the first year. How important is China as a source of global demand? With imports equivalent to 30% of its GDP, China is a major source of global demand. Exports to China as a percentage of GDP are largest in Asia and amongst the commodity exporters, so these countries would be hardest hit. Drawing on different studies, mainly from the IMF and the OECD, we estimate that the impact of the trade channel from the type of hard landing in China described in the previous section would cut GDP growth by around 4.5pp in Taiwan, 2.5pp in South Korea and Malaysia, 1.2pp in Australia, 0.6pp in Japan, 0.3pp in the euro area and 0.2pp in the US. For the global economy ex-China, the trade channel effects would bring about a reduction of around 0.7pp to GDP growth. The impact of a Chinese hard landing on the rest of the world could be aggravated by the fact that investment would be particularly hard hit. As noted in the previous section, we expect investment – which now makes up half of Chinese GDP – to fall more than consumption if China does suffer a hard landing. And investment has significantly higher import content than consumption, most notably through commodities and machine tools. This could have a particularly sharp impact on some smaller commodity producers. For example, exports of energy and metals to China make up over 40% of Mongolia’s GDP. In terms of capital good exports to China, Taiwan has the closest ties, depending for just under 15% of its GDP thereon; but this is already a much lower number than that of Mongolia and many of the other commodity exporters. Exporters of consumer goods are less exposed, as seen in the chart overleaf. For all the talk of the importance of China to exporters such as Germany, the absolute numbers remain modest despite strong growth in recent years. Would currency and trade wars result? The decline in global trade that would come with a China hard landing naturally leads to the question of whether currency and trade wars would result. As outlined by Wei Yao in the previous section, our scenario assumes Chinese policymakers would tread very carefully, being only too well aware of the dangers. In Washington, the appreciation of the dollar that would follow as investors (both new foreign investment and US repatriation from abroad) seek the safety of US shores would not be welcome. Moreover, the Chinese yuan would be far from the only currency depreciating against the US dollar; trade weighted, our China hard landing scenario assumes a 10% dollar appreciation in the first year and this despite additional QE from the Fed. It does not take any great stretch of the imagination to paint an even bleaker scenario in which a China hard landing triggers outright currency wars and protectionist measures on trade flows. This would further aggravate the negative impact of a China hard landing and extend the duration of the shock. How important are financial links to China? Of the total foreign claims of BIS-reporting banks as of June 2012, only $731bn – or just 2.4% of the total – are on China. The risk of China transmitting a hard landing to the rest of the world through the banking channel thus appears modest. Foreign corporations present in China would see the value of their investments decline, but more importantly, profits generated in China would slump, hitting several major multinational companies. The response would be cost cutting, and not just in China. Does the starting point for the global economy matter? Our what-if analysis of a China hard landing draws on a wide body of academic research that analyses various shocks and how these disseminate to the global economy. These analyses often implicitly assume the starting point of an economy in equilibrium and with a well stocked arsenal of policy ammunition. The current situation is very different, however, with large output gaps in many of the world’s major economies, ongoing headwinds from deleveraging and policy arsenals already depleted. Add a China hard landing to the mix, and we expect the result would be a far greater uncertainty shock than had the starting point been a world in overall good health. Uncertainty would cause corporations globally to hold back further on investment and hiring decisions (even those not directly exposed to China). And, feedback loops from financial channels would further amplify the uncertainty shock as risky asset prices collapse. At the global level, we estimate that the combined uncertainty shock in our China hard landing scenario could exceed 1% of global GDP. Where could offsets come from? The effects of a Chinese hard landing on growth could, however, be offset by some secondary effects. Lower commodity prices are perhaps the most important. As a rule of thumb, we assume that, all else being equal, a $10/b permanent drop in the oil price would boost global GDP by around 0.3pp. Our commodity strategists’ assumption that a Chinese hard landing would initially cut oil prices by 30% implying a first offset. The greater hope for offset is policy. Central bankers are usually the first at the scene of any shock and a first response would likely be more QE from the Federal Reserve, Bank of Japan and Bank of England. However, several prominent central bankers have already noted that there is a limit to QE and that it comes with diminishing returns. The ECB would keep the promise of OMT (Outright Monetary Transactions under the conditionality of a European Stability Mechanism programme) on the table and continue to supply amply liquidity. Central bankers could also explore other possibilities. The BoE already has a funding for lending scheme, the BoJ buys ETFs and REITs, Danmarks Nationalbank has a negative deposit rate … none of these measures have to date proven a panacea, however. This would not prevent central banks from trying, but we remain doubtful it would work and also note that some measures would require changes to legislation (such as the Fed buying equities) and would thus not be a day one response option. Turning to fiscal policy, we believe most advanced economies have little room for manoeuvre, though the US and Germany are potential exceptions; but even here we would not look for aggressive steps measures. By contrast, emerging economies have greater room for both fiscal and monetary policy stimulus. If China does experience a hard landing however, some of the foreign inflows attracted by the higher returns in these markets could reverse, adding to pressure on these economies (albeit with the silver lining of currency depreciation). Overall, we see little scope for economic policy to significantly offset the negative effect of a Chinese hard landing on the global economy. Additional policy stimulus would mainly serve to limit negative tail risks.
Via UBS Investment Research Erosion of BoJ Independence: “Fonetary-Policy”? The erosion of the BoJ as independence and the implications for central banking The Japanese government’s pressure on the BOJ for more monetary stimulus is clearly intensifying as the bank’s October 30th meeting approaches. Why is the BOJ facing heightened pressure for more easing? Last August the Japanese government passed a bill to raise the consumption tax from the current 5% up to 8% in April 2013 and to 10% in 2015. However, the government ultimately opted to make the tax hike contingent on the prospect of the Japanese economy emerging from its deflationary rut in the fall of 2013. Accordingly, the government is now seen as increasing pressure on the BOJ to do something to combat deflation, given that the Japanese economy is likely to post negative growth over the July–September quarter amid the economic slowdown in China and other such factors. Is the BOJ really under pressure? As it now stands, the BOJ has set a target for the Asset Purchase Program (APP) of ¥80tr by year-end 2013 from ¥63tr currently. Media sources have reported that the government is calling on bank officials to raise that amount by a further ¥20tr (Sankei newspaper, Oct 23). However, prior APP portfolio increases have always come in increments of between ¥5tr-¥10tr, so a ¥20tr increase would be equivalent to roughly 4% of Japan's annual GDP, or 14% of the BOJ balance sheet. Although many market players obviously remain skeptical that the BOJ might actually increase the facility by such a large amount, bank officials may have become more susceptible to pressure to initiate further stimulus measures. What about legally-mandated BOJ independence? The BOJ Act was revised in April 1998 to ensure that Japan's central bank would maintain its independence from the government. This was done to make it easier for bank policymakers to expeditiously fight inflationary pressures. The difficulty of managing policy at the zero interest rate bound, as evidenced by the BOJ’s seeming inability to push prices onto a positive trajectory, coupled with its diminished role as a financial intermediary (due to stagnant loan markets) have put the central bank on its back foot. Downward economic pressure following the 2008 financial crisis and the aftermath of the Tohoku earthquake and tsunami has compelled the bank to invoke further monetary accommodation. Lawmakers have also implemented aggressive spending programs with the intention of spurring economic activity. With sovereign debt ratios at very elevated levels, legislators are increasingly tempted to lean on monetary officials to provide further accommodation, to little avail. Despite the monetary and fiscal pump priming which has taken place, the bank's 2014 (FY) CPI outlook is expected to fall short of the bank's 1% inflation goal set back in February. This factor, coupled with the increased perceptions of political pressure, has raised market expectations that further measures will be forthcoming at the October 30 meeting. Why is the BOJ seen as hesitant to provide more easing? Until now, BOJ monetary easing measures have been linked to the prospect of increased sovereign debt investment by financial institutions (Figure 1). The monetization implemented by the central bank finds its way into the banking system and then, rather than getting re-circulated into risky assets such as loans, ends up invested in the JGB market. Such moves have not reduced real interest rates through heightened inflationary expectations, nor have they brought about increased private-sector investment through lending. The BoJ’s unsuccessful efforts to stimulate inflation using these tools has likely heightened scepticism that further monetary easing of this same nature will be able to bring about an end to deflation. Ongoing and accelerated purchases of government bonds by the BOJ also poses the danger that such moves could be perceived as central bank financing of government spending, particularly given government lacking progress with financial reconstruction initiatives. BoJ Independence or Interdependence? There is a possibility that the realm of monetary policy could increasingly merge with that of fiscal policy and national debt management policy.“Fonetary-policy” – fiscal policy plus monetary policy. The BOJ embarked on its strategy of quantitative easing from 2000 to 2006, engaged in a comprehensive monetary easing initiative commencing in 2010, and has been extending out beyond conventional T-bills to purchasing assets such as long-dated JGBs, ETFs, and J-REITs. Policy makers have been gradually exposing the bank to ever higher levels of price volatility risk. Along those lines, an agreement could emerge that would put Japan on a trajectory toward a combined monetary and fiscal policy, which might look much like the regime which existed in the U.S. prior to 1951. From 1942 to 1951, the Fed agreed to support massive government borrowing to fund the war effort by purchasing sufficient amounts of Treasury debt to keep interest rates pegged at artificially low levels. The post-War economic expansion, brought about by returning veterans and a conversion of the economy from a war-time footing, ultimately kindled strong inflationary pressures and monetary policy makers were incapable of a response. After much acrimony, the 1951 Accord was agreed to, stipulating a division between fiscal policy and monetary policy in order to safeguard the economy from inflationary pressures. Central Banks and Debt Managers: Embracing a Negative Dynamic Globally, central banks are edging down monetary policy paths that can be viewed as increasingly backstopping budget deficits as lawmakers of respective governments continue to fail to make progress toward fiscal consolidation. A progression down this road could lead to many unsavoury outcomes, as fiscal and monetary policies entwine themselves in an increasingly negative dynamic.
By Sober Look With the GSEs (Fannie Mae and Freddie Mac) forced to shrink their balance sheets (see discussion), the private sector will need to step in. As demand for mortgages increases with the growth of the US population (see discussion), the federal government will simply lack the political will to allow the GSEs to accommodate this new demand – [...]Related research and analysis at Credit Writedowns Pro starts at $3.99. Try Credit Writedowns Pro free for one week. Mortgage REITs’ leverage poses significant risks to the overall mortgage market originally appeared on Credit Writedowns Links: RSS - Daily - Weekly - Twitter - Facebook - Contact Credit Writedowns Feed # abf0d081857b85fe6be494728740a4f1