Credit deflation and the reflation cycle to come (part 2)

[sancho panza]

After the sugar rush comes the snooze....

Just had the LA round today and was scoping her on what's going on.She was saying Leicester has had loads of Londinium fugees bidding up rental and house prices.

The smoke msut be in a perilous state if Leicester's a better option

 

 

https://wolfstreet.com/2021/06/02/buyers-strike-mortgage-applications-drop-deep-into-2019-range-as-people-looking-for-a-home-to-live-in-step-back-from-raging-mania/

Buyers’ Strike? Mortgage Applications Drop Deep into 2019 Range as People Looking for a Home to Live in Step Back from “Raging Mania”

by Wolf Richter • Jun 2, 2021 • 129 Comments

Investors may still be doing a lot of heavy breathing.

By Wolf Richter for WOLF STREET.

Whatever demand there may be from investors, demand from buyers needing a regular mortgage in order to buy a home continues to decline, and in the week ended May 28 fell 4.0% from the prior week, to the lowest level since May 2020 (when mortgage applications were coming out of the collapse of the prior weeks), according to the Mortgage Bankers Association today.

This put applications for mortgages to purchase a home roughly in the middle of the range of 2019, having worked off the entire Pandemic boom (the big drop and bounce-back in February was the result of snowmageddon; data via Investing.com):

 

The NAR also confirmed the decline in sales volume: sales of existing homes have been falling for months and in April hit their lowest level since July 2020, having worked off most of the Pandemic spike.

This comes as mortgage rates have ticked up a little from their record lows late last year, but remain near historic lows, with the average interest rate on 30-year fixed rate mortgages with conforming balances and a 20%-down-payment at 3.17%, according to the MBA this morning:

Mortgage applications to refinance existing mortgages have also worked off the Pandemic spike and have fallen below the year-ago-level.

But these refi applications remain over twice as high as in early 2019, when the average 30-year fixed rate mortgage carried an interest rate of a now unthinkably high 4.2%, though they’d been over an even more unthinkably high 5% in late 2018.

What would the housing market look like with mortgage rates at 5% and today’s sky-high prices? That was a rhetorical question. Back then, among the effects it had was that it calmed down refi activity by a lot:

There are now a number of “obstacles,” as the MBA calls it, to home sales, the primary obstacle being sky-high prices, and by extension the affordable supply that has moved out of the affordability range of many potential buyers.

Then there is the possibility that the explosion in volume over the past 12 months, a form of panic buying, is now showing signs of getting exhausted, as many people who really wanted to buy bought, and enough potential buyers that are looking for a home to live in – rather than investors – took a deep breath and stepped back from the “raging mania” and the crazy bidding wars.

Investors are still reported to be out there in large numbers, and worrying even Fed officials. But enough regular home buyers may be staying away from the raging mania to where it has started to show up in the numbers.

[sancho panza]

another UK bank ratio's for consideration

market cap £24bn total assets £800bn

Dowd Buckner capital ratio=24/800=3%

 

What's really interesting to me is that the market's view of RBS is that it's worth £24bn and yet shareholder equity is stated at £43.86 bn.

How do we explain that which at first appears a paradox?Clearly,the accountants have a rosier view of RBS's position than market participants.Would welcome the views of the resident accountants @Castlevania @sleepwello'nights

Deposits are up £44bn in 4 years,that's nearly two times market cap......

Net loans up £39bn in 4 years ramping up alongside the bubble in the housing market.

It's as if they learned nothing from 07/08.

A 20% drop in UK real estate and a few loans going sour and Tommy the taxpayer will be getting tapped up again methinks.dyodd natch

https://www.investing.com/equities/royal-bank-of-scotland-balance-sheet

 

 

[janch]

Regarding China's aging population, how ironic it would be if they have to allow immigration of younger people from countries with much younger populations eg Phillipines/Indonesia/Africa to look after all their old people.  Were they allowing for the resulting population increase by building all those unoccupied cities I wonder?

[janch]

5 hours ago, Popuplights said:

Does the hive mind think RMG is still worth a punt?

I'm kicking myself for selling far too early..........I should have kept a few.  I don't think I'll be buying now.

This is my most "well behaved" share as it just keeps going.  It'll probably dive now I've mentioned it

[Cosmic]

19 minutes ago, janch said:

Regarding China's aging population, how ironic it would be if they have to allow immigration of younger people from countries with much younger populations eg Phillipines/Indonesia/Africa to look after all their old people.  Were they allowing for the resulting population increase by building all those unoccupied cities I wonder?

By the time they get to that stage the new cities will have fallen to ruins and need rebuilding - even if its in 10 years time! Makes our new builds look well built and long lasting.

[sancho panza]

4 hours ago, Cattle Prod said:

From tomorrow's Spectator:

https://www.spectator.co.uk/article/why-chinese-women-dont-want-more-children

Excerpt:

So how is China going to pay for this, with supply chains moving out and the oil bill going up? They're going to have to pull a .999 gold rabbit out of a hat.

[Harley]

1 hour ago, Cattle Prod said:

Not going to happen, it's a fundamentally racist society in the truest sense. They believe the Han Chinese are above all other races. Their name for China is the Middle Kingdom, i.e. between heaven and the rest of us plebs. Us whites were called routinely called laowai (hairy monkeys), I supect other races will have a pretty hard time of it. Japan is similar in that they don't want immigration to help their demographics, and social cohesion is more important. Fair enough, but Japan still earns plenty of dollars, and didn't cover up a likely virus leak that destroyed word economies.

Agreed, although they have their colonies!

[planit]

@sancho panza

 

Since I will do an exam on this next week I will have a go

I assume the 2 figures come from different places so they are a measure of different things, a bit like space in a car with one person measuring the storage space and the other the seating space, they are for different things.

 

So the 2 things are:

a) the share price market cap

and

b) the 'Equity' section on the "Statement of financial position".

 

The market cap of a company is the number of shares in issue multiplied by the current price.

The shareholder equity is what is left after all assets and liabilities are paid off and is a heading listed in the figures you posted.

 

Importantly, there is no representation of the current market cap in the financial statements, there is only the share capital which is listed as "Common stock, Total - $12.129bn". If you know the nominal share value (ie $0.50) then you can work out the shares in issue = 12.129 / 0.5 = 24.26bn.  So there are 24bn 50cent shares in issue

Figures and ratios for bank shares are different than other companies so I tend to avoid them as they require different analysis.

 

Extra note:

These days there are financial instruments that could be classed as equity or liability and would therefore be allocated to the relevant section on the balance sheet. So there could be a type of loan with benefits that needs to be stuck in the equity section making the Equity bigger and the liabilities smaller.

You can read here if you want [too much] more information.

 

Here is what happened at the last BP agm, really interesting as the shareholder was peeved but as Looney points out, BP has no choice in this allocation.

Quote

Shareholder: BP stated that net debt fell to below $40 billion. However, that was only
because you issued some $12 billion worth of hybrid bonds that for inexplicable reasons
are classified as equity. These were very expensive at up to 4.875%. Two points on this.
Is it not misleading to say net debt has fallen when we have $12 billion of hybrid bonds on
the balance sheet excluded from the calculation? And second, why have you issued such
expensive debt? Is it because of the accounting that allows these to be misleadingly
classified as equity?

Murray Auchincloss: Great, okay. Thank you for your question.

Just to go back to the financial frame and the five priorities. Priority number two is the
balance sheet, what we were focused on was achieving our net debt target of $35 billion.
We did that 12 months ahead of time and we ended the first quarter around $33.3 billion
of net debt.
It is a well defined figure. We have defined it since 4th August when we launched it. It
excludes the hybrids as they are treated as equity per international accounting standards.
So I think we have been fairly clear on how we do that. They are a perpetual part of our
balance sheet, so it seems sensible for us to classify it that way. And we feel very
confident moving forward that this is an important part of the balance sheet and how we
measure it. It is important to have diversified investors not only in our equity but in our
debt, that is why we are lengthening the nature of our debt and that is why we have
diversified it to things like hybrid bonds as well. It is nothing unusual for the sector to do
this to have a well diversified debt book. Many of our competitors do it as well, so we
think it is a sensible thing to do as well.

Bernard Looney: I think just two things that I would add if I may. You mention the word
misleading. I think Murray has made it very, very clear that it is not misleading, it is entirely
in accordance with international practice standards, and of course approved by our
auditors, so I would not want anybody to think that it is in any way misleading because it
is not. It is entirely transparent and entirely in compliance.
And the other part of your question was you say it is the only reason why our net debt
came down. That is not quite true. Our net debt was $51 billion at the end of the first
quarter of 2020. It probably went higher than that intra-quarter, but at the end of last
quarter was $33.3 billion. Yes, you are quite right the hybrid was a big part of that but it
was not the only part: so were divestment proceeds, so was the work that we have done
and the team have done around cost, so we are taking $2.5 billion a year out of running
the business between 2019 and 2021, and we have also brought our capital down. So it
was partly driven by the hybrid but not the only reason.
I just wanted to add those clarifications to that. Thank you.

I hope I am correct and this helps.

[Hancock]

2 hours ago, Cattle Prod said:

, but Japan still earns plenty of dollars, and didn't cover up a likely virus leak that destroyed word economies.

I dont think we can blame China for the insanity thats gone on with Covid, that's entirely down to Boris and Trump for listening to Ferguson the doom merchant and SAGE.

 

[Hancock]

8 minutes ago, Cattle Prod said:

Not China, but the CCP. The whole thing is riddled with the CCP, from fake videos of people collapsing in the street and being welded into apartments, letting planes leave to spread it around the world for months after they knew of the leak, troll farms targeting Italy to nudge them into lockdown which was then copied, Ferguson and SAGEs funding etc etc. Boris is just a (very) useful idiot, at least Trump shut down flights early doors, and called the CCP out directly and on multiple fronts. Shame no one believed him.

I dont believe anyone of influence in the west, as at the very worst covid killed a few thousand over 80 year olds, last year. Yet its still going on due to the endless amounts of new variants and people allegedly catching them ... this is nothing to do with China.

I do believe western govts needed a reason to print many trillions of £$EY; then gave a name to a cold virus, and marketed it like never before.

China isn't at fault for western govts exporting their manufacture base over there and to Asia, then creating a ponzi debt driven economy to replace it with.

Chain isn't at fault for the last 40 years of Britain slowly (then rapidly) turning into an Orwellian nightmare.

 

[Hancock]

41 minutes ago, Cattle Prod said:

Agree with all of that, Hancock. They're all as bad as each other, really, with some US governors and some northern european governments as honourable exceptions. How do you escape this madness??

Would seem we now live in a full on totalitarian planet, and they're never going to give up this power they have over us ..... Only thing that can save us from the Orwellian globalist cunts is "high interest rates"!

My cunning plan is to head East, where i will refrain from the idiot box and the internet.

 

 

[Shamone]

12 hours ago, Loki said:

The printer under the arm

I didn’t notice that. I knew that picture would appeal to your humour.

[The Idiocrat]

3 hours ago, Hancock said:

My cunning plan is to head East, where i will refrain from the idiot box and the internet.

Norfolk? Are things really that bad?! 

[wherebee]

So I go to bed and wake up and everything has shit the bed.  What did I miss?  Some announcement from the FED that they are going to stop propping the market up?

[Sugarlips]

1 hour ago, wherebee said:

So I go to bed and wake up and everything has shit the bed.  What did I miss?  Some announcement from the FED that they are going to stop propping the market up?

This?

 

[Castlevania]

13 hours ago, sancho panza said:

another UK bank ratio's for consideration

market cap £24bn total assets £800bn

Dowd Buckner capital ratio=24/800=3%

 

What's really interesting to me is that the market's view of RBS is that it's worth £24bn and yet shareholder equity is stated at £43.86 bn.

How do we explain that which at first appears a paradox?Clearly,the accountants have a rosier view of RBS's position than market participants.Would welcome the views of the resident accountants @Castlevania @sleepwello'nights

Deposits are up £44bn in 4 years,that's nearly two times market cap......

Net loans up £39bn in 4 years ramping up alongside the bubble in the housing market.

It's as if they learned nothing from 07/08.

A 20% drop in UK real estate and a few loans going sour and Tommy the taxpayer will be getting tapped up again methinks.dyodd natch

https://www.investing.com/equities/royal-bank-of-scotland-balance-sheet

 

 

Loan book accounting for distressed debts is very backward looking. The market seems to be pricing in significant write downs. I haven’t checked in a while but Barclays used to trade at a discount to RBS, despite having a stronger presence in credit cards (the high interest rates charged, more than cover the credit risk over the cycle) and a big investment bank that should make money regardless of the credit/economic cycle.

[wherebee]

31 minutes ago, Castlevania said:

Loan book accounting for distressed debts is very backward looking. The market seems to be pricing in significant write downs. I haven’t checked in a while but Barclays used to trade at a discount to RBS, despite having a stronger presence in credit cards (the high interest rates charged, more than cover the credit risk over the cycle) and a big investment bank that should make money regardless of the credit/economic cycle.

I'm still of the view that almost all banks globally are fucked at a fundamental level, due to the massive zombification of the global economy for 20 years, which means most debts could never be paid back unless the wheels of the zombie cart keep spinning.  Moreover, if inflation really lets rip, and interest rates follow, you'll see events which bank risk models have simple not been designed for for 40 years being acted out.

I can't tell you which country, but I was in a meeting a good few years ago where a Bank was pitching a REIT to do with hotels.  I happened to know that airbnb was mushrooming in that country and undercutting the hotel industry massively, plus demographic/crime changes in the cities meant tourism was sure to decline.  I asked a few simple questions and the answer was 'we don't think that is a risk'.  Not 'we've look at long tail risks and we think the risk is minimal but have priced accordingly' but 'we don't think that is a risk'.

I wonder how those REITS are performing now with COVID and AirBNB shotguns to the head?

Anyway, my point is that I suspect strongly most bank leadership know this and just hope to get out with their bonuses after a few years before it all collapses.  Pass the parcel.

[wherebee]

https://www.imf.org/external/pubs/ft/fandd/2000/03/jarvis.htm

a good read.  Several similarities to much of the 'wealth' in the western world today, in my view.

[MrXxxx]

15 hours ago, sancho panza said:

.

How do we explain that which at first appears a paradox?Clearly,the accountants have a rosier view of RBS's position than market participants

Intangible assets I.e. the RBS brand name (yes I know!)

15 hours ago, sancho panza said:

It's as if they learned nothing from 07/08

They didn't have to as the tax payers footed the bill for their lack of business  acumen!

[MrXxxx]

10 hours ago, Cattle Prod said:

Boris is just a (very) useful idiot

Well you got half of that right! :-)

[MrXxxx]

10 hours ago, Cattle Prod said:

How do you escape this madness??

Well I believe the French had the right idea about 200 years ago :-)

[MrXxxx]

1 hour ago, wherebee said:

Anyway, my point is that I suspect strongly most bank leadership know this and just hope to get out with their bonuses after a few years before it all collapses.  Pass the parcel.

You can understand why politics and finance are bedfellows, and a position in one leads to a position in the other.

[Onsamui]

Cargill Taps Startup Producing Smart Cow Masks To Trap Methane Burps  | ZeroHedge  Gates is heavily invested in Cargill who are putting Indian farmers out of business.  More people are starving to death than dying from the virus in India because they have no work.

[Bricks & Mortar]

Interesting set of tweets.  This guy seems fairly sure deflation will happen, but presents 3 hypotheses about the manner in which it will occur.
I think his hypothesis (1), the Beautiful Deleveraging is for the birds.  To much leverage.  Too much much depending on the leverage - like businesses, homes, jobs, capital investment, etc.
Hypothesis (2) OMG What a Mess Deleveraging:  The David Hunter Hypothesis.  I need say no more.
Hypothesis (3) Awkward Deleveraging.  A series of short deflationary events over the decade, with the Fed intervening quickly each time.

I think I'm still in David Hunter camp for US and most of the world, as I don't think their money distribution pipelines go direct to business and jobs, but more through the consumer.  So, I think there's still too much leverage, and insufficient capability for central banks to get cash where it needs to go in a bk.  Here in the UK, the BoE put in the plumbing to quickly pass cash to business, which could help us ride a global bk event without the mass bankruptcies, redundancies, and repossessions.
But, I'm not so sure that'd be good for the UK in the longer term.  If the rest of world is cleaning out their Augean Stables, it might be better not to remain up to our armpits in shit.

But, for the first time, I now see that (3) is a possibility.
 

 

[M S E Refugee]

Russia to complete Pakistan Stream gas pipeline in 2025 – energy minister https://www.rt.com/business/525664-russia-pakistan-gas-pipeline/