Credit deflation and the reflation cycle to come (part 3)

[Castlevania]

1 hour ago, Democorruptcy said:

Is The Fed balance sheet really only $8.57 trillion? I had no idea it was so low.

That’s the Fed as opposed to the US government. I misread it earlier and thought the same I.e. that’s low.

[sancho panza]

6 hours ago, dnb24 said:

It was only $900 billion at start of 2007

Incredible to see how that's happened

Who'd have thought all that dollar printing would bring commodity led price inflation the world over?

Wolf brings the recent hike action together.Looks transitory to me.

https://wolfstreet.com/2021/12/22/end-of-easy-money-global-tightening-in-full-swing-fed-promises-to-wake-up-in-time/

The Czech National Bank dished out another surprise today, raising its main policy interest rate by 100 basis points to 3.75%, the highest since February 2008, and the fifth rate hike this year. A hefty rate hike had been expected, but not this hefty: None of 11 analysts polled by Reuters predicted a 100-point hike.

At its prior meeting on November 4, the CNB had jacked up its policy rate by 125 basis points, the biggest shock-and-awe rate hike in 24 years. Since June, when it began its rate-hike tango, the CNB jacked up its policy rate by 350 basis points, from 0.25% to 3.75%.

The Central Bank of Russia, on December 17, raised its policy rate by another 100 basis points to 8.5%, its seventh rate hike this year, totaling 425 basis points, from 4.25% to 8.5%, pressured by surging inflation, particularly food price inflation. Overall inflation in Russia hit 8.4%, food inflation hit 10.8%.

This makes the Central Bank of Russia the only central bank whose rate hikes have actually caught up with inflation. Interest rates that are below the rate of inflation are still stimulative and inflationary; Russia has reached some level of neutral.

Since July, the Bank of Russia has been using the term “persistent” in its statements to describe this inflation, while the Fed’s Powell was still clinging ludicrously to “transitory” and “temporary.”

The Bank of the Republic (Colombia), also on December 17, hiked its policy rate by 50 basis points to 3.0%, the third rate hike in a row, totaling 125 basis points since liftoff at 1.75% in September. Inflation hit 5.3% in November.

The Bank of England, on December 16, raised its policy rate by 15 basis points for liftoff, to 0.25%, dishing out a surprise to markets, after having walked back expectations of a rate hike at this meeting. Inflation in the UK surged to 5.1% in November, the worst in 10 years.

Norges Bank, the central bank of Norway, also on December 16, hiked its policy rate by 25 basis points to 0.5%, its second rate hike, after its September liftoff from 0%. Inflation in Norway jumped massively from 3.5% in October to 5.1% in November, the worst since 2008.

The ECB, also on December 16, announced a sharp reduction of QE, from an average of €92 billion a month currently, to about €40 billion by March, and to €30 billion in Q3, and to €20 billion in Q4.

This reduction is a two-step process: First, the end of its €72 billion a month Pandemic Emergency Purchase Programme (PEPP) by March. To ease the blow of the €72 billion cut, the ECB will raise its classic QE program from €20 billion a month now to €40 billion in March, cutting on net its total QE by €52 billion a month by March.

The Bank of Mexico, also on December 16, surprised markets by raising its benchmark rate by 50 basis points to 5.5%, the fifth rate hike in a row, totaling 150 basis points. Inflation in Mexico has jumped to 7.4% in November, the worst since January 2001.

The Central Bank of Chile, on December 14, dished out a 125-basis-point rate hike, to 4.0%, in line with expectations, following the shock-and-awe surprise 125-basis-point rate hike at its October meeting, and the fourth rate hike since the cycle started in July, totaling 350 basis points.

The National Bank of Hungary, also on December 14, hiked its policy rate by 30 basis points to 2.4%, the seventh rate hike in a row, from liftoff in June at 0.6%. Inflation has spiked to 7.4% in November, the worst since 2007, up from 6.5% in October, and from 5.5% in September. So this is moving fast, much faster than the rate hikes, but at least it’s doing something, unlike the Fed.

The State Bank of Pakistan, also on December 14, jacked up its policy rate by 100 basis points, to 9.75%, after the shock-and-awe 150-basis-point hike in October, and a 25-basis-point liftoff hike in September from 7.0%. The three rate hikes totaled 275 basis points. Inflation in Pakistan spiked to 11.5% in November.

The Central Bank of Armenia, also on December 14, hiked its policy rate by 50 basis points to 7.75%, seventh rate hike in this cycle, from liftoff at 4.25%. Inflation jumped to 9.6% in November.

The Central Reserve Bank of Peru, on December 11, hiked its policy rate by 50 basis points to 2.5%, the fifth rate hike in a row, since liftoff at 0.25%. Inflation was at 5.7% in November.

The National Bank of Poland, on December 8, hiked its policy rate by 50 basis points to 1.75%, third rate hike in a row, totaling 165 basis points, from liftoff at 0.1%. Inflation spiked to 7.8% in November, from 6.8% in October and 5.9% in September – now moving very fast, and the central bank is falling way behind, but not as far behind as the Fed.

The Bank of Brazil, also on December 8, hiked its policy rate by another 150 basis points, to 9.25%. Since March, when the rate hikes started, it has jacked up its policy rate by 725 basis points, from 2.0% to 9.25%, as inflation shot straight up starting last year, to 10.7% in November, the worst since 2003, driven by all the usual suspects, from fuel to housing costs.

The Bank of Korea, on November 25, during its final meeting in 2021, raised its policy rate by 25 basis points to 1.0%, following its 25-basis-point hike in August. Inflation has jumped to 3.7%, the worst since 2012.

The Reserve Bank of New Zealand, on November 24 during its final meeting in 2021, hiked its policy rate by 25 basis points to 0.75%, the second rate hike in a row, after having ended QE cold-turkey in July, and after having created the worst housing bubble in the world.

The South Africa Reserve Bank, on November 18, during its final meeting in 2021, hiked its policy rate by 25 basis points to 3.75%, marking liftoff. Inflation hit 5.5%.

The Central Bank of Iceland, on November 17, hiked its policy rate by 50 basis points to 2.0%, fourth rate hike since liftoff in May from 0.75%. Inflation has surged to 5.1%, the highest since 2012.

The Bank of Japan, like the Fed and the ECB, has not hiked rates yet. And unlike the Fed and the ECB, it is not yet under red-hot pressure from inflation and housing bubbles. But ahead of the Fed and the ECB, the BoJ has ended its super-massive QE in May, after beginning the taper in the fall last year, when Abenomics came to an end with the exit of Prime Minister Shinzo Abe. And so one of the biggest money printers in the world has stopped printing money, which is a start.

And where is the Fed? Powell, after downplaying inflation all year, finally declared that inflation is a “big threat.” The Fed has cut its asset purchases, promised to end them entirely no later than March, discussed Quantitative Tightening, and put some timid rate hikes on the table for next year. But all this is too little too late, as inflation in the US has reached the worst level in 40 years, and is worse than in many of the countries listed here that have already jacked up their policy rates multiple times to tamp down on inflation, while the Fed’s policy rates are still near 0%, and it’s still printing money.

 

[sancho panza]

US national debt/4 to allow for trend watching versus Fed balance sheet.What happens when the Fed unwinds QE?Sustainable meh!

 

[CannonFodder]

Thank you SP; wondering if this will create a weak dollar if everyone else is raising but fed not.

USTs will be increasingly sold in these countries as less attractive investment.

[Juniper]

3 hours ago, CannonFodder said:

Thank you SP; wondering if this will create a weak dollar if everyone else is raising but fed not.

USTs will be increasingly sold in these countries as less attractive investment.

I saw an argument for a strong dollar this morning from Chase Taylor of Pinecone Macro:

It does make sense that energy may be a strong influence given the current prices. Currency still proves too complex for my understanding so I just thought the different perspective was interesting.

Jesse Felder talked on macrovoices last week about a ‘trifecta’ of rising energy prices, rising dollar and rising interest rates leading to an earnings recession…perhaps an option for where we’re headed? @sancho panza this is similar to your theory but I’m not sure your thoughts on the dollar?

[DoINeedOne]

Interesting little Twitter thread

 

 

 

[DurhamBorn]

7 hours ago, Juniper said:

I saw an argument for a strong dollar this morning from Chase Taylor of Pinecone Macro:

It does make sense that energy may be a strong influence given the current prices. Currency still proves too complex for my understanding so I just thought the different perspective was interesting.

Jesse Felder talked on macrovoices last week about a ‘trifecta’ of rising energy prices, rising dollar and rising interest rates leading to an earnings recession…perhaps an option for where we’re headed? @sancho panza this is similar to your theory but I’m not sure your thoughts on the dollar?

Earnings recession for anyone who cant put up prices with inflation.Its the distribution cycle kicking in.Energy costs are ground zero first.Then tax as government tries to give more free money to cover up the massive hit.Then everything else.

Houses will give up lots of equity to pay a good chunk of it.

[Bobthebuilder]

1 hour ago, DurhamBorn said:

Houses will give up lots of equity to pay a good chunk of it.

With what I have learned about bank mortgage lending this last couple of days, a large amount of equity is gonna go up in smoke I think, and the banks are prepared for it.

[Phil]

46 minutes ago, Bobthebuilder said:

With what I have learned about bank mortgage lending this last couple of days, a large amount of equity is gonna go up in smoke I think, and the banks are prepared for it.

So only distressed sellers then. 

[Bobthebuilder]

4 minutes ago, Phil said:

So only distressed sellers then. 

Try to raise the money to buy it and then let me know.

[Phil]

Just now, Bobthebuilder said:

Try to raise the money to buy it and then let me know.

I agree. I think the housing market has totally stopped functioning. It will be totally fubared with lots of debt prisoners, which will lead to relationship breakdown and the banks owning. The knock on is the debt stays with the debtor and their credit file is then fubared so that’s them for 6 yrs.  I think there will be a window for them who have a reasonable deposit, full time job and little to no credit as well as having unicorns as pets.

[Bobthebuilder]

1 minute ago, Phil said:

I agree. I think the housing market has totally stopped functioning. It will be totally fubared with lots of debt prisoners, which will lead to relationship breakdown and the banks owning. The knock on is the debt stays with the debtor and their credit file is then fubared so that’s them for 6 yrs.  I think there will be a window for them who have a reasonable deposit, full time job and little to no credit as well as having unicorns as pets.

I have been looking to help a family member who will be homeless soon, bank says no. I am not rich, but doing OK and if I can't help him then anyone else in his position is fucked.

[RJT1979]

Just now, Bobthebuilder said:

I have been looking to help a family member who will be homeless soon, bank says no. I am not rich, but doing OK and if I can't help him then anyone else in his position is fucked.

Everyone needs to stop helping. Then prices free fall

[Phil]

1 minute ago, Bobthebuilder said:

I have been looking to help a family member who will be homeless soon, bank says no. I am not rich, but doing OK and if I can't help him then anyone else in his position is fucked.

Sorry to hear. Hope it works itself out. Strong men/women make…. and all. I’m in the same situation to be fare. It’s one of the reasons I hate this shithole and our glorious leaders. Rant over.

[Plan-b]

Surely housing can never be allowed to substantially fall, if it does then the banks go with it. Perhaps the currency will be devalued instead so any property falls to the casual observer look small.

This seems to be the way of every currency in history. 

[DurhamBorn]

2 minutes ago, Plan-b said:

Surely housing can never be allowed to substantially fall, if it does then the banks go with it. Perhaps the currency will be devalued instead so any property falls to the casual observer look small.

This seems to be the way of every currency in history. 

Banks can take 40% off without a care.Higher rates mean profits shoot up.Leveraged BTL will take a lot of heat.Might not be losses,more equity going up in smoke and profits.

[Bobthebuilder]

2 minutes ago, Plan-b said:

Surely housing can never be allowed to substantially fall, if it does then the banks go with it

Check out banking shares since 2007.

[Lightscribe]

22 minutes ago, Plan-b said:

Surely housing can never be allowed to substantially fall, if it does then the banks go with it. Perhaps the currency will be devalued instead so any property falls to the casual observer look small.

This seems to be the way of every currency in history. 

As I’ve said before on here. The BK will bankrupt the majority of the population through stocks/pensions/houses/debt/cost of living.

Too big to bail out so planned controlled economic demolition and asset forfeiture. Very few (like us on here) will be able to economically survive the decade. We won’t be left alone either, all assets will be fair game and taxable for the benefit of the many rather than the few.

That then paves inroads for UBI, social credit scores and CBDCs.

[Majorpain]

Slightly out of date as its come down recently, but its a good chart to show how mad Gas went in relation to crude.  $340 for a barrel of crude would collapse things quickly.

[Plan-b]

So in the end what was it all for?

A list someone compiled to highlight the amount of schemes and efforts made to keep house prices high - shocking. Just in case its thought it all happened by accident         

BTL

Dual income mortgages

Interest only mortgages

BTL tax advantages

Interest rates

Relatively lower Basel capital requirements/risk weightings for property backed assets

'Postponed' council tax revaluations

Less regulated BTL lending

Funding for Lending

Newbuy Guarantee

Firstbuy Scheme

Homebuy

FIRE sector party donations

Help to Buy equity loans

Help to Buy mortgage guarantee

Shared Ownership

PFI

Housing benefit

Support for Mortage Interest

Build now pay later Scheme

New Homes Bonus

Affordable Homes Programme

Get Britain Building Fund

Builders Finance Fund

Right to Buy

Proposed building standard and regulation cost cutting

Looser residential planning approval rules for offices/commercial property

Releasing more public land for private rather than public uplift

New homes zero-rated for VAT

Build to Rent Fund

Stamp duty reforms

Rental Deposit Loan Scheme

Help to Buy ISA

Pension/inheritance reforms

'Discounted' starter homes

Expropriating HA properties

Raising inheritance tax limit for property

Housing Growth Partnership

Starter Homes Fund

Business Rates reforms

Starter Home Scheme

Right to Acquire

'Pay to Stay' social rents

Preserved Right to Buy

Self 'Build' Portal

Discounted Sales

Part ownership - Resales

Part ownership - HOLD

Part ownership - OPSO

Part ownership - Social HomeBuy

MoD Tenancy Deposit Loan Scheme

Forces Help to Buy

'Starter' Homes Local Authority Funding Programme

The Community Pub Business Support Programme

Coastal Communities Fund

Term Funding Scheme

Home Building Fund

Capacity Fund

'Affordable' Housing Guarantees Programme

Estate Regeneration Fund

Rent to Buy

Public land for Housing/Accelerated Construction Programme/Large Sites and Housing Zones Fund

Garden Cities Towns Villages

Starter Homes Land Fund

Care and Support Specialised Housing Fund: phase 2 (private sector developments)

'Affordable' Homes Programme funding expansion

Enterprise Zones business rates relief

Housing Infrastructure Fund

Digital Infrastructure Fund

Business rates relief for broadband installers

Land Release fund

Build to Rent boost

Term Funding Scheme (APF) limit increase

Northern Cultural Regeneration Fund

---------

FTB stamp duty relief

£10 billion new funding for Help to Buy Equity Loan

Cash boost for garden towns

Planning Delivery Fund

Housing guarantee scheme - private rented sector

Relaxation of permitted development regs for agricultural buildings

Statutory business rates exemption for plant nurseries

Coastal Revival Fund

Move On Fund

Voluntary Right to Buy Pilot (housing association tenants)

Pub is The Hub funding

£1.3 billion Land Assembly Fund

£630 million Small Sites Fund

£1 billion Housing Delivery Fund

[Majorpain]

https://www.theguardian.com/business/2021/dec/27/fears-of-higher-uk-home-prices-as-habito-launches-7x-mortgage

Quote

A mortgage lender is letting homebuyers borrow up to seven times their income – well above the traditional maximum – which it says will allow some to buy a property they might have assumed was well out of their price range.

Habito’s new formula for calculating how much people can borrow is considerably higher than the industry’s typical maximum of between four and five times salary, and while it could allow some buyers to scale up their property-buying ambitions, it could also revive debate about responsible lending practices.

7 times income but over 40 years.  Northern Rock 2.0?

Massive two fingers up at BOE.

[CannonFodder]

27 minutes ago, Plan-b said:

Surely housing can never be allowed to substantially fall, if it does then the banks go with it. Perhaps the currency will be devalued instead so any property falls to the casual observer look small.

This seems to be the way of every currency in history. 

Perhaps think of it that a bank borrows a £1 and then lends it out again 25, 40 or 75 times, the same £1 i mean.

At 1% interest, it costs 1p to borrow and 75p in income so 74p profit

At 10%, it cost 10p to borrow and 750p income so profit is £7.40 on every £1 they borrow from central banks.

High interest rates are not bad for banks.

This is very oversimplified.

[Bobthebuilder]

9 minutes ago, CannonFodder said:

Perhaps think of it that a bank borrows a £1 and then lends it out again 25, 40 or 75 times, the same £1 i mean.

At 1% interest, it costs 1p to borrow and 75p in income so 74p profit

At 10%, it cost 10p to borrow and 750p income so profit is £7.40 on every £1 they borrow from central banks.

High interest rates are not bad for banks.

This is very oversimplified.

This no longer applies, rules have changed.

Banks are bust.

[CannonFodder]

13 minutes ago, Bobthebuilder said:

This no longer applies, rules have changed.

Banks are bust.

With respect, i disagree.

Basel 3 gives a leverage ratio of 3 % so 33 times lend out.

Then take into account that this is current mortgages on the bank.s book. So create 33 mortgages sell on, etc. Create another 33.

That considers all financial institutions are signed up to it.

I do agree that banks are in a bad way atm but that is cos interest rates are so low. Higher rates will heal them.

They were fine in the 70s.

I DONT like the banks but the higher rates go, the more money people pay to banks.

More money coming in is good for banks.

They create their own money supply so interest rates flow heavily to margin.

[wherebee]

5 hours ago, CannonFodder said:

With respect, i disagree.

Basel 3 gives a leverage ratio of 3 % so 33 times lend out.

Then take into account that this is current mortgages on the bank.s book. So create 33 mortgages sell on, etc. Create another 33.

That considers all financial institutions are signed up to it.

I do agree that banks are in a bad way atm but that is cos interest rates are so low. Higher rates will heal them.

They were fine in the 70s.

I DONT like the banks but the higher rates go, the more money people pay to banks.

More money coming in is good for banks.

They create their own money supply so interest rates flow heavily to margin.

Yes, IF they can get through the collapse.  The 70's period of high inflation was not entered into by banks having on their books volumes of mortgagees who could not afford a 2% rise in rates.  Very few people lost their houses in the 70's from repossession - the public housing sector was much larger (pre buy to let) and the rental market was slumlords with little bank debt.

I think banks will be OK because, simply, fiat collapse is coming.  The GBP and AUD will be worth- in real terms - much much less.  House prices will stay flat in nominal fiat terms, but drop a lot in real terms.  If people hand the keys in, the banks will sell, get the mortgage covered, and not show a loss on the books (although it will be a loss in real value terms). 

The only ones that might be fucked is where the value of the properties the loans are secured on goes down a lot.  I could see student flats, inner city flats, etc, taking a big hit.  Of my sons mates, all about to enter final year, not one is planning on Uni.  most are going to do a year or two work - they want cash, and don't like remote learning (which is what aussie unis have been doing now for 2 years).  That will decimate the student lets industry.