The markets are about €0.53 away from having a Jackie Moon moment when Deutsche Bank’s stock becomes a single digit midget (non-p.c., my bad). As per September 2016, when it traded single digits for a few nanoseconds, we are not so sure the financial authorities will allow it to get or stay there.
Clearly, a shift in the supply curve for new homes to the left.
OK – and some buying at irrational prices fueled by artificially low-interest rates and excess money. The irrational panic buying will take care of itself as interest rates rise and the Fed reduces its balance sheet making money tighter.
This is not the highly leveraged housing market of 2006-07, where even our range boy at the local golf club owned mortgaged three homes, quit his job, and bought an Escalade financed by a home equity loan (true story). This market is driven primarily by restricted supply and will be more difficult to pop. The price adjustment will also take place over a much longer period.
The New Supply-Side Economics Is Not Good
We have written how private equity has taken a yuuuge supply of existing homes off the market through their mega 2012-14 bankruptcy purchases, and now rent out the homes to the same people they foreclosed on. Existing housing is a perfect substitute for new homes.
Rising Costs
The rising costs of building, primarily labor shortages in the construction sector, and restrictive zoning laws are constraining building and the supply of new homes.
The lack of enough skilled workers and a narrow talent pipeline has added extra hurdles, time, and costs to many current projects, according to builders, hindering the current boom time in the industry.
“The number one issue is the cost and availability of labor,” says Randy Strauss, owner of Strauss Construction in Amherst, Ohio, roughly 40 miles east of Cleveland.
The issue is a nationwide one. Contractors in areas such as Houston, which were battered by Hurricane Harvey last year, have struggled to staff up, and the National Association of Home Builders recently found that 82 percent of its members believe the cost and availability of labor are their biggest issues. In 2011, only 13 percent named labor costs as their biggest worry. — Curbed
The immigration crackdown has played a significant role in the labor shortage in the construction sector.
One study from the National Bureau of Economic Research found that over 1.1 million undocumented immigrants, many of them skilled in essential trades such as framing, work in the construction industry. – CITYLAB
Lumber Prices
The parabolic rise in lumber prices isn’t helping either. Lumber prices are down over 12 percent from last week’s high, however, with several days of limit down in the futures markets. Look no further than the long-term lumber price chart to understand what tariffs do to prices and input costs, which ultimately hurt the majority.
Last April, the Trump administration placed a 20.83 percent tariff on Canadian lumber, to the benefit of politically valuable voters in Maine. Within the construction industry, these imports commonly turn into framing lumber, which is used to build single-family homes and small multifamily buildings. – CITILAB
Bad timing by the administration unless you belong to the small minority of those who make their living in the framing lumber business.
Policy Relief Needed
Shortages are breaking out and are now ubiquitous throughout the economy.
The housing market is one of the hardest hit sectors. Shortages of new and existing homes; shortages of buildable land, shortages of skilled construction workers. Inflation is running rampant in the sector. Yet it hardly registers in the inflation indices because of the way the government measures housing costs.
The new supply-side of housing (shifting the curve left) is not working for most Americans. Taking existing homes off the market for rentals or the restriction of new supply through rising input costs, labor shortages, and zoning restrictions are severely reducing affordability and turning the country into a Landlord Nation.
Since most of the problems are policy-induced, they can be fixed by better and a more comprehensive housing policy. That is getting back to the old supply-side economics of the Reagan era where the supply curve shifts to the right, illustrated in the simple graph below. Lower prices with more supply of homes (P 2, Q 2).
Higher prices and lower supply may work for some, but it is certainly not good economics and only adds to an already toxic political environment.
Intelligent, indestructible and with no humans on board, these sailboats are plotting their own course through the waters of San Francisco Bay. If Richard Jenkins gets his way, soon there’ll be hundreds of them – trawling the oceans for data.
Video by Victoria Blackburne-Daniell, David Nicholson – Bloomberg
…what Kim’s move reveals is a broader strategy at work. In the lead-up to the Singapore summit, should it still take place, Trump may be preparing for the wrong game: a two-player round of checkers when Kim is steeling for a multiplayer two-board chess match. On one board will be the future of North Korea’s nuclear weapons programs, what Trump came to negotiate. On the other will be what Kim and the other participants know is also crucially at stake: the future of geopolitics in northeast Asia. – Foreign Affairs
Xi and Kim’s Second Meeting
Did President Trump Just Have An Epiphany?
President Trump may have finally had an epiphany that China’s President Xi and Kim Jong Un are engaged in three-dimensional diplomacy and may be playing him. After today’s press conference it sure sounds like it.
We have been pounding the table about this in several posts over the past few months. See here, here, here, and here.
Today’s Presser
Here is what President Trump said during today’s impromptu presser in the Oval Office with South Korean President Moon Jae-in. His comments, by the way, caused stocks to sell off into the close. We warned about these risks yesterday.
I will say I’m a little disappointed because when Kim Jong Un had the meeting with President Xi in China, the second meeting — the first meeting we knew about, the second meeting I think there was a little change in attitude from Kim Jong Un.
..there was a difference when Kim Jong Un left China the second time. And I think they were dedicating an aircraft carrier that the United States paid for, OK?
QUESTION: … China maybe discouraged Kim?
..I think that President Xi is a world class poker player…I will say this, there was a somewhat different attitude [from North Korea] after that meeting, and I’m a little surprised.
…maybe nothing happened.., But there was a different attitude by the North Korean folks when — after that meeting. So I don’t think it was a great meeting.
Nobody knew about the meeting and all of a sudden it was reported that he was in China a second time. The first time everybody knew about, the second time was like a surprise. And I think things changed after that meeting. So I can’t say that I’m happy about it, OK? – President Trump, May 22
President Xi, a world-class poker player, indeed. Even your so-called friends covet your poker chips.
President Trump is learning by doing, Lord Palmerston’s dictum, “in international relations, there are no permanent friends or permanent enemies, only permanent interests.”
History Of Korea And China
We believe there is no way in hell President Xi will allow a unified Korea under western influence. Losing Korea on his watch? NFW!
Let’s go back just to 1950 to understand China’s strong national interest in Korea, which probably hasn’t changed much from a strategic perspective, even though the world is entirely different. Also, keep in perspective, Xi is the new Mao.
If we allow the United States to occupy all of Korea, Korean revolutionary power will suffer a fundamental defeat, and the Americans will run more rampant and have negative effects for the entire Far East. Threat of U.S. Bombing – Mao Zedong, Secret Cable to Stalin, Oct. 2, 1950
Two weeks after the Stalin cable, China invaded North Korea, surprising American troops, who were heading the United Nations military effort to protect the South Korean Government of Syngman Rhee. Thankfully, for us, Stalin reneged on his offer to supply air cover for the Chinese invasion force.
General Douglas MacArthur, the commander of the U.N. forces, openly doubted China’s resolve to move into Korea. The entry of 260,000 Chinese troops into the war, shocked the American commanders and forced them into “the greatest retreat in United States military history.”
Different Time, Same Chinese “Permanent Interest”
Of course, the times are different.
China is now a nuclear and rising world superpower and beginning to challenge U.S. hegemony. They now control the South China Sea.
China, will, no doubt, have a seat at the table at the Singapore summit, if there is one, maybe not literally, but in the form of the deal already cut with the North Koreans.
Who knows what kind of deal Xi and Kim have cut, but there is no doubt they have an agreement of some sort, which is also playing into the U.S.- China trade talks, and that realization is now in Trump’s head. Go no further than today’s presser for proof of the latter.
Deutsche Bank (DB) stock is approaching single digits again. Watch this space.
In 2016, DB traded with a single digit handle for a few seconds before, we suspect, the monetary authorities stepped in.
When a “too big to fail” (TBTF) bank stock falls to into single digits, the risk of panic increases, the bank may begin to experience funding pressure, short selling proliferates, and systemic risk skyrockets.
Unlike Lehman, however, DB has a deep deposit base and is less dependent on wholesale market financing.
We are not certain why the stock is plummeting, but we do suspect markets are getting a bit concerned about Deutsche’s humungo derivatives book, and the global size of the derivatives markets, in general.
Derivatives, especially credit default swaps (CDS), are a legacy of the financial crisis which was ignored and never really dealt with.
Derivatives have never really gone away in the ensuing decade. The total value of the books at five of the biggest US banks has dropped about one-quarter since tougher capital rules kicked in, from 2013. Even so, there were $157tn of derivatives out there at the end of last year, according to data prepared for the FT by Aite Group, a Boston-based research firm. That’s about 12 per cent more than the amount these banks had, entering the crisis.
…The banks say these huge numbers — $157tn is more than twice global GDP — do not tell the whole story. And they are right: headline figures say nothing about the counterparties, the collateral, the offsetting positions, or whether the trades are centrally cleared. (Bear’s actual credit exposure — or its “net replacement cost of derivatives contracts in a gain position”, in the jargon — was much smaller, at $12.5bn.) – FT, March 16
Though, we believe it is a small probability, if the markets do run on DB’s derivatives book, even God won’t be able to save it.
Low probability, high impact event. A major macro swan. Keep it on your radar.
Markets are all lathered up over a China Trade deal? WTF?
Alternatively, is the market higher because of just the cessation of hostility and talk the trade war is now “on hold.”
Whatever the case, here is the exchange with Larry Kudlow and George Stephanopoulos on ABC yesterday afternoon.
George Stephanoplous: Just to be clear, it there an agreement or not?
Larry Kudlow: The is no agreement for a deal. We never anticipated one. There’s a communique between the two great countries. That’s all. – This Week With George Stephanopoulos, May 20
Couldn’t be more clear, and a communique is worth nothing more than the paper it is written on.
Nevertheless, the efficacy of any trade agreement with China, if there is one, will be judged through the political lens based on did it protect and create more jobs for President Trump’s base? Selling more Boeing aircraft to China will not move the political needle in his direction, in our opinion.
President Trump will ultimately realize this and given his proclivity to mood swings and his own form of recency bias – those who speak to him last – we wouldn’t be making bets on this news for more than a trade or a day or two. Uncertainty still reigns.
The Growing Perception Trump Is A Paper Tiger
Furthermore, the president will not like the headlines coming out that he is being played by China and North Korea because, among other things, he is putting a North Korea deal that will win him a Nobel Prize above all else, and that he losing the trade war.
This only adds to the perception that America is perceived as a Paper Tiger in Asia. We have pointed this out in several posts. See here and here.
It may cause some erratic tweets and destabilizing behaviour going forward, raising the event risk of unexpected (though we expect) tape bombs.
Critics fear Trump is ceding too much to China on trade
President Trump’s tough-guy persona is taking a beating from China, judging from the reaction of some of his allies on Capitol Hill and in the trenches of the trade wars.
The former business executive, who prides himself on his negotiating savvy, is facing criticism for bending to the Chinese government on two key trade disputes in the space of a week, alarming longtime supporters who had welcomed his call for a more confrontational approach to Beijing. – Washington Post, May 20
Note that almost 40 percent of WalMart’s y/y revenue growth in Q1 was due to the exchange effect, and over 1300 bps of tax cut relief. That is one-offs.
Though the dollar was weaker in Q1, it has rebounded sharply in Q2. Thus a deleterious exchange rate effect is coming to Q2 earnings. Not to mention higher gas prices and interest rates, which will negatively impact the non-energy and non—financial sectors.
Global Macro Monitor 