Morning Report – China’s bubble bursting? 3/19/14

Posted on March 19, 2014 by Brent Nyitray

Vital Statistics:

 

  Last Change Percent
S&P Futures  1866.7 2.9 0.16%
Eurostoxx Index 3084.8 11.0 0.36%
Oil (WTI) 100.3 0.5 0.55%
LIBOR 0.234 -0.001 -0.43%
US Dollar Index (DXY) 79.43 0.019 0.02%
10 Year Govt Bond Yield 2.69% 0.02%  
Current Coupon Ginnie Mae TBA 105.4 -0.1  
Current Coupon Fannie Mae TBA 104.3 -0.1  
RPX Composite Real Estate Index 200.7 -0.2  
BankRate 30 Year Fixed Rate Mortgage 4.31    

 

Markets are up small on no real news. Bonds and MBS are flat. Mortgage Applications fell 1.2% last week. Later on today we will get the FOMC rate decision. Expect to see another 10 billion reduction in asset purchases and a change in the language regarding the threshold for raising rates. The Fed is expected to de-emphasize a single number (6.5% unemployment) and move to a more holistic threshold. Right now, the futures are forecasting that the first rate hike will be in Q4 next year. Watch to see if that forecast changes after the meeting
 
Housing starts came in about as expected at 907k. January was revised upward from 808k to 909k. We are still running at pretty much depressed levels. Weather undoubtedly played a part, as starts in the Northeast fell pretty dramatically. Building Permits increased to just over 1 million, but most of the growth was multi-fam, not single fam.
 
KB Home reported better-than-expected first quarter numbers. Revenues rose 11%,while orders grew 18% and backlog increased 21%. Deliveries were down about 3% in units, and average selling prices rose 12%. Part of the increase in ASPs is due to a strategic change in KB’s business so you might not be able to draw many conclusions from that number. Gross margins continue to expand, and their 17.7% margins are the highest since 2006. No comments about traffic in the PR, maybe they will address the Spring selling season at the 11:30 EST conference call.
 
In a development that could impact rates here, a big Chinese developer has gone belly up and cannot repay $600 million in loans. We have known for some time that China has an epic real estate bubble and that it may finally be bursting. We are seeing a big drop off in commercial building sales, and that combined with a a historic investment rate topping 20% spells trouble. House price to income ratios in China are over 11. In Shanghai and Beijing that number is 23. To put that number in perspective, in Japan’s bubble in the 80s, the ratio topped out at 15 times income. In the US, it got to about 5x. Fast growing economies have these episodes (we did in the 1930s, Japan did in the 1990s, and China is having theirs now). 
 
What will be the spillover when it bursts? The biggest one will be economic – a burgeoning Chinese middle class had been a big component of global demand growth, and that will undoubtedly get depressed. This could be the catalyst that bursts the Canadian real estate bubble, as Chinese money is behind a lot of that as well. The biggest question will be what effect it has on rates in the US. Will Chinese investors dump Treasuries and MBS (remember, in crises, you sell what you can, not necessarily what you want to) or will there be a massive flight to safety which means rates go lower? My gut tells me that rates go lower because commodity price inflation is about to get slammed and China will attempt to export its way out of the predicament. This means even lower inflation in the US. That is something that will worry the Fed. 

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19 Responses

  1. jnc4p, on March 19, 2014 at 9:42 am said:

    Unintentionally first:

    “March 19, 2014, 06:00 am
    O-Care premiums to skyrocket

    By Elise Viebeck”

    http://thehill.com/blogs/healthwatch/health-reform-implementation/201136-obamacare-premiums-are-about-to-skyrocket#ixzz2wPrJesfU

    Drip, Drip, Drip.

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  2. Brent Nyitray, on March 19, 2014 at 9:46 am said:

    Guarantee you the first insurer that announces an increase in prices gets pilloried by the Administration and their attack dogs in the media.

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  3. jnc4p, on March 19, 2014 at 9:48 am said:

    I suspect they are going to try some sort of creative reinsurance provision to avoid it.

    This of course will catalyze the “Obamacare Bailout” talking point.

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  4. jnc4p, on March 19, 2014 at 9:55 am said:

    OT: Always interesting to see where former administration officials end up.

    “The LIFT Coalition (short for Let’s Invest for Tomorrow), run by former Obama administration communications director Anita Dunn, advocates for the repatriation holiday, and includes Intel, Cisco, Hewlett-Packard, the Semiconductor Industry Association, and “TechNet,” a separate lobbying coalition that counts as its members Google and Facebook.”

    http://www.salon.com/2014/03/19/more_evil_than_genius_how_ipad_and_google_glass_makers_are_secretly_scamming_america/

    Dayen’s larger argument is bogus. You don’t tax the Chinese government in the US just because they invest in US Treasuries. Making every entity that bought US Treasuries subject to US tax law would be a real quick way to end the preferential interest rates that the U.S. government enjoys.

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  5. Brent Nyitray, on March 19, 2014 at 10:18 am said:

    And the US dollar as a reserve currency.

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  6. lmsinca, on March 19, 2014 at 11:09 am said:

    As a footnote to our Vegas trip last weekend it looks like the big solar project we’ve been watching them build is up and running. It was surreal looking and very futuristic. You could see what looked like an ocean (thousands of solar panels) below these three large towers with huge reflectors on them and the light literally lit up the atmosphere around the towers in triangular shapes. Anyway, it was very impressive.

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  7. lmsinca, on March 19, 2014 at 12:47 pm said:

    This appears to be an interesting (to me anyway) legal case in Mississippi. I’m a bit of a prude when it comes to drug use (even prescription) during pregnancy, but according to the piece, the science doesn’t really support drug use as a cause of infant death in this case and possibly others as well.

    The case intersects a number of divisive and difficult issues — the criminal justice system’s often disproportionate treatment of poor people of color, especially in drug prosecutions; the backlash to Roe v. Wade and the conservative push to establish “personhood” for fetuses as part of a broad-based strategy to weaken abortion laws. A wild card in the case — Mississippi’s history of using sometimes dubious forensic evidence to win criminal convictions over many years — could end up playing a central role.

    http://www.propublica.org/article/stillborn-child-charge-of-murder-and-disputed-case-law-on-fetal-harm

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    • ScottC, on March 19, 2014 at 1:24 pm said:

      lms/jnc:

      This is the kind of subtle but prejudicial framing that I always find interesting. From the article:

      …part of a wave of “fetal harm” cases across the country in recent years that pit the rights of the mother against what lawmakers, health care workers, prosecutors, judges, jurors, and others view as the rights of the unborn child.

      Why not simply say “pit the rights of the mother against the rights of the unborn child”?

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  8. jnc4p, on March 19, 2014 at 1:08 pm said:

    Thanks for the link lmsinca. I always like propublica.

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  9. lmsinca, on March 19, 2014 at 1:22 pm said:

    Hey jnc, do you happen to know anything about John Rizzo or his book “Company Man”?

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  10. jnc4p, on March 19, 2014 at 1:30 pm said:

    I know the name, but I haven’t read the book.

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  11. lmsinca, on March 19, 2014 at 1:34 pm said:

    Okay thanks.

    Scott, presumably they’re referring to those who bring forward the cases or judge the cases, but I get your drift.

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  13. lmsinca, on March 19, 2014 at 2:52 pm said:

    Thanks jnc, I’ll check it out. It’s probably been six months since I’ve actually read anything over there…………….just realized how out of touch I am. Not that reading the WP keeps one in touch………………hahahaha!

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  14. Whitaker. Motherfucking. Chambers, on March 19, 2014 at 3:49 pm said:

    Lying about AGW is totes cool cause Science!

    https://twitter.com/AmyOtto8/status/445994688156557312

    Why do you hate Gaia?

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  18. novahockey, on March 20, 2014 at 8:28 am said:

    Is it Friday yet? good lord.

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