New Developments Threaten To Burst China's Staggering Housing Bubble

JP Morgan

$('.icon-tooltip').tooltip();In late 2011 many were expecting China's property bubble to burst. It looked as though housing prices had peaked and signs of stress were beginning to appear (see discussion). But the correction turned out to be quite shallow and in spite of China's government's multiple attempts to arrest housing price appreciation (and partially succeeding - see post), house prices went on rising.

With real rates on deposits remaining in negative territory for years, there were few places to turn for wealthy savers. Property became one of the primary vehicles to put away excess cash to escape inflationary pressures. Moreover, municipal governments made large sums of money selling land to developers, while banks ("encouraged" by municipalities) have been happily lending. And in many cases lenders and developers have set up arrangements that are a bit closer than "arms length" (see discussion). Except for ordinary families who got shut out of the housing markets, everyone benefited from this rally.

Housing investment as percentage of GDP has been growing unabated, and in recent years started approaching levels that other nations experienced at the height of their property bubbles.

Credit Suisse

Now, based on the house price to wage ratio compiled by the IMF, China's large cities have the most expensive real estate in the world. Beijing is particularly expensive, as party officials deploy their "hard-earned" cash.

Creidt Suisse

And while Western economists debate if China's property market is truly a bubble, major Chinese developers are openly admitting it.

South China Morning Post: - China Vanke [one of the largest developers in China] chairman Wang Shi said the mainland's property market faces the risk of a "bubble", reiterating concerns the developer raised three months ago.

The bubble is not "light", Wang said at a conference in Shanghai yesterday. "If the bubble lasts, it will be dangerous."

Home prices have been increasing even as the government in March stepped up a three-year campaign to cool the market.

The measures have included raising down-payment and mortgage requirements, imposing a property tax for the first time in Shanghai and Chongqing, and enacting purchase restrictions in about 40 cities. New home prices jumped 6.9 per cent in May, the most since they reversed declines in December, SouFun Holdings, the mainland's biggest real estate website owner, said.

But bubbles can last for a long time. Are there indications that this market may have peaked? Two key economic developments point to rising risks to this multi-year housing rally.

1. Real rates on deposits have turned positive in China recently, which will reduce incentives to use property markets as a savings tool. If rich savers make more on interest than they lose to inflation, they are less inclined to look for alternatives to bank deposits.

Credit Suisse

2. The recent madness in China's money markets and PBoC's "delayed reaction" to tight monetary conditions (see discussion) could potentially spill over into the broader credit markets, resulting in increased lending rates and tighter credit conditions in general. That's not great news for property markets.

JPMorgan: - We expect liquidity conditions to ease in July, but in the near term, there is a risk that the tough line taken by the PBOC will create an artificial liquidity squeeze and cause an increase in the lending rate to the real sector (the SHIBOR rate also increased significantly, to 5.4%), putting further pressure on already-weak economic activity. In our view, the PBOC should reintroduce reverse-repo [injecting liquidity] operations very soon to calm the panic in the interbank market.

These threats to China's property markets, combined with weakness in manufacturing, do not bode well for China's near term growth prospects.

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Turmoil In Latin America [INFOGRAPHIC]

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IT'S NOT OVER: A Top Analyst Makes The Case For More Gold Carnage In This Brief Presentation

Credit Agricole

Gold has been getting unceremoniously crushed since it entered a bear market in April, with levels falling below the $1,200 mark this week.

At some point, one would expect the rout to swing back in the goldbug's favor, right?

Wrong, according to Crédit Agricole in a new report titled "Gold — No Relief On The Horizon."

"Our new end year 2013 and 2014 forecast is USD 1150 and 1050, respectively," wrote Crédit Agricole's Mitul Kotecha.

High U.S. yields, a firmer dollar, and struggling India/China demand leads Crédit Agricole to believe gold will continue to get crushed.

Kotecha lays all of this out in a brief presentation.

NOTE: Thanks to Crédit Agricole for giving us permission to feature these slides.

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Stocks Have Completely Erased Their Losses

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Janet Yellen Is A Small-Statured But Powerful Woman Who Has Wall Street Worried

AP

Janet Yellen

$('.icon-tooltip').tooltip();Janet Yellen is in the running to become the next chair of the Federal Reserve, and that has many bankers and Wall Street titans worried. The diminutive vice chair of the U.S. central bank — an academic economist who is married to a Nobel Prize-winning economist — is known to be a formidable intellect and a force on the interest rate-setting Federal Open Market Committee.

Her views on financial market regulation — an area where she’d have tremendous power as leader of the central bank — are less well-known.

“Her strengths are as an economist and thinking about macroeconomic policy and monetary policy,” said Tony Fratto, a former Treasury assistant secretary under President George W. Bush. “There’s no question that’s where the bulk of her experience is.”

The Center interviewed Yellen and reviewed her career through two stints on the Federal Reserve Board and as president of the San Francisco Fed Bank  — including speeches, meeting transcripts, government testimony and reviews of bank failures.

The picture that emerges is of an overseer who tried to point out dangers in the banking system before the situation came to a crisis in 2008, but who didn’t act forcefully against banks that she saw taking excessive risk because she didn’t believe she had adequate authority.

After working through the depths of the crisis and having a hand in closing more than a dozen failed banks  — including Washington Mutual, the largest bank failure in U.S. history  — Yellen now appears determined to ensure that banks fortify themselves against financial shocks and that regulators have the power to police the system.

Yellen is unlikely to push for revolutionary change, such as breaking up the biggest banks.

The Fed so far “has taken the view that we need the rules not to change too much,” said Simon Johnson, a professor at the Massachusetts Institute of Technology, who supports making banks smaller.

However, many expect her to be a tougher regulator than the current Fed chairman, Ben Bernanke, and she appears more willing to take strong action to stop banking giants from putting taxpayers at risk. But even so, the power of the Fed has its limits.

“They can’t stop all future crises, but it’s up to the Fed to make these crises more or less severe,” said Johnson, author of 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown.

Bernanke’s term ends at the end of this year and President Barack Obama has suggested that he may replace him.

She wants to require big banks to hold more capital than is currently proposed, to boost the margin requirements on derivatives trades and to require foreign banks that do business in the U.S. to hold capital in the U.S.  

“We would expect her to toughen rules for the biggest banks,” said Jaret Seiberg, analyst at Guggenheim Strategies in New York, in a client report. “We believe her elevation to chairman would be negative for the mega banks.”

Yellen was first appointed to the Federal Reserve Board in 1994 when Alan Greenspan was chair. She was at the Fed less than a year when she dealt Greenspan his first and only defeat in a vote over his 18 years at the helm.

The Fed’s Board of Governors was set to vote at a rare open meeting in 1995 to require banks to use a uniform formula to inform consumers of the true rate of return on bank CDs. Yellen and then-Vice Chair Alan Blinder were opposed.  

“The formula was wrong. It was just wrong,” Yellen said in an interview in her office. “I couldn’t stand it.”

On her way to the meeting, she complained to another governor about the faulty formula, invoking the image of her mother whose savings was in CDs. When it was time to vote, Greenspan had three yeas to Yellen’s four nays.

That Yellen dealt the notoriously laissez-faire chairman his one defeat in a vote on bank regulation is both amusing and telling.

“On the pro-regulation, anti -regulation spectrum, if we imagine such a thing, she is miles away from Alan Greenspan,” said Blinder.

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FRANK HOLMES: Gold Will Rally 15% Over The Next 12 Months (GLD)

Gold is back above the $1,200 level today, but the precious metal is well off its 52-week highs.

While some expect gold to tumble much further, Frank Holmes at US Global Investors expects the yellow metal to rally by about $200 over the next 12 months.

He said the low for the year tends to take place in June-July.

US Global Investors

"Markets are capitulating, there's liquidation and if you just look at the math of volatility, it is extremely oversold," Holmes told Business Insider. "That crowded trade would be how many people were short the commodity. And we like to take a lot comparing it to how has Facebook done, and how has Apple done in the past 12 months. Those stocks have lost more money, each of them individually, than all the gold, but people are fixated on gold going down."

Holmes also pointed to what all of this means for gold supply. Gold mining companies are producing gold at cost or are losing money. Their goal now is to drive down costs.

"We are going to see the supply of gold decline. That's a real key factor. And the junior companies are starved for capital, and them being starved for capital, most big discoveries come from juniors, and if they're starved for capital, there's going to be no success in exploration...

"We're below the cash cost for producing an ounce of gold. And what we're going to see is what we saw with natural gas, the huge explosion in the discovery of natural gas and immediately drilling stopped. All the drilling companies stopped that took supply away from the market. And I think you're going to start to see the same thing with gold."

Besides the technical break in gold, Holmes said the biggest two things he is seeing are the "short-term calamity in America and China with the punch bowl being take away allegedly," and India's higher taxes on gold imports.

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