This Stock Market is Really Sick, and Big Institutional Investors are Bailing out

Share on FacebookTweet about this on TwitterShare on LinkedInShare on Google+Share on RedditPrint this pageEmail this to someone

They’re slashing their equity allocations: BlackRock.

Stocks can’t seem to rally for more than two days in a row before getting hammered down again, punishing dip-buyers with relentless regularity for doing what had worked flawlessly for years.

Today’s swoon — S&P 500 and Nasdaq down 1.6%, Dow down 1.3% — put an end to the short-covering rally that started midday Wednesday, when the S&P 500 bounced off 1,812 and then rose 5.3% by late Friday. Draghi had given the buy signal.

“By the end of the week, weary investors had returned to an old habit: looking to central banks for solace,” wrote BlackRock Global Chief Investment Strategist Russ Koesterich, Monday morning before it all fell apart again.

But despite the vague promises embedded in Draghi-speak, it didn’t last long. Overall, it was a puny rally compared to the brutal selloff that had started at the end of December. The S&P 500, at 1,877, is now back exactly where it had been on March 10, 2014. Despite all the drama and volatility, it has gone nowhere in nearly two years — not counting anguish, fees, and taxes.

Large institutional investors are starting to figure this out too. And they’re planning to bail out of this cursed market.

BlackRock, the world’s largest asset manager, polled 174 of its largest institutional clients, including corporate pension funds (34%), public pension funds (25%), insurers (25%), endowments and foundations (7%), investment managers (6%), official institutions (1%), and others (4%). This might be an adequate sample of all institutional investors.

The poll, conducted in December, sought to find out about changes in their asset allocations for 2016. The results are not exactly a vote of confidence for this stock market.

“Institutional Investors to Embrace Illiquid Assets….” That’s how the headline of the announcement started out. And they would do so “to combat macro-economic trends, anticipated market volatility, and divergent monetary policy.”

The report explained the phenomenon this way:

Recent market volatility is driving a repricing of assets globally. The ripple effect from recent events is causing investors to actively manage risk and seek alternative sources of returns.

Investors are attempting to look past the current market environment and find alpha generating opportunities that match their liabilities.

So forget stocks. Only 18% of these institutional investors plan to increase their allocation to equities, while 33% plan to cut their allocation, for a net 15% reduction, globally. In the US and Canada, the feelings are much stronger: 50% plan to cut their stock portfolios.

Sell, sell, sell. But what are they going to buy? Not bonds.



These folks are also lightening up on bonds: 24% plan to increase their fixed income portfolios, while 30% plan to cut them. And the remaining fixed income portfolios are getting riskier, with funds shifting from core allocations to private credit, securitized assets (collateralized loan obligations and the like), and US leveraged loans (which helped fund the now collapsing US energy companies).

With reductions in equities and bonds, what are they going to buy?

“Long-dated illiquid strategies,” that’s where asset allocations are heading. In order of magnitude of the shift: private credit (“over half” plan to increase their portfolios), real assets (53% increase v. 4% decrease), real estate (47% increase v. 9% decrease), and private equity (39% increase v. 9% decrease).

The report offered two reasons why investors are fleeing into illiquid assets: to earn the higher return premia that illiquid assets offer, and most prominently, to escape the volatility of stocks and bonds.

Illiquid assets — because they aren’t regularly traded, there is no pricing data — have an advantage over stocks and bonds for institutional investors in these trying times: their losses don’t have to be booked every time a statement goes out. Losses aren’t known, and certainly aren’t disclosed, until years down the road.

If the stock and bond markets crash, if junk bonds completely collapse, so be it. The values of these illiquid assets will remain stable, and the pension fund managers can sleep at night. This is not a strategy to reduce risk — some of these illiquid assets are very risky. It’s a strategy to dodge the requirement to book losses when asset prices head south.

It’s a sign that institutional investors have soured on stocks and their potential trajectory. No one minds being required to book gains. It’s the part about booking losses that is painful — and that these folks are trying to avoid.

These changes in asset allocation away from stocks will have a special effect on the market. When large institutional investors unload stocks en masse, however gradually they’re trying to do this in order to not crush the market on their own, it’s going to get a lot uglier out there.

Turns out, this stock market faces a host of issues — on the junk bond side. Read…  This is Why Junk Bonds Will Sink Stocks: Moody’s



Share on FacebookTweet about this on TwitterShare on LinkedInShare on Google+Share on RedditPrint this pageEmail this to someone

  55 comments for “This Stock Market is Really Sick, and Big Institutional Investors are Bailing out

  1. Bruce Adlam
    January 25, 2016 at 10:05 pm

    Buying over priced real estate is very risky too you can hide your losses unless you have to sell

    • January 25, 2016 at 10:34 pm

      I agree. Sounds like a recipe for disaster.

      • nick kelly
        January 26, 2016 at 5:18 am

        But not a guarantee- which is what this stock market is. Real estate, unlike stocks is regional. There is expensive and there is cheap and there is in between. You can ‘force’ appreciation in a property by renovation or even a cosmetic clean up.
        But you would do better in cash than in this stock market.
        Somewhere on this site, or maybe it was on CNBC there is the chart of the five periods most similar to today- beginning with 1929 and ending with 2008. There is another one to two years of down coming
        Not only do they ring a bell at the top in this case they fire off a bunch of flares

    • Indiana Joe
      January 26, 2016 at 11:24 pm

      Overpriced real estate does not exist. How much do the canvas and ink of a Van Gogh cost? Is that rational?

      Given the tax law on foreign pension fund investment in US real estate has recently been reduced, it’s fairly likely (51%) that US real estate will be going to the moon. Does anyone here think that QE4 won’t be starting within the next year?

      Since the workers are not driving this real estate boom, you can assume they are completely unecessary for its perpetuation.
      The surplus any ‘worker’ can get for their labor above their ‘basic needs’ is being squashed by rampant money printing. Compare the global gdp contribution of labor vs that of money printing. Trillions will flow here (how long, who knows?). Any surplus a worker gets is consumed by rents from real estate and associated taxes. It’s about forced displacement, followed by eradication.

      As robots will replace the workers soon enough, the owners of capital can expect to reign supreme.

      Our only hope is that president Trump will so tick off the world, they’ll invest in large floating islands instead!

  2. Vespa P200E
    January 25, 2016 at 10:09 pm

    Larry Fink the head of Blackrock and vociferous ardent Wall St bull using Blackrock’s mouthpiece chief strategist to beg for more “solace” from CBs? So what else can Janet do for you Larry? QE IV and back to ZIRP so you can front run the trades of your own muppet clients?

    Hey the big institution boys – please exit in orderly fashion (their private accts) while exhorting buy & hold, buy at the dip, don’t panic, etc. mantra on CNBC (?)

  3. Kevin Beck
    January 25, 2016 at 10:50 pm

    The idea that the losses don’t have to be booked is somewhat hilarious, if not bizarre.

    Assets without liquidity are fine if your time horizon is infinity. But when payouts are required, there has to be cash to cover the bills. The person to whom the pension payment is owed probably will not take an IOU from an investment bank that is backed by some asset that cannot be identified and has no ready market for redemption. Are they going to substitute a 10% interest in a condominium project for the payout? Or a 10% working interest in an oil well that’s not producing because of low prices for the end product? And illiquid assets lead to forced sales, when cash has to be raised for payouts.

    I know that might seem comical, but there is a reason that marketability is a good thing for asset managers. I don’t really have too much interest in seeing how these issues get resolved.

    • B Tilles
      January 26, 2016 at 9:42 am

      Hi Kevin,

      One question: is it possible for real estate to have a negative value upon liquidation? Aside from interest expense, which might be considerable, a vacant or lightly tenanted building incurs considerable ongoing expenses for property taxes, utilities, maintenance, insurance etc. which may not be offset by current cash flows.

      Wolf’s article yesterday on an asset liquidation in the oil patch got me thinking about this. If I recall bond holders received maybe ten cents on the dollar.

      A friend of mine once described price discovery in a down market as being a bit like bare knuckle boxing at the turn of the last century: ugly, bloody and brutal. But you did find out who was the best. Perhaps a capitalist fable for our times.

      • Petunia
        January 26, 2016 at 10:31 am

        Yes it is possible for real estate to have a negative value for the seller. Some years ago I bought a house where the seller had to bring money to the table to get rid of the house. He was a job transfer, so his company made up the difference, but otherwise the house was never worth what he paid for it again.

      • nick kelly
        January 26, 2016 at 2:18 pm

        Properties with contamination can have huge negative value

  4. Cameron
    January 25, 2016 at 11:32 pm

    “Things have just stopped in China,” said George Logothetis, chairman and chief executive of the Libra Group, an international shipping firm, speaking…at the World Economic Forum in Davos, Switzerland. He described the situation as ‘Armageddon level.’

    The Baltic Dry Bulk Index, sometimes viewed as a proxy for global trade, peaked out just before the 2008 financial crisis at 11000 points. On Wednesday, it closed at 358.”

    http://www.wsj.com/articles/dry-bulk-shipping-firms-face-unprecedented-crisis-1453293892

  5. hidflect
    January 26, 2016 at 12:00 am

    I’ve read that Ferrari sales in Japan are at an all time high while the economy slumps worse than ever. Money needs to have a use-by date. The idea that just on the basis of some transactions made a century ago by some distant relative, some inheriting trustafarian can then demand goods and services from complete strangers without having done anything to show for the demand skews the productivity of the economy.

    • Jonathan
      January 26, 2016 at 2:29 am

      Yup the whole idea is entirely ridiculous. There really needs to be a progressive inheritance tax force accumulated wealth into good use instead of being hoarded uselessly by a private party.

      But of course the opposition from the elites would be massive, just as large as their egos and sense of smug entitlement. Their rebuttal would be a very well crafted version of “life aint’ fair, get over it”, if the politicians somehow miraculously resisted their bribes and managed to got the ball rolling. I won’t be holding my breath for that.

      • night-train
        January 26, 2016 at 3:22 am

        Jonathan: The GOP came up with the term “Death Tax” to gain support from the regular folks who would never have had to pay it anyway. Sounds scary doesn’t it. It is part of the Trickle Down or Supply Side economic theory. Just cut the really wealthy’s taxes enough and they will invest their extra winnings, I mean earnings, in the economy and create jobs for their lessors. Been in play since the early 80s and it’s about to work. Anytime now. Anytime. You just wait. Anytime. Tick tick.

        • Petunia
          January 26, 2016 at 9:01 am

          Just so you know, in America there is a death tax that affects all working people. It is called medicare. I recently lost my mother in law after a long illness in a hospice. The only major asset she had was a very small cheap condo, worth less than 50K. It will be sold to pay off the medicare debt she incurred by becoming ill. This is after my in laws spent a life time paying into the medicare system. Don’t get sick in America because it will cost you everything you own if you are an average working stiff.

    • nick kelly
      January 26, 2016 at 5:39 am

      Japan has more earned wealth than the English speaking victors in WWII. Most urban real estate was destroyed
      Sochihiro Honda first began using small engines salvaged from portable generators to motorize bicycles in 1946-47, when Ford was already the largest maker in the world.
      Similar stories can be told about many Japanese companies, although of course many banking and trading outfits are old timers.
      People confuse the precarious finances of government with the fact that Japan remains an export powerhouse. You can see similar remarks about the US- on paper it’s broke yet is also immensely wealthy

      Re: a time- dated money. Japan has experimented with a version of this. Certificates good for purchase of consumer durables were sent to each house but they had an expiration date. Don’t know the details.

  6. Keith
    January 26, 2016 at 3:16 am

    A dark shadow hangs over the world, an opaque market that operates out of sight and dwarves all other markets, i.e. complex derivatives. This market is currently estimated at 1.5 quadrillion.

    We become aware of its existence when it blows up problems in other parts of the world and transmits them internationally. Before 2008, banker’s said they made the financial system safer by spreading risk through the system, 2008 showed conclusively this was not the case.

    In 1998, a small firm collapsed and posed a systemic risk to the US and Western financial system, Long Term Capital Management (LTCM). A small firm used the incredible leverage available through complex derivatives to place bets on activity round the world. It’s poor judgement on the situation in Russia, turned this small firm into a financial black hole and initially everyone was terrified at the extent of possible losses. In the end the problem was manageable with a huge bailout.

    In 1999, the decision was made not to regulate derivatives.

    In 2008, for the first time ever a housing bust in one nation spread out across the world through complex derivatives. Again a financial black hole had been created and everyone was terrified the Western financial system would collapse. In the end the problem was manageable with unprecedented bailouts across the world.

    James Rickards in Currency Wars gives some figures for the loss magnification of complex financial instruments/derivatives in 2008.

    Losses from sub-prime – less than $300 billion
    With derivative amplification – over $6 trillion

    Complex derivatives multiplied losses by twenty times and spread them around the world.

    The complex derivatives market that creates potential financial black holes has grown considerably since then.

    The visible markets around the world have already lost over 1 trillion in value. The loss multiplier of complex derivatives is yet unknown. It is only when the dark star, the financial black hole blinks into existence and everything starts getting sucked in will we realise the danger.

    Third time lucky for these financial weapons of mass destruction.

    (Warren Buffett in 2002 used the term financial weapons of mass destruction to describe complex derivatives).

    • Nicko
      January 26, 2016 at 6:24 am

      Ok, so how best to position one’s self to withstand the firestorm?
      I’m guessing Ca$h, and real estate in safe havens?

      • Keith
        January 26, 2016 at 6:46 am

        How it plays out is a difficult (impossible) question to answer.

        How Central Banks react to the problems presents another unknown.

        It looks as though deflation will be the problem where cash is king.

        But ……

        If Central Banks go into helicopter money mode then there could by inflation/hyper-inflation and gold is a good bet.

        From things I have read, those who can are setting up a nice little bolt hole in New Zealand or similar so they can run away as their crisis engulfs everyone else.

        Diversification is probably the best bet, to handle as large a range of possibilities as possible with fine tuning later when you can see the way it is panning out inflation/deflation/collapse.

        Jim Rickards suggests something along these lines and he knows what he is doing (I think). He likes gold and silver, they may not be the best but they will always maintain their value.

        • Spencer
          January 26, 2016 at 9:49 am

          Hugo Salinas Price has a nice piece on re-evaluation.

          http://www.plata.com.mx/mplata/articulos/articlesFilt.asp?fiidarticulo=281

          Somehow the debt accumulated will have to be dealt with. A lot of people are going to get a severe beating from all of this.

        • polecat
          January 26, 2016 at 12:15 pm

          ‘Diversification’ ……….. what a weasel term that word is…. What say you, Rickards, or others with multiple assets, to those of us (in the millions) who have nill or none…….?? I’ll tell you what asset will increase in value…….LAMPOSTS

        • Peter forsyth
          January 26, 2016 at 4:47 pm

          Silver is a high ride and not to be treated like gold.

        • d
          January 28, 2016 at 7:24 am

          “From things I have read, those who can are setting up a nice little bolt hole in New Zealand”

          If it all turns to dust up there, stay there, you come down here we will let the native’s eat you. As they domt like working for their food.

          I will use you for fish bait. If they dont get you.

          You lived the benefits up there, you live the pain to.

          WE DONT WANT YOU DOWN HERE.

      • Michael Gorback
        January 26, 2016 at 8:03 am

        Real estate is ok if you have some gold buried in it. :) Real estate can be an inflation hedge but in many areas right now it’s already overpriced. It’s also illiquid. In a deflationary scenario paying the note gets more expensive. I just don’t see buying it right now.

        Cash in case of deflation, gold in case of inflation. IMHO the CBs will eventually lose the battle against the overwhelming force of debt deflation but not before going totally Japanese.

        • Chris
          January 26, 2016 at 8:14 am

          Gold would have to drop considerably in order to be a good buy at this time, IMO. We are witnessing a global slowdown. Manufacturing is down and there is a collapse in the price of metals and oil (due in part to Saudi Arabia). Consumers are not buying and companies cannot make their products cheaply enough to convince them to buy. This is deflation. The only safe haven is cash. However, once the pendulum swings the other way there will be massive inflation. Gold will be a good hold at that point. In the meantime, hold cash until the price of gold drops.

        • Petunia
          January 26, 2016 at 10:25 am

          I think in the future only things with utility will hold value. Gold is not a high utility commodity. My utility argument is held up by how people are currently spending.

          Many on this site criticize the stupid consuming public for buying cars they don’t need. People are buying new cars because they need them and the economics of car buying support the activity. It makes sense to them to trade in limited utility in the future for more utility in a longer future. Most new cars cost less per month to carry than old ones.

          You can also see this in the smart phone/computer choices being made. Phones are cheaper and do almost everything they need, so they scale back.

          The ultimate utility is in cash because it will buy anything. In a deflationary environment things don’t hold value. I would be holding a basket of physical currencies and renting everything.

        • d
          January 28, 2016 at 7:28 am

          Carefull where and what the real-estate is.

          It can and in many cases will be socalized/confiscated (rusia, china, vietnam, DPRK) by takers, who do not wish to support themselves..

    • Iggy
      January 31, 2016 at 11:56 am

      So true and so right.
      Mankind just is unable not to follow permanently into the eternal return of the identical.
      It’s like the planet has no other way of cloning and repeating the same patterns again and again

  7. Chris
    January 26, 2016 at 3:31 am

    The great shell game continues. Fund managers move their investments from one sick dog to the next. The only difference between the stock/bond dog and the illiquid asset dog is that the former has an obvious case of rabies while the later has a latent case of cancer. Other than cash and US securities (for now) there is no safe harbor. Either way, both investment options of stocks/bonds and illiquid assets are dead dogs. Neither are long for the world but at least the cancerous mutt may linger on for a while longer. Just make sure it has a nice collar on and is recently bathed before you take it for a walk. Maybe you can unload it on some unsuspecting sap before it gets too sick.

    Well, when in the casino, you may as well double down. I’ll have a Manhattan with my new hand, thanks!

    • Vespa P200E
      January 26, 2016 at 11:05 am

      Add to this the banksters tendency to hide the non-performing loans and tried & true hide the weenie – EXTEND and pretend that the loan in default will eventually revive and make payments – yeah right.

      I suppose extend and pretend the loan defaults till the economy improves or something. And we have the Fed allowing the banks to play this game also afraid of mounting bad debts. But the reality is that debt is either paid off or defaulted but banksters along with CBs in denial would rather kick the bad debt can down the road…

  8. walter map
    January 26, 2016 at 8:18 am

    Global demand for antidepressants should remain strong.

    When all the world is flooded
    And I’m about to die,
    I’ll climb up on my finance book
    Because it is so dry.

  9. Michael Gorback
    January 26, 2016 at 8:38 am

    Derivatives can hedge risk but in doing so they encourage more risk-taking. If the credit market is highly accomodating the risk behavior increases until credit has leaned out over the tips of its skis.

    • Vespa P200E
      January 26, 2016 at 11:11 am

      Guess who bailed out AIG the ex-con master of derivatives and paid the banksters off? US government of course with taxpayer money.

      So what the heck – why not go all in on risky derivatives bet knowing that the counterparty (US Fed/Treasury) will always bail them out?

      You see there are TERRIBLE consequences to the government not allowing bad deals to blow up as would be in capitalist society but we have sick case where losses are socialized and gains are privatized. Banksters win every time.

  10. walter map
    January 26, 2016 at 10:32 am

    Yikes.

    Former BIS Chief Economist Warns of Massive Debt Defaults, Need for Debt Jubilee; Fingers Europe as First in Line

    http://www.nakedcapitalism.com/2016/01/former-bis-chief-economist-warns-of-massive-debt-defaults-need-for-debt-jubilee-fingers-europe-as-first-in-line.html

    You know it’s going to be really really bad when even the banksters start sounding like socialists.

    • B Tilles
      January 26, 2016 at 11:12 am

      Hi Walter,

      Ask yourself a question. As a policymaker you have maybe $4 trillion to plug a huge financial, mortgage related hole blown into the system by a combination of greed, fraud, stupidity with a smidge of willful ignorance. The perpetrators? Large banks, Wall St., rating agencies– the by now usual suspects.

      Who would you give the money to? The perps or the victims.
      If it makes you more comfortable substitute the term reparations for jubilee.

    • Vespa P200E
      January 26, 2016 at 11:17 am

      Yep read that on UK Telegraph last week.

      Note that he is “former” BIS honcho and probably asked to leave for refusing to drink the Kool Aid and tell the truth.

      In the mean time I read about how the new leg down is not going to be severe as Lehman/BS of 2008, etc. LOL yeah like they really know when things are blowing up all over EM and especially China and CB cabals of the world running out of easy money QE/ZIRP ammo. Which means it can get lot worse than 2008.

      • Chris
        January 26, 2016 at 11:25 am

        I truly hope what I’m about to say is wrong but the coming train wreck will make ’08 look like Mr. Toad’s Wild Ride in comparison. The CB’s did nothing but make matters worse with all the excessive money printing. The era of Consumerism is over. It failed. We are headed, not for a recession, but a depression. The FED and its cohorts in the banking cabal are out of ammo. The chips will fall where they may. In the long run this may be for the best. In the short run it will be very bad.

        • Vespa P200E
          January 26, 2016 at 12:12 pm

          ” The era of Consumerism is over. ”

          Indeed as even the head of Ikea lamented that people are done or maxed out of buying stuff. China the world’s factory is busy closing plants and many workers who haven’t been paid (still get free housing and meals) show up to find the factory owner left the town. These workers along with construction workers from the country side are powder kegs – unemployed, broke and angry over wage not paid…

          BTW – many of the past Chinese emperors were taken out of power due to peasant uprisings and BIGGEST fear of commie comrades.

        • economicminor
          January 26, 2016 at 1:10 pm

          If you take the S&P 20 yr chart and draw a line from the lows in 2001 across the lows in 2009 that line ends up around 950.

          Right now if you take the low in Oct 2014 and the low in Aug 2015 and the low in Oct 2015 and draw a line. This is the resistance line we are currently bouncing along.. IF or when it breaks down thru this line with volume the next resistance today (moving line) is around 1788.. IF / when it broke thru this resistance the next real resistance is the 2009 lows and then the 950.

  11. Vespa P200E
    January 26, 2016 at 11:24 am

    I think Europe will face more turmoil due to migrant crisis after hearing about Germany, Sweden and Calais France.

    What the hell did Angie and liberals in Brussels expect allowing 1mil Muslim migrants of which 700k are young single men from North Africa (perpetrators in Sweden and Germany rapes), Iraq, Syria, Pakistan and Afghanistan? This is indeed “cloaked” jihad trojan horse and expect another million plus to arrive this spring now that the word is out of comfy everything free life in socialist leaning Europe.

    I saw TV interview on PBS about asylum seekers in Sweden and get this all 5 interviewed traveled to Sweden from Italy using fake passports that cost $2k. IF they are migrants than where in the hell did they come up with that money (wired from relatives with hopes of joining the exodus).

  12. memento_mori
    January 26, 2016 at 12:15 pm

    I dont think economics is a science as physics or maths etc, hence it is a guessing enterprise and everyone has an opinion and everyone could be right because we can only see things in hindsight and never know what the outcome would have been if a different decision would have been taken at a certain point in time.
    Case in point, the decision to go full retard with QE and bail out the banks. Lots of people claim it was a success others are asking for more QE right now. The truth is we would never know what would have happened if we there was no QE at all, maybe we would be in a better position, maybe not, such is the guessing science of economics, and that is why so many people are economists, it is easy to have an opinion. My grand mother has one too, and she probably could make a better economist than many out there.
    The same thing is going on now with deflation and the prevailing theory seems to be that we need negative rates because of savings glut.
    I would say if there are so much savings out there and we want some inflation, maybe jacking up rates to 4 or 5% instead rather than going negative will unleash some inflation as people are more prone to spending interest income than capital. But of course we will never know because only one decision at a time will be taken and right now it seems to be low to negative rates.
    Where do you invest your money then in this environment?
    I am paying down my mortgage as soon as possible and making sure I am debt free. Why pay interest to the bank where the banks pays me 0% on my savings?
    If there is any leftover, I am investing in myself , getting a second degree, skills are things the government can’t take away from me and hopefully give me more flexibility in whatever environment I find myself in the future.
    But I agree, it sucks out there to be an investor, the amount of risk is too big for such a small marginal benefit.

  13. Mark in Denver
    January 26, 2016 at 12:40 pm

    Wolf,
    I assume that institutions would be investing in commercial real estate. However, your recent column on the bubble in commercial real estate would call that into question. How is this investment likely to work out for them?
    http://wolfstreet.com/2015/12/07/when-will-the-craziest-ever-commercial-property-boom-implode/

    • January 26, 2016 at 1:44 pm

      Commercial RE in the US will come under heavy pressure. There are already problems at regional malls. A building boom in apartments is putting a huge wave of units on the market this year and next year. Manufacturing in the US is certainly not expanding… Credit is tightening. And the classic 7-year cycle of commercial RE is now peaking.

      On a national basis, the boom hasn’t turned yet, as far as I can tell, but problems are cropping up locally. I’ll keep my eyes on it.

  14. Vespa P200E
    January 26, 2016 at 1:00 pm

    Talk about BIG investor going bust – how about John Paulson’s situation?

    Astute yes but he is having to wager in his own money as collateral after his wrong bets on Puerto Rico and Greece both in defaults. And another wrong way bet on controversial Malinkrodt… Guess there is price to be paid being contrarian here but geesh one would think Paulson knew better on the perennial defaulters PR and Greece getting cut from the market…

  15. economicminor
    January 26, 2016 at 1:15 pm

    About Real Estate… I am wondering about the commercial paper. I have been thru some regional malls since the first of the year and they have a lot of empty space.. My guess is that there is or will shortly be a huge problem with REITS as with the consumer cutting back quicker than most anticipated, isn’t this going to put tremendous downward pressure on the commercial retail space.. which I’m not sure as I have no way of knowing, but I would assume that most of it is highly leveraged.. then with utilities, security, upkeep, taxes and etc. that much of it would be or becoming underwater so to speak..

    Anyone, Wolf, got anything on this?

    • Petunia
      January 26, 2016 at 1:46 pm

      I recently talked to a couple of RE agents in South Florida who told me houses are renting very fast and rents have climbed. My own rent is up 6% for the year and they tell me it will go up every year. All the big REITs own houses here.

      For the past 4 years the commercial space in the malls has been flat to down but last week I went to one I haven’t been to in the last few months and there were many more tenants. I was surprised to see it. Reporting from the front lines…

      • economicminor
        January 26, 2016 at 4:42 pm

        From looking at stocks and the underlying fundamentals I would be careful as real estate is often the last bastion of hope… Rents are part of the problem with consumer retail.. to many homes controlled by the private equity. At least that is what I read.. So any of that PE that is also into retail in any way or stocks or junk bonds is going want to sell..

        Also as this rolls out, more and more jobs will be cut. And Florida is one of those spots where foreign buyers were happy to try and hide some money.. Well, that is also going to be interesting as the EM are in such a dump.. Are any of those buyers hedged the wrong way?

        Just saying the world always looks the rosiest at the peak..

        • Petunia
          January 26, 2016 at 5:28 pm

          The new condo sales in Florida are being affected by the South American buyers disappearing, mostly from Venezuela and Brazil. The Canadian dollar is also hurting sales. China was never a big player here.

          The RE agents I was referring to said that everybody these days wants to rent which is why rents are increasing. They say people value being mobile due to the job markets being very volatile. I am one of the rent poor so retailers can’t count on me to bail them out.

  16. kayjay
    January 26, 2016 at 1:48 pm

    An important article by Robert Gordon/NW Univ. has rattled too may cages which ties economic growth to productivity growth and the on-going “deflationary” forces that have been set en-train. The problem is that internet unleashed productivity is vertually impossible to measure and Gordon has no way of measuring the “progress”/changes that have taken place. A few examples: I don’t have to mail my utility checks to the providers and I am fairly certain that they will arrive on time instead of worrying about their arrival date. I can even pre-schedule payments in my bank account and the bank will transfer the funds w/o my writing and mailing the check. Mailmen lose their jobs in the process and this gain in productivity which is deflationary and “subtracts” from economic growth, but increases productivity, yet, does not show up in National Income Accounts, and thus, Gordon’s model.

    Economic seers, mostly unwise, miss this increase in growth and see it as lowered growth when in fact, it is an increase in productivity. Stock market speculators acting as herd see nothing but lowered growth on the horizon and bet against the stock-indices, a possibility that just did not exist may be 35 years ago. Ergo, shoot the stock indices.

    The global data does not look bad: China (discounted) at about 3% growth, U.S. at ~ 2-3%, India at ~ 6 to 7%; even Germany is growing a little. So, now you have accounted for about 80% of the global economy and have around 3%+ growth, may be more. This is not deflation, esp. considering productivity increases ! So, why all this concern about lack of long-term growth and its blowback on stock markets. Essentially, you are dealing with not very bright lights. Few othe remarks:

    1/ with so much illegal immigration, are these new denizens unemployed? If not, how is that under-ground economy measured, if at all. They obviously are not starving!

    2/ I wrote on another site (NC) some time ago that oil prices were rigged and an accident and long term auto efficiency trends militate against current prices. Sure enough that has happened.

    3/ I wrote that some thing was afoot when house prices were much higher than expected in a town of interest to me north of SF. Sure, enough, the lowered USD was bringing in Canadian, Australian, Chinese and So. Am money which caused the SF people to move up north collecting lots of profit and jacking-up prices in those areas.

    4/ Current oil prices now are being manipulated by a vast pool of speculative shorts and soon may be 3-4 months, are likelyto give way to a moderate equilibrium and help the large banks despite the Iranian factor.

    So, I say seer beware!

  17. Julian the Apostate
    January 27, 2016 at 9:12 am

    Kayjay, your points about online bill payments and the demise of snail mail are on target, I’ve been resisting the changeover but have lost several pieces of mail or it takes two weeks to go 350 miles. Am planning to switch over soon. Your other arguments however prompt me to remind you that Denial is not a river in Egypt. A hundred years ago they might have had merit, but the immigration in the Ellis Island days is but a fond memory, and the new unwashed hordes sign up for social programs and don’t work, for the most part. Also they come here (and Europe) with an identifiable agenda: whether La Raza wanting to reclaim territory lost in the Mexican War or the Islamists wanting to bring on the Caliphate and spread Sharia Law, or just the Democrats wanting to have a built-in majority. The Boomers are aging fast, and those homes will go on the market and there won’t be enough buyers to pick up the slack. The Millennials are not buying houses and therefore aren’t outfitting them. Each time a pillar collapses, like oil, coal, or manufacturing it takes out the whole support system and this trickles down to massive unemployment. The unemployed don’t support the economy either, and when the digitalized money printing finally collapses there will be riots in the streets. And don’t forget: the Internet has an off switch. If it goes down every piece of equipment that relies on it will stop working. Economics isn’t an exact science but
    it operates in cycles. My grandparents weathered the Great Depression. Most people were still tied to the land back then, and what money there was bought more. There was still silver in circulation although Roosevelt outlawed gold. There are good arguments for holding cash AND gold and silver. Don’t wait to buy the gold and silver: when King Dollar collapses you won’t be able to buy at any price. Remember that the price of gold and silver do not change; what changes is the value of the local currency.

  18. Doc Holiday
    January 27, 2016 at 3:46 pm

    This seems to be a story about rental income as a proxy for bond yields, but I’m curious about the implications of illiquid collateral and taxes. Is this an all cash game, where investors buy homes (in all-cash deals) and then just move forward as landlords, making profit from rent and playing the Monopoly Game? If so, local property taxes and depreciation, bad renters, and all those little nagging problems would eventually surface in the form of decreased yield. If anything, this is a short-term game to drive up home prices and lure lemmings back-into an over-valued asset trap and return us to the glory days of 2007. The Flippers of 2018 will become High Frequency traders in an unregulated market. This apparently will be part of the Macro Momentum Bubble that JPM has recently alluded to.

  19. d
    January 28, 2016 at 8:01 am

    Bailouts.

    20/20 hindsight.

    It would have been much cheaper for the fed to bailout and takeover Lehman, at a much higher paper value. selling its assets at a more fiscally opportune time.

    Than the results of letting it collapse, and be taken for pennies on the dollar. By wall street

    So not all bailouts, are bad.

    The bailouts given to many banks after Lehmans, were bad, particularly those in Europe.Which in reality, rewarded imprudent risk taking.

    The key to this whole mess is still

    How much debt, and more importantly bad debt, does china really have.

    How much undeclared CNY in cash, state guaranteed, and not state guaranteed bonds, is really in circulation.

    If it unravels in a hurry overnight, which it can in china. A big truck load of of 100 CNY notes, could be worth less than a Continental. In the morning.

    Then anybody who has debt, that exceeds on hand liquidity, will have a problem,as chinas mess unravels.

    I think before that happens, china will start a war. They will blame on others, So they dont have to pay, till its all been inflated away.

    • Chris
      January 28, 2016 at 10:25 am

      From what I’ve read China has an incredible amount of bad debt. There are, literally, entire cities that have been built that are vacant. Massive shopping malls with no vendors and no foot traffic. The amount of bad debt in China must be staggering. War, maybe. Let’s hope not. Suffice to say, China is NOT the engine of growth for the global economy. That 7% annual growth that the communist party always boasted about was all built on debt, and as it turns out, much of that debt is bad debt. We are about to witness a collapse of the greatest ponzi scheme in recorded history.

      • d
        January 28, 2016 at 10:56 pm

        many of the apartments in the ghost citys are owned but not occupied they are like bank accounts.

        However the resources to build the rest of the city are another matter, huge debts, not generating anything there except interest and service costs due..

        Yes the malls like the pentagon, huge, dead, and decaying, credit funded investment. Then the vacant industrial areas around them.

        Overcapacity on a massive scale, the only way to use it, is to destroy the industrial capacity, of the rest of the planet. Yet india wants to do the same??????????

        As the numbers weep out ,and old men start to ask WTF have we done here. The consensus is forming, that the annual growth numbers were false from day 1 Those 10 and 7 % numbers were closer to 4 and 3%.

        China is till trying to dominate international shipping, by flooding the oceans with new huge chinese owned ships, operating at a loss.

        one belt, one road, all operated, owned, and controlled by china, with all profit moving only to china. is the objective.

        The money has been moving to china, and staying there, (Building ghost city’s) for to long now, all the west has is debts, that supplied the money, that went to china.

        This is what started the opium trade, and the opium wars, except then it was hard silver.

        Europe was flooded with credit notes and going bankrupt, as china had all their silver, as china would only take silver for trade, and buy nothing with silver.

        The answer was find something, anything, they want, and sell it to them, only for silver.

        China being a developed society at the time, already had a drug problem, and its own drug lords, hungry for supply.

        Yet the chinese blame the Europeans for the opium wars. and its Opium problems. The rest of the liberals, and anti-colonial, white-man haters, jump on the band wagon.

        I only observed these parallels recently, its massive. like looking at the historical US $ and other historical charts.

        The long term repeat patterns are. Obvious.

        And in chinas case frighting.

  20. Chris
    January 29, 2016 at 5:56 am

    I don’t consider the Pope to be an economist but his instincts were correct when he remarked that the global economy is on the verge of collapse. Indeed, it is. The US and China are excellent examples of what is wrong. In the US, the model is one of import and consumption without a sufficiently complementary production and export component to the economy. In China, the model is production and export without a complementary domestic consumption component. To the extent that there is consumption in China it is made possible by the average citizen leveraging assets to buy real estate and stocks and the government underwriting shadow loans for infrastructure build up. In the US, consumption is made possible by the ability of the US government to print as much $$ as it wants and the ability of its citizens to borrow well beyond their means. Fiat currency and petrodollar recycling make this possible. The central planners attempted to break the world into neat little hubs of production and consumption. The problem is that in order to make China the Detroit or Pittsburgh of the globe you need far greater integration, both economically and politically, than is possible. The United States used to function well because there were few trade barriers along with political (and monetary) integration. The world does not have this. As such, you are correct, China wants it all. All the export business and all the wealth. The west wants all the consumption and luxury without having to pay for it. In this regard, both are similar. Western consumption is built on unsustainable debt and Chinese development is built on unsustainable debt. Global growth over the last two decades is built upon unsustainable debt. The entire system is completely out of balance and is headed for a crash and a major reset. With crashes and resets war is frequently part of that scenario.

    • d
      January 29, 2016 at 10:55 am

      Just as it did in korea, china can, and will, make a huge number of problems disappear, very quickly. In a small war.

      The question being, will they be able to keep the war small, like Korea and Vietnam, or will they loose controller of it, as the west realises what they are doing.

      Xis new army command structure would be a new non communist party.
      China could come out of a small war, with no creditors, and everybody as debtors. To their independent holding agents in Belgium. (The same ones who work for the Putin clan evading the sanctions) If the stupid west let them.

      Simply by declaring all their international debts onerous and predatory, and changing the currency, similar to what the communist did in 1950.

Comments are closed.