Fed Sees Risk of Big Declines in Still-Lofty US House Prices
The Federal Reserve suggested on Friday that lofty home prices could be susceptible to steep declines after big run-ups in recent years on the back of ultra-low interest rates.
“With valuations at high levels, house prices could be particularly sensitive to shocks,” the Fed said in its semiannual Financial Stability Report released Friday.
Though housing price increases have slowed recently as the Fed has raised interest rates, valuations remain stretched when compared with such metrics as rents, the central bank said. It also cited “strained” liquidity conditions in the Treasury and some other crucial financial markets; elevated leverage at hedge funds; and high commercial real estate prices when compared with market fundamentals. (…)
“Today’s environment of rapid synchronous global monetary policy tightening, elevated inflation and high uncertainty associated with the pandemic and the war raises the risk that a shock could lead to the amplification of vulnerabilities, for instance due to strained liquidity in core financial markets or hidden leverage,” Fed Vice Chair Lael Brainard said in a statement accompanying the report. (…)
- New Home Cancellations increased Sharply in Q3 “Significant shift in market conditions”
(…) In general, cancellation rates doubled or tripled in the most recent quarter compared to 2021.
Toll Brothers reported a cancellation rate of 13.0%, well above their historical rate of 7%. During the housing bust, Toll Brothers cancellation rates peaked close to 40%!
For D.R. Horton, the 32% cancellation rate was well above their normal rate in the 16% to 20% range. During the housing bust, Horton’s cancellation rate was close to 50% for a couple of quarters in 2007 and 2008. (…)
Speaking of cancellations, this chart explains why manufacturing activity will keep declining:
@MichaelAArouet
Facebook Parent Meta to Lay Off 11,000 Employees Meta Platforms said it would cut 13% of staff, embarking on its first broad restructuring to cope with a slumping digital-ad market and falling stock price.
(…) Twitter cut roughly half of its staff last week. Snap Inc. said in August it would cut roughly 20% of staff, or more than 1,000 employees (…). Business software company Salesforce Inc. also started laying off employees this week. (…)
(…) “The job cuts are only the start and the tip of the spear. Larger and more thoughtful companies are starting to understand that capital is fleeing investment in the stock market into ‘safer’ assets like bonds or treasuries as interest rates rise,” said Wesley Chan, an investor and former tech leader at Google who developed early Google projects including Google Analytics, Google Voice and Google Ventures. He is a co-founder of early stage investor FPV Ventures.
“The downturn has kind of started but it hasn’t hit bottom and will get bad, very quickly, likely sometime mid next year,” Mr. Chan said. He expects a decline in demand for marginal or luxury areas like crypto, grocery and food delivery services, “neobanks,” and high-end travel and beauty. (…)
- Rivian’s Losses Mount as It Continues to Burn Through Cash [BTW, RIVN reached $180 in Nov. 21. Closed yesterday at $28]
- Beyond Meat Reports Weak Sales and Mounting Losses [BTW, BYND reached $220 in Jan. 21. Closed yesterday at $12]
- Carvana’s Earnings Crash Spurs Bond Selloff [BTW, CVNA reached $370 in Aug. 21. Closed yesterday at $7.60]
- Redfin Shuts Home-Flipping Business, Lays Off 13% of Staff [BTW, RDFN reached $98 in Feb. 21. Closed yesterday at $3.25]
- [BTW, ARKK reached $160 in Aug. 21. Closed yesterday at $32.50]
- [BTW, ARKF (Fintech fund) reached $65 in Feb. 21. Closed yesterday at $14]
“Long ago, Ben Graham taught me that price is what you pay, value is what you get.” (Warren Buffett)
China Property Crisis Imperils $1.6 Trillion of Local State Debt
China’s deepening property crisis is piling pressure on a $1.6 trillion corner of the country’s onshore bond market, as cities and local administrations step in as white knights to bail out troubled developers in a state-backed bid to aid the sector.
After replacing builders as the biggest buyers of land earlier this year, the nation’s so-called local government financing vehicles, or LGFVs, have now become the main purchasers of half-finished projects of defaulters including China Evergrande Group. Their increasing involvement in real estate has analysts raising red flags.
Moody’s Investors Service says that could weigh on the credit profile of these state funding agencies. While no LGFV has defaulted in the current cycle, Bloomberg Economics isn’t ruling out one ahead. Though China’s loosened monetary policy has largely pushed onshore borrowing costs to the lowest in years including for most LGFVs, average credit spreads on some of the worst-performing LGFV local bonds have almost doubled since mid-January to nearly 10 percentage points. (…)
A potential default could cause another convulsion in a market, where LGFVs’ 11.6 trillion yuan ($1.6 trillion) of notes account for about a third of China’s local corporate bonds. (…)
David Qu and Chang Shu at Bloomberg Economics estimate total LGFV debt, including bank borrowings, to be as much as 60 trillion yuan, or about half of China’s GDP. Defaults would have major consequences, they said. (…)
Also unraveling:
@Sino_Market
Asian Property Debt Woes Worsen as Indonesia Shows More Distress The bonds of Indonesian property companies are slumping, adding to signs of property debt distress that’s been deepening in China, South Korea and Vietnam.
(…) The mounting strains come as property firms in more countries grapple with slower sales and higher borrowing costs. (…)
Rising interest rates around the world are exposing risks that have accumulated in property markets, juiced by cheap funding during the pandemic. South Korea rolled out fresh measures to help its struggling real estate market on Thursday in the form of additional guarantees to project financing. (…)
FTX on brink of collapse after Binance abandons rescue Sam Bankman-Fried’s crypto exchange dashes to fill $8bn hole as Sequoia writes down equity on ‘solvency risk’
- Binance Walks Away From FTX Deal Crypto exchange Binance said it would walk away from an initial offer to acquire its competitor FTX after a review of the company’s finances.
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Crypto Has Reinvented Bank Runs FTX’s crisis is a reminder of what is right about traditional finance
(…) The exact problems that faced FTX remain unclear. Were they primarily related to the treatment of customer assets or related more to the firm’s own assets? Further complicating matters, the line between a bank and a brokerage isn’t always clear in crypto, where one firm can effectively be your bank, broker, exchange, lender, market maker and so on. That creates many opportunities for things to go wrong.
If crypto is to survive the winter, it might need to universally adopt and prove it is using some of the conventions of traditional finance, or “tradfi,” such as ironclad segmentation of customer money and clearer lines between those different services. (…)
But how about first demonstrating actual, real world, usefulness…
- Crypto’s FTX Moment Shows Danger of Centralized Finance With No Central Bank After Binance agreed to takeover rival FTX, the danger is obvious: There’s no one big enough to rescue Binance
It also shows finance’s “me-too” effect, its impact on valuations and on naive investors. ZeroHedge revels on this:
In a tweet late on Wednesday, venture capital giant Sequoia Capital said had written down the entire value of its stake in FTX, a little over $210 million. (…)
A smaller venture fund, Multicoin, told investors Wednesday that about 10% of its assets under management were affected. (…)
We start at the top, where we find the “who is who” of clueless momentum chasers, who over the years somehow got confused with credible, diligent investors: we are talking of course about Tiger Global, which is down 55% this year (and is about to be down a whole lot more) and of course the fund that we once dubbed the bubble era’s “short of the century“, SoftBank. (…)
There are more funds, of course: Third Point and Altimeter Capital Management are among hedge funds that recently participated in funding rounds for Sam Bankman-Fried’s once-high-flying crypto exchange. Brevan Howard Asset Management’s Alan Howard, the family office of Paul Tudor Jones and Millennium Management founder Izzy Englander also chipped in as angel investors, alongside celebrities including Gisele Bundchen and Tom Brady.
There were many others: FTX also attracted capital from the Ontario Teachers’ Pension Plan, Sequoia Capital, Lightspeed Venture Partners, Iconiq Capital, Insight Partners, Thoma Bravo and Masayoshi Son’s SoftBank.
Tiger Global and Ontario Teachers’ first invested in FTX in December 2019 in a funding round that valued the company at $8 billion, according to PitchBook data. Both topped up their wagers in October 2021, giving FTX a $25 billion valuation, and did so again in January, the data show. Some of the other firms and individuals backed FTX in July 2021, paying cash to participate in a $1 billion funding round that valued the crypto exchange at $18 billion. (…)
Remarkably, as ever more clueless pedigreed investors piled up to fund this fraud of epic proportions, the valuation went super parabolic, and after two early rounds in 2019 and 2020, FTX got its first real outside funding in July 2021 when it pocketed $900MM at a valuation of $18 billion in its Series B round; this was followed by two more rounds, the most notable of which was Series C when ts valuation exploded to a staggering $32 billion. It was around this time that Scam Bankrupt-Fraud started naming sports stadiums, and imagined a world in which FTX would buy Goldman.
The chart below is the definitive proof that even (or rather especially) the smartest investor do no homework before allocating huge amounts of capital. (…)
More to come, including margin calls and another contagion…
Naturally, the SEC will now step in…
Russia orders troops fall back in Kherson Russia’s defense minister and a top general told troops to fall back from Kherson city to the eastern bank of the Dnipro River. Ceding control of the regional capital would mark a major retreat.
Lastly:
Trump Is the Republican Party’s Biggest Loser The WSJ Editorial Board: He has now flopped in 2018, 2020, 2021 and 2022.
- With No Red Wave, Trump Is Out at Sea By Karl Rove