A weekend topic starting with KSL in Utah. “Orn Bodvarsson, an economics professor at Westminster College, said the country is on a decade-long expansion trajectory that shows almost no sign of faltering anytime soon. He said there are a variety of macroeconomic indicators that show the strength of the expansion explaining what’s been driving the ongoing growth. ‘The No. 1 driver has been easy money, a very accommodative Fed,’ Bodvarsson said.”
From Senior Housing News. “‘2020 is, in my view, sort of the reset year for the industry altogether,’ Eclipse Senior Living CEO Kai Hsiao told Senior Housing News. ‘If you don’t do things differently … it’s not a good way to move forward.’”
“For Eclipse, the key is growing in a way that makes the most sense, given its current market presence. That can be tough given the sheer amount of capital flowing through the industry right now. ‘Our biggest challenge right now is saying no, politely,’ Hsiao said. ‘I am concerned that there’s too much capital out there, being a former guy from a REIT on the capital side.’”
From Bisnow Washington DC. “Following a banner year for the multifamily sector during which institutions poured billions of dollars into apartments, large investors and lenders hope to continue increasing their multifamily deal volume in 2020. As Fannie Mae and Freddie Mac pour billions of dollars into the multifamily sector, Allianz co-head of debt investments Mike Cale said it can be hard to find enough projects to finance. ‘The challenge we have with the multifamily space is we’re competing with the agencies, which are very aggressive in the arena,’ Cale said.”
“Managing Director Jason Hernandez also said competition is among Nuveen’s top challenges in meeting its capital allocation goals, but he is most worried about other debt funds. A proliferation of debt funds has led to more than 180 of them competing for deals, he said, adding that an ideal market would only have about 20. The increased competition has put downward pressure on returns, he said. ‘The thing I’m most concerned about isn’t the state of the market, it’s that there’s an oversupply of capital,’ Hernandez said. ‘There’s too much capital chasing too few deals today.’”
From Housing Wire. “Federal Housing Finance Agency Director Mark Calabria reiterated his previous sentiments that publicly offering stock in the government-sponsored enterprises will only happen when the companies have a sufficient financial base. Last year, the government allowed the GSEs to retain up to $45 billion in combined capital as they move towards exiting conservatorship. ‘Fannie and Freddie own or guarantee a combined $5.5 trillion in single and multifamily mortgages. That is nearly half of America’s residential mortgage market. But when I walked in the door at FHFA, they were limited to just $6 billion in allowable capital reserves. This put their combined leverage ratio at nearly a thousand to one,’ Calabria said.”
“‘Since I came into office, we have nearly quadrupled capital at the Enterprises. But it still stands at nearly two hundred and forty to one – roughly 20 times the average leverage of the institutions represented here today,’ Calabria said. ‘This is far less capital than Fannie and Freddie need to survive even a modest downturn,’ Calabria added. ‘The question I ask myself every day is: Are Fannie and Freddie ready for a stressed housing market? Right now, the answer is no. In their current financial condition, Fannie and Freddie would fail in a downturn,’ Calabria said.”
From ABC News. “A week ago, Australian stocks were riding high, riding on the record-breaking coat-tails of Wall Street. In the space of just six brutal trading sessions, however, the mood has turned from serene optimism to abject fear. Almost every country has some form of debt bubble. In Australia, we hold world record levels of household debt. The US Federal Reserve holds more than $US4 trillion in debt securities that it used to pump up the global economy.”
“China, the world’s second biggest economy, has debt bubbles at government, central bank and corporate levels. And let’s just not talk about Japan, which has a government debt of around 260 per cent of GDP. Then there is the vast accumulation of debt in developing nations, which the World Bank estimated at $US55 trillion in 2018. ‘The size, speed and breadth of the latest debt wave should concern us all,’ World Bank group president David Malpass said in December.”
“The rationale for all this was to spur investment: for individuals and firms to borrow money to invest in new factories, in plant and equipment. It was supposed to create jobs, boost demand and fuel inflation and wages. The debt would then fade into obscurity. Instead, it has mostly just inflated asset prices. Housing prices have gone nuts. Global stock markets have been soaring, scaling new heights even as the global economy has barely been stumbling along.”
“With so much debt issued at record-low interest rates, it has become almost impossible for policymakers to even consider raising interest rates in good times, for fear of creating a debt default avalanche. The companies most at risk will be those labouring under massive debt. That’s why Wall Street is shuddering, for traders now realise just how fragile the foundations of the current boom really are. The rush for the exits is turning into a stampede.”
From Krishna Gupta. “The 2008 crisis was hardly one of a kind and many crises in the past had a similar genesis. Nouriel Roubini, the NYU economist has reminded us that crises such as the speculative bubble in tulips in 1630 in Holland or the Great Depression of the 1930s had a similar genesis as the 2008 crisis. They had the same elements: a boom, followed by speculation in an asset class (tulips in 1630, Housing in 2008), creation of a bubble and the bursting of the bubble. Roubini says that all such crises are hardly ‘Black Swans’ – instead, they follow a predictable path and corrective action should be taken as soon as tell-tale signs appear.”
“It was not as if there were no warnings about the impending crisis. Roubini had warned in 2006 that corrective measures need to be taken since debt in the financial system was rising beyond manageable levels. Raghuram Rajan had also cautioned in 2005 that the compensation of bankers and traders needed to be rationalised so as not to incentivise them to take on too much risk and over-leverage the system. Nassim Nicholas Taleb (of the ‘Black Swan’ fame) had cautioned that financial markets were over-leveraged and many of the investment banks were under-regulated and would not be able to handle ‘fat-tail’ events.”
“Even with the warnings expressed above, the US Federal Reserve under Greenspan was a little late in reacting. In fact, the ‘Greenspan Put’ became well known whereby interest rates were kept low leading to growth in the stock markets. Investment banks were led to believe that low-interest rates would hold and therefore they could enter long positions and sell stocks at a higher price creating a ‘Put’ option. Greenspan was criticised for this policy since it encouraged risk-taking.”
“In the end, Hyman Minsky’s work comes to mind. We may recall that Minsky had argued that instability originates in the very financial institutions that makes capitalism possible. While Minsky had made his comments in the 1980s, his ghost revisited us in the financial crisis of 2008.”