A weekend topic starting with the Telegraph. “Stephen Schwarzman, the chief executive of the world’s largest private equity firm, is not someone who takes kindly to criticism. So when Blackstone was last month forced to limit investor withdrawals from its $69bn (£58bn) real estate fund, the combative billionaire came out swinging against his company’s detractors. ‘The idea that there is something going wrong with this product because people are redeeming is conflating completely incorrect assumptions,’ he said. ‘This was not meant to be a mutual fund with daily liquidity. These are pieces of real estate.’”
From Bloomberg. “The world’s pile of negative-yielding debt has vanished, as Japanese bonds finally joined global peers in offering zero or positive income. The global stock of bonds where investors received sub-zero yields peaked at $18.4 trillion in late 2020, according to Bloomberg’s Global Aggregate Index of the debt, when central banks worldwide were keeping rates at or below zero and buying bonds to ensure yields were repressed. Japan’s yields were the last to leave the sub-zero club because policy makers there had stuck so long with ultra-loose settings brought in even before the pandemic.”
“Investors are now betting the Bank of Japan — the world’s last uber-dovish monetary authority — is inching toward normalization. The European Central Bank exited its negative-rate policy in July, followed by its counterparts in Switzerland and Denmark in September. The Federal Reserve raised its benchmark by 4.25 percentage points last year, the most since 1973.”
From Reuters. “Aiming to fortify broad labor market gains among U.S. minority groups over the previous decade, Federal Reserve Chair Jerome Powell in 2020 engineered a historic promise to try to maintain that progress by giving ‘broad-based and inclusive’ employment a status equal if not superior to the central bank’s pledge of low inflation. Amid a still-raging escalation in prices, however, that commitment has taken a blow.”
“The minutes from last month’s meeting, however, may be a warning of what lies ahead, and stand as a blow to the job-friendly framework formally adopted by the Fed in mid-2020 and crafted with the view that a strong job market and low inflation can coexist. That was the case through the record-long expansion that began in 2009 and was still underway when the pandemic hit.”
“Officials then expected inflation to rise for any number of reasons, from the Fed’s own massive bond purchases to a steadily falling unemployment rate. It didn’t, and remained so persistently low that policymakers worried they might face Japan’s fate, where the central bank’s inability to raise inflation to the 2% target presented risks of its own.”
“The new framework aimed to fix that with a built-in bias against raising rates until inflation had not just returned to the 2% level but exceeded it, allowing loose credit to power the economy, and prices, higher. In theory, more jobs and lower joblessness would also result. That approach, embodied in policy statements in the critical months when rising inflation took hold in 2021, has been criticized as anchoring the Fed to a course of action officials were too slow to abandon.”
“Policymakers have acknowledged as much, even as they also argued it would have made little difference if they had mobilized against inflation a few months earlier. What they fear developing now is a different problem altogether: Inflation that may become driven by the very labor market conditions they promised to encourage.”
“The notion of a ‘wage-price spiral’ remains disputed, since inflation so far has exceeded average wage gains. But as inflation ebbs from what Fed officials hope will prove a mid-2022 high point, Powell and others await a moderation in wage gains too.”
From Business Insider. “The Federal Housing Finance Agency raised its conforming loan limit values for mortgages in 2023. In most of the US, the agency raised the conforming loan value from $647,200 to $726,200. Under the The Housing and Economic Recovery Act, the FHFA is required to raise their baseline ceiling loan limit — or CLL value — each year to reflect adjustments to the average US home price. Due to the rapid home price growth seen over the past year, the agency raised the CLL value for one-unit properties by 12%, going from $647,200 to $726,200 in most of the United States. However, in high-cost areas of the country, such as New York City or San Francisco, the loan limit ceiling has been changed to $1,089,300.”
“But while these new changes may be encouraging to some, Melissa Cohn, the regional vice president of William Raveis Mortgage, warns that it could spell trouble for borrowers who are looking to stretch their budgets to qualify for the most home they can at the time. ‘The bank will help you stretch, but how far do you really want to stretch and is it comfortable?’ she told Insider. ‘What Fannie and Freddie deem you can afford versus how you can really live are two different things.’”
The Island Packet in South Carolina. “Last year, the Beaufort County housing market witnessed towering mortgage rates, soaring inflation, record-high prices and even a Zillow economist calling Hilton Head the ‘new Hamptons.’ For the past two years the market was largely fueled by a petrol pump of cheap debt, which ran out when mortgage rates hit 7% in October, and the newfound ability to work from home. In 2023, experts say, Beaufort County’s real estate market won’t be able to rely on low interest rates or buyers’ interest in working remotely.”
“‘When you remove an unprecedented factor, like COVID, that drove every market red hot, you come back into a mode where some markets simply do better than others,’ Collins Group Realty owner Chip Collins said. ‘That begs the question of ‘What’s going to happen here?’”
“Since 2008, lending standards have changed. Nationally, precautions were made. The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in 2010 to target financial system sectors believed to have caused the 2008 crisis. USCB Business Administration Chair George Smith isn’t convinced lending standards will prevent a housing crisis.”
“‘I think one of my big issues is when I look at people. Are people really different as they’re making these decisions, or are we just simply hoping that the scaffolding put up there is going to protect people from themselves?’ he asked. ‘U.S. consumers tend to have short memories, and they don’t tend to retain many of the lessons from what happened before.’”
From Mansion Global on California. “The drumbeat of layoffs at companies such as Meta, Robinhood, Adobe, Salesforce and Twitter is especially loud in the San Francisco Bay Area. While real estate agents don’t see a mass exodus from the area, there are bargains to be found in the luxury market in some parts of the city and its surrounding suburbs. The price per square foot declined from an average of $1,901 for homes and condos that sold in the third quarter of 2021 to $1,631 during that same period in last year, according to Carrie Goodman, a real estate agent with Sotheby’s International Realty in San Francisco.”
“It’s not a sellers’ market anymore, and buyers have a little more leeway with their offers,said Jill Fusari, a real estate agent with The Agency in the Bay Area. ‘You can get a better price on every property now than you could in 2021,’ Ms. Fusari said. ‘It could be 20% or even 40% less than in 2021, but that market was an anomaly and people were paying well over asking prices.’”
The Maple Ridge News. “Dec. 29, marks a fun anniversary – on this day in 1989, the Japanese Nikkei stock index hit its highest point before that country’s asset bubble began to really deflate. I’ve been going back and reading articles and retrospectives about the Japanese bubble years during the last little while because, well, have you taken a look at our economy lately? Now, the Japanese bubble was different in a lot of ways from what B.C., or Canada, or the developed world in general, has been going through in recent years.”
“But you’d have to clap both hands over your eyes to miss the similarities. In broad strokes, this is what happened in Japan in the 1980s: A country that was getting wealthier and wealthier from a large trade surplus, for various reasons, also slashed interest rates, while loosening up its financial controls. This unleashed a torrent of speculation in property, especially in the biggest cities. This then led to fears of inflation, which in turn led to sharp increases in interest rates.”
“Lots of differences to our situation, of course, but it does rhyme. And one thing was definitely the same – lots of people who should have known better insisted that the good times were here to stay forever. They weren’t. Starting in 1989, the Nikkei began trending down and it never quite recovered. In 1991, property prices began to drop. They didn’t start to rise again until around 2007, but they still aren’t back to anywhere near the peak. Considering that Japan’s population is shrinking, it’s doubtful they ever will, at least in real, inflation-adjusted terms.”
“So here in Canada and North America more generally, we’ve seen very low interest rates for years (which are now being raised at a shocking speed) a massive run-up in the stock market (which has been crumbling) and absurd housing valuations (which are now starting to erode).”
“Where we end up is anyone’s guess. In Japan, the economy suffered what they called the Lost Decade, then the Lost 20 Years, then the Lost 30 Years, as growth slowed to a crawl. We also might see a long, sustained period of doldrums. It should be a warning to us not to let our economy run white-hot, especially the real estate sector. But by the time it ends, we’ll probably have forgotten why that’s a bad idea.”
The Globe and Mail. “A couple of years ago, we talked about the massive global fiscal response to the COVID-19 crisis as a de facto policy experiment in modern monetary theory (MMT). Today, surveying the economic damage, it’s easy to declare that experiment an abject failure. Easy, yes. And hasty. And oversimplistic.”
“Yet that’s what the Institute of International Finance did in a recent research note. The Washington-based finance-industry group wrote that 2022 marked ‘an abrupt halt’ to the ‘illusion’ of MMT: that ‘the ability to run up debt without consequences … is limitless.’ The huge expansion of government debt during the pandemic, supported by low interest rates and money creation by central banks, has resulted in the high inflation, soaring interest rates and looming recession. ‘The reality is that fiscal space is a scarce and valuable commodity to be used sparingly, the opposite of the MMT zeitgeist that has been so influential in recent years.’”
“The fiscal experiment that has taken place during the pandemic, far from exposing MMT as an ‘illusion,’ has tested those limits. The ‘failure’ of the experiment, as MMT opponents would frame it, has not marked the death of MMT; rather, it has demonstrated to what extent MMT-like fiscal expansion can be pushed. Perhaps it’s not as far as many MMT proponents had hoped. But it’s no debunking.”
“As I wrote in that 2021 article, government actions in the face of the pandemic had rapidly put many of MMT’s key concepts into action: ‘The pandemic demonstrated that, at least over the relatively short term, governments actually can spend as much as they deem appropriate, and they can create the money to do so almost instantly. Central banks, as the agents that issue debt and create currency on behalf of those governments, can do both as much as is necessary.’”
“What we hadn’t yet seen was the inflationary impact. It’s now clear that the huge global fiscal expansion in response to the crisis, and the money growth at central banks that facilitated it, helped ignite an inflation explosion not seen in decades. Nevertheless, it does appear that MMT-like fiscal policy exceeded its non-inflationary limits. MMT can, indeed, unleash an inflation monster about which critics of the theory had always warned. While no reasonable voice in the debate had ever claimed that debt and money creation was limitless and consequence-free, we have now seen how quickly and easily those expansions can let inflation loose, and how difficult and costly it can be to get it back in its cage.”
“This experience has also demonstrated perhaps the biggest weakness in MMT-influenced fiscal policy: it is a cumbersome tool to apply to managing inflation. Unlike interest rates, which can be adjusted within a matter of weeks to address inflationary pressures, government fiscal plans unwind over years.”