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It's Another Housing Bubble And The Fed Is Holding The Pin
Are we heading toward housing crisis 2.0?
That remains to be seen.
Two things are for certain. The is a massive housing bubble. And the Fed is holding the pin.
The bubble in the housing market today is bigger than it was before 2008. And there is a bubble for the same reason. The central bank has held interest rates artificially low for nearly two years. On top of that, it stuck its big fat thumb on the mortgage market with its purchase of mortgage-backed securities. With those loans off their books, banks could lend more.
The result — skyrocketing home prices.
In the same way, quantitative easing creates artificial demand for Treasuries, thereby keeping rates low and facilitating more federal government borrowing and spending, it also keeps mortgage rates artificially low and juices the housing market.
As economist Alex Pollock put it in an article published by the Mises Wire earlier this year, the Fed “continues to be the price-setting marginal buyer or Big Bid in the mortgage market, expanding its mortgage portfolio with one hand, and printing money with the other.”
In 2006, the Fed owned zero mortgages. Today, The central bank holds about $2.6 trillion in mortgage-backed securities on its balance sheet. According to Pollock, about 24% of all outstanding residential mortgages in the US reside in the central bank. That makes the Fed, by far, the largest savings and loan institution in the world.
The result was entirely predictable.
According to Fed data, the average sales price of a home in the fourth quarter of 2021 was $477,900. That compares to $403,900 in Q4 2020 and $384,600 in the fourth quarter of 2019. In other words, the average sale price increased by $93,300 in just two years. That is by far the biggest increase ever recorded in a 24-month period.
Here’s a little more data to chew on.
The 12-month home sales price increases in the first three quarters of 2021 were all above 17%. That’s the biggest increase ever recorded over any three-quarter period since at least 1963. That’s the earliest data available.
Justin Haskins summed up the situation in an article published by The Federalist.
Put simply, Americans have literally never seen housing prices skyrocket like they are now for this long of a period. And every time they have approached the numbers we are seeing today in the past — in the 1970s, late-1980s, and early to mid-2000s — there was a massive real estate or stock market crash that soon followed (or both). There appear to be no exceptions, other than a few rare cases where housing prices increased quickly immediately after a crash had occurred.”
So, we have a massive housing bubble — even bigger than the one that popped in 2007 and led to the 2008 financial crisis.
And what always happens to bubbles?
They pop.
And the Fed has the pin in its hand. It’s about to raise interest rates. Mortgage rates will go up right along with them. And it’s already tapering its purchase of mortgage-backed securities.
Haskins provides a comparison between the runup to 2008 and today.
The bubble that developed from 2002 to 2007 peaked at around a 47 percent price increase, before plummeting by 20 percent from 2007 to the first quarter of 2009. If we see a similar pattern emerge for the bubble that has been developing since roughly 2012, then we could see housing prices drop by 30 to 40 percent over a two-year period. Whatever the final numbers end up being, the evidence is clear: based on data reported over the past six decades, America appears to be on the verge of an epic real estate crash.”
That’s not to say it will precipitate another 2008-style crisis. The dynamics in the subprime market are different this time around. But a collapsing housing market will ripple through the economy and it’s hard to say exactly how it will play out.
Regardless, this is a big problem for the Fed. We have been saying that the Fed can’t do what it’s saying it will do to fight inflation, and this is yet another reason. If it follows through with rate hikes, and if it stops buying mortgage-backed securities and then starts selling them into the market, mortgage rates are going to skyrocket. Unaffordable homes will become more unaffordable.
The housing bubble will pop.
Again.
It may not take much of a pinprick to pop the bubble. Even the 1 or 2% rate hike the Fed is talking about could do the trick.
This is yet another reason Peter Schiff says the Fed is “running out of minutes.”
Chinese Tech Stocks Suffer Biggest 2-Day Rout Since July Amid Fears Beijing Will Unleash More Crackdowns
While not directly impacted by the sharp crisis escalation in Ukraine or fears of multiple rate hikes by the Fed, Chinese tech shares suffered their worst two-day drop since July following renewed fears Beijing may roll out more restrictions for private enterprise.
Shares of China's tech giant, Tencent, sank 5.2% on Monday, hammered by speculation about an unspecified, impending crackdown on China’s largest social media and gaming firm that company spokesman Zhang Jun later denied. Traders pointed to everything from warnings from regulators over the weekend about scams in the metaverse to talk about yet more curbs on the gaming industry. Zhang said the online rumors were unfounded, without elaborating.
Amid the rout, Tencent’s head of public relations Zhang Jun denied online speculation that it’s facing a major regulatory crackdown, issuing an unusually aggressive public response after fears of more tech-sector restrictions tanked markets on Monday. He disputed the widely circulated post that suggested the company would weather another heavy blow from regulators in the near future. The account carrying the rumor has since been suspended, Zhang said on his semi-public WeChat feed.
“Ask me next time, at least that’s more legit. And I’m not afraid of going on record,” Zhang said, poking fun at the post citing an anonymous Tencent employee. Before its removal, the post was widely shared on Chinese social media and stock-trading forums. It hinted at another big step in China’s internet crackdown, without providing specifics.
Tencent shares have plunged 40% since a peak in January last year. The gaming giant, along with peers such as Alibaba and Meituan, were caught in Beijing’s crosshairs as China cracked down on monopolistic behaviors and tightened its grip on user data. The yearlong clampdown has wiped out more than $1.5 trillion in market value from the nation’s tech sector.
Meanwhile, as noted earlier, Chinese authorities told the nation’s biggest state-owned firms and banks to start a fresh round of checks on their financial exposure and other links to Jack Ma’s Ant Group Bloomberg reported after markets closed. Alibaba Group, which owns a third of Ant, fell 3.9% prior to the report.
As a result, Hong Kong’s Hang Seng Tech Index lost 5.9% over two sessions, the biggest 2-day drop since July. The decline started Friday when Meituan plunged as much as 18% after Beijing rolled out a new policy to curb the delivery giant’s service fees.
“There is concern about new regulatory reforms,” said Justin Tang, head of Asian research at United First Partners. “Prior to Meituan, there was a sense of ‘this is it in relation to reforms.’ Investors are now thinking that there could be more to come.”
As Bloomberg notes, on Friday the China Banking and Insurance Regulatory Commission warned against fund-raising and investment products related to the metaverse concept, citing their speculative nature. A metaverse industry body vowed on Monday that the sector should be developed to serve the real economy.
“The market is very fearful that more crackdown will come and that could leave technology companies very little room to turn around their businesses,” said Castor Pang, head of research at Core Pacific-Yamaichi. “The metaverse fears shows that the market is worried that tech firms may not be able to grow a new business rapidly, like how they did in the past in China. That’s really dampening the already-fragile sentiment.”
In coming weeks investors will find out how much Beijing's ongoing clampdown has impacted the profitability of some of the biggest tech firms as they release earnings; Alibaba will report on Thursday.
“Nerves are on edge this week as Alibaba reports earnings -- in the midst of war, additional Hong Kong curbs and regulatory oversight,” said Wai Ho Leong, strategist at Modular Asset Management.
Russian stocks plunge 14% as tensions flare over Ukraine
Western sanctions ‘would clearly be problematic’ for investors
Russian stocks plummeted in turbulent trading on Monday, on mounting concern that Moscow could soon launch an invasion of Ukraine.
The Moex index plunged as much as 14.2 per cent after Moscow claimed it destroyed two Ukrainian military vehicles that entered Russian territory, in an unconfirmed incident that would be the first direct clash with Ukrainian forces since Moscow mobilised 190,000 troops on its border. The move puts the Moex on track for its largest single-day fall on a closing basis since the financial crisis in 2008, according to Refinitiv data.
Russian president Vladimir Putin also on Monday convened his top security advisers to discuss recognising two Moscow-backed separatist regions in eastern Ukraine.
“It does feel like the market isn’t quite panicking but that it has moved into a stronger form of risk aversion,” said Altaf Kassam, head of investment strategy and research at State Street. “There’s a feeling that Russia could yet escalate and take us over a cliff edge, [when] before it felt like Russia was as incentivised as the west to calm things down.”
Shares in Rosneft, Russia’s leading oil producer, were down almost 20 per cent in Moscow on Monday and have shed close to 30 per cent of their value since the start of this year. State-owned gas producer Gazprom declined almost 16 per cent, before trimming some of its losses, taking its fall for 2022 to 19 per cent. Shares in gas producer Novatek were trading 12 per cent lower.
The sell-off in Russian assets has also hit the likes of food group Magnit, down more than a tenth, and bank VTB, shares in which fell about 19 per cent on Monday.
US president Joe Biden and Putin on Monday agreed “in principle” to hold a summit which it is hoped could lead to a de-escalation of tensions on the Ukraine border. Yet hours later, Russia’s army said it had destroyed the two Ukrainian infantry fighting vehicles, killing five people.
Over the weekend, UK prime minister Boris Johnson vowed to impose economic sanctions and stop Russian companies raising money on UK markets in the event that Moscow moved to invade Ukraine.
Monday’s share price declines were evidence that proposed western sanctions on Russian companies “would clearly be problematic” for investors, said Charles Hall, head of research at UK-based investment bank Peel Hunt.
Even so, many of Russia’s biggest energy groups “don’t need to raise money right now as they’re doing very well from a profitability point of view”, added Hall. “Russian billionaires might now get a slightly less warm welcome in London than they’re used to, however.”
Russian government bond prices also tumbled on Monday, pushing yields to their highest level of the current crisis. The yield on Russia’s dollar bond maturing in 2030 climbed three-quarters of a percentage point to 5.14 per cent, up from just above 2 per cent at the start of the year.
Ukrainian yields also surged, with the yield on a dollar bond maturing in 2032 up more than half a percentage point at 11.1 per cent.
In currency markets, the rouble fell 3 per cent to trade at 79.6 to the dollar, its weakest level since October 2020.
The risk of tougher western sanctions was weighing on Russian assets and the rouble, according to Natalia Lavrova, senior economist at BCS Global Markets in Moscow.
Following Biden’s comments about an imminent Russian invasion of Ukraine, “the volume of capital outflow may grow significantly, hence, the rouble will remain under pressure”, said Lavrova.
GXO/Clipper: logistics expertise delivers for shareholders
Investors on the lookout for take-out candidates in sector experiencing growth and consolidation
As ecommerce boomed during lockdown, so did demand for the machinery that makes it happen. Powerful trends are driving growth and consolidation in the logistics sector. A proposed £943mn bid for British ecommerce specialist Clipper Logistics by New York-listed GXO Logistics is the latest in a flurry of deals.
Investors will be on the lookout for the next take-out candidate. Shares in Wincanton, another UK logistics company, rose 4 per cent on Monday morning. The number of potential acquirers has expanded as ship owners, flush with cash from high freight rates, have moved into the sector.
For sure, some air has escaped from contractors’ valuations amid worries about lorry driver shortages and wage inflation. GXO’s potential cash-and-share offer is a 32 per cent premium to Clipper’s three-month average. But it is much the same as the September share price, which — at 32 times forward earnings — was half as much again as the 10-year average.
GXO should be able to cover the premium with savings from procurement and other costs, and, more nebulously, with cross-selling gains. The deal will extend GXO’s geographical reach to Germany and Poland, and will add fast-growing life sciences to its sector specialisms.
The US company has until late March to publish a formal offer. But with investors representing 23 per cent of the shares backing the deal, the initial 14 per rise in Clipper’s share price to 885p on Monday lifted it to just 4 per cent below the offer price.
There is plenty of scope for further consolidation. GXO has just 5 per cent of the outsourced market, even though it is the largest pure-play contract logistics provider, and the biggest overall after Deutsche Post DHL. Outsourcing too is growing; it accounts for just a third of the $430bn market for logistics in Europe and North America, according to Jefferies.
The use of specialist contractors is growing with the realisation that delivery plays a critical role in the consumer’s experience. Expect leading contractors such as GXO to make the most of their technology and expertise, extending their reach through takeovers such as this.
Worldline/Apollo: low-priced sale fails to thrill amid payments M&A
Jaded investors clearly needed more to spark their interest
For months the only line that mattered to shareholders of payments group Worldline was the one sloping down. Slow progress on selling a payment terminals division was one reason the French payments group’s market value halved since late July.
Bulls see Worldline as a potential consolidator in the fragmented payments industry, which many incumbent banks are exiting. Selling the wireless card payment terminals, never seen as important to the group, would provide cash for more purchases.
When Worldline paid €7.8bn for local payments rival Ingenico in 2020, the terminals business came with it. On Monday Worldline happily announced that US buyout specialist Apollo had paid €1.7bn in cash upfront, plus additional preference shares worth as much as another €900mn. Markets cheered briefly, then lost interest.
Jaded investors clearly need more to spark their interest. A significant chunk of the price comes via the preferred shares portion. The value of these depends on how much Apollo can improve the profitability of the terminals business. The cash valuation alone implies free cash flow will slide at a 7 per cent rate annually long term. That perhaps underestimates Apollo’s abilities. It also understates the potential of the unit, thinks Citi.
Apollo will receive a cash generative business that with leverage should generate a typical 18 to 20 per cent compounded annual investment return desired in most buyout transactions. It may also see a bargain, paying under 7 times forward ebitda including any added preference shares. The closest rival to this business, Verifone, was bought by another buyout group for 10 times in 2018.
The issue is perhaps more prosaic. Worldline reports full-year earnings on Tuesday and investors do not take chances on fintechs as they once did. Until the tech-friendly, risk-on market returns, Worldline’s share price will continue to stagnate, however it tweaks its portfolio of businesses.
The Science Behind Why Children Fare Better With Covid-19
Children’s innate immune systems help fend off the virus more effectively than those of adults
Children’s seeming imperviousness to Covid-19’s worst effects has been one of the biggest mysteries—and reliefs—of the pandemic. Now the reasons are coming into focus, scientists say: Children mobilize a first line of defense known as the innate immune system more effectively than adults.
Although some children do fall seriously ill after coming down with Covid-19, the most have mild symptoms or no symptoms at all. Unlike other respiratory viruses such as the flu or respiratory syncytial virus, SARS-CoV-2 doesn’t hit children nearly as hard as it does adults or the elderly.
The lower risk to children has discouraged some parents from getting them vaccinated. Vaccination rates among children eligible for Covid-19 shots lag far behind those for adults. Public-health experts say they want to explain the science behind children’s stronger protection against Covid-19 while still emphasizing that vaccines are important to protect vulnerable children and control infections. Covid-19 hospitalization rates for children reached records in January as the Omicron variant drove cases far past previous pandemic peaks.
“Some do get quite ill,” said Lee Beers, a member of the American Academy of Pediatrics’ board of directors and a professor of pediatrics at Children’s National Hospital in Washington.
The immune system consists of different lines of defense. Innate immunity coordinates the initial response against an infection, while adaptive immunity develops more slowly and mounts a more specific defense.
To understand why children fare better than adults against Covid-19, said Kevan Herold, a professor of immunobiology and internal medicine at Yale University, imagine the immune system as a medieval fortress. The innate response, which includes mucus in the nose and throat that helps trap harmful microbes, is like the moat, keeping assailants out. Innate immunity also includes proteins and cells that trigger the body’s initial immune response. Dr. Herold likens them to cannonballs launched as the enemy is beginning an invasion.
A second line of defense, the adaptive immune system, includes T cells and B cells. The adaptive immune system takes longer to initiate a response, but can remember specific weaknesses of past invaders. Think of them as soldiers preparing for battle inside the fortress, Dr. Herold said.
Innate immunity doesn’t have the same kind of memory. It relies on patterns associated with harmful microbes more generally. Immunologists have found that children’s immune systems have higher levels of some innate molecules and increased innate responses compared with adults. Experts including Dr. Herold and his wife, Betsy Herold, a pediatric infectious-disease doctor at the Children’s Hospital at Montefiore in the Bronx, think this is key to helping children better fight off the virus that causes Covid-19.
As Covid-19 swept across New York in early 2020, the Herolds set out to figure out why so many more adults were ending up in hospitals with Covid-19 than children. With other researchers, they initiated studies looking at children’s immune systems. They started with what Betsy Herold called the lowest-hanging fruit: cytokines, small proteins produced by a range of cells that help them communicate with each other.
Two cytokines important to the innate immune response are less prevalent in the blood of older people compared with younger people, they found. “That’s where the idea that it was an innate response started to be developed,” Betsy Herold said.
The Herolds’ study comparing 65 young patients and 60 adults with Covid-19 in New York City found that children were less reliant on the adaptive immune system than adults, likely because they had a stronger innate response.
They also looked at nose-and-throat swabs of 12 children and 27 adults and found that more genes involved in innate immunity were activated in the children, who also had higher levels of cytokines involved in innate immunity.
A lack of immune memory relative to adults may also give children an advantage in fighting off SARS-CoV-2, said Amy Chung, a researcher at the Peter Doherty Institute for Infection and Immunity in Melbourne, Australia. After exposing the blood of healthy people to the pandemic coronavirus, she and her colleagues found that healthy seniors had strong pre-existing antibody responses to Covid-19, likely because they had been exposed many times to other coronaviruses, such as those that cause common colds.
Children, on the other hand, don’t have as strong of a pre-existing antibody response, said Dr. Chung, because they have had less exposure to other coronaviruses. While that might not seem like a good thing, in this case it confers an advantage: When children encounter SARS-CoV-2, they mobilize and attack the essential parts of the virus immediately.
Older people’s immune systems are targeting parts of the SARS-CoV-2 virus they have encountered in other coronaviruses. “Those parts don’t seem to be as important to stopping infection,” Dr. Chung said.
Children’s relative resilience to Covid-19 has led some parents to keep eligible children from getting vaccinated. The Kaiser Family Foundation’s most recent survey of 420 parents found that half weren’t too worried or not worried at all about their child getting seriously ill from Covid-19.
Kate Symonds said she doesn’t plan to get her 2-year-old and 9-month-old children vaccinated when they are eligible because of the relatively lower risk of severe illness and because she is worried about possible adverse effects from the shots.
“If it was a disease that was affecting young people more than older people, my opinions might be different, but that’s not the case,” said Ms. Symonds, 40, who lives in Canandaigua, N.Y. She said her husband is vaccinated and that she isn’t.
Vaccination rates among people under the age of 18 are significantly lower than those of adults, according to data from the Centers for Disease Control and Prevention. Around 40% of eligible children are fully vaccinated, compared with about three-quarters of eligible adults.
Researchers haven’t found evidence that Covid-19 vaccines pose any serious safety concerns. In trials conducted on thousands of children, the most common side effects of the vaccine were mild and didn’t have any lasting impact, the CDC said.
Covid-19 vaccines aren’t yet available for children under age 5. U.S. health regulators delayed their review of the Pfizer Inc. - BioNTech SE Covid-19 vaccine for that age range because the initial two-dose series wasn’t working well so far against the Omicron variant during testing.
Even if vaccines are available for this younger group, only 31% of parents of children that age say they would get their child vaccinated right away, according to the Kaiser poll. Around one-quarter of parents said they would definitely not get their child vaccinated.
But children’s risk of getting infected with Covid-19 appears similar to that of adults, recent research suggests, and children appear better at spreading the virus than early studies suggested.
Some children do require hospitalization with Covid-19 and some continue to have symptoms long after they have cleared the virus, said Betsy Herold. Children also are at risk for multisystem inflammatory syndrome, or MIS-C, a rare condition that can occur in children several weeks after Covid-19 infection. MIS-C can lead to organ damage or even death.
“The innate barrier is not 100% protective,” Betsy Herold said.
While that protection is robust, she said, Covid-19 still presents risks to children including the possibility of lingering symptoms. Without vaccination, she said, “you’re taking a gamble.”
Virgin Hyperloop axes half its staff in focus on freight
Pandemic has prompted strategic shift for superfast transport system, says company
Virgin Hyperloop has made almost half of its staff redundant as the company developing the high-speed transport system pivots from passenger travel to freight.
Contacted by the Financial Times, the company confirmed that 111 people had been laid off on Friday, in a move it said would allow it to focus on delivering a cargo version of the experimental transport, which propels pods through low-pressure tubes at speeds of up to 670mph.
Two of the people who lost their jobs said that the lay-offs were announced via video conference. One said the scale of the cuts was “definitely not expected”.
“It’s allowing the company to respond in a more agile and nimble way and in a more cost-efficient manner,” Virgin Hyperloop told the Financial Times. “These types of decision are never taken lightly.”
The company is “changing direction”, it added. “It really has more to do with global supply chain issues and all the changes due to Covid.”
It said the logistics market had changed “dramatically” and that it was responding to strong customer interest in a cargo-based service.
Backers of the company, which is developing technology first proposed by Elon Musk, include Dubai government logistics provider and ports operator DP World and Sir Richard Branson’s Virgin Group.
Virgin Hyperloop, which has raised more than $400mn in funding, is the only company to have completed a successful test run with passengers using the technology.
The system builds on existing technologies around vacuum tubes and magnetic railways with a view to cutting land-based travel times drastically and boosting the efficiency of freight transportation.
Government-owned DP World, which has a 76 per cent stake in Virgin Hyperloop, is working on a hyperloop-enabled cargo system to deliver freight at “the speed of flight and closer to the cost of trucking” by connecting with existing road, rail and air transport.
But since its inception, doubts have emerged over the cost of bringing the system to market given high costs, even if it wins regulatory approval.
And internal turmoil has followed the departure of Virgin Hyperloop co-founder Josh Giegel last year, triggering a “massive talent flight” as other executives also quit the company, according to one former senior employee. “Morale is low and there is no confidence in the new direction.”
Shunning passenger transport was triggering a “complete unravelling” at the group and would put its sole contract with the Saudi government in jeopardy, the person said.
But DP World said the Saudi government saw “great value” in the cargo option, eyeing a route linking the western port city of Jeddah with the capital Riyadh and beyond to the Gulf states on the east of the Arabian Peninsula.
Virgin Hyperloop is in discussions with 15 customers over delivering a pallet-bearing version of the new technology, DP World said.
Profits from successful sales of the cargo version, which it said could be ready in about four years, could be reinvested into a launch of the passenger version by the end of the decade.
“It’s abundantly clear that potential customers are interested in cargo, while passenger is somewhat farther away,” DP World said. “Focusing on pallets is easier to do — there is less risk for passengers and less of a regulatory process.”
The company is also considering a merger with a special purpose acquisition company, or Spac, two people briefed on its strategy said. Virgin Hyperloop, Virgin Group and DP World declined to comment on any plans.
Virgin Hyperloop said it “continues to invite long-term investors who share our vision for the future of transportation”.
The focus on cargo raises questions about the long-term involvement of Virgin Group. But two people familiar with the matter said its commitment remained unchanged, despite Branson previously citing his company’s experience in running passenger transport businesses as a reason for its interest.