Wall Street's Best Minds
Bill Gross: The Past 40 Years Are Unrepeatable
The fund manager writes that economic trends that have fueled outsize returns are coming to an end.
By William H. Gross
You can observe it as well in the “discounts” to NAV or Net Asset Value in closed-end funds. They are historically tight, indicating very little “carry” for assuming a relatively illiquid position.
John Mauldin, Editor
Outside the Box
Maximizing Your Social Security Benefits
U.S. Home Prices Jump as Supply Pinch Plays Out
Sign the housing market has momentum heading into the spring selling season
By Laura Kusisto and Chris Kirkham
Photo: Wilfredo Lee/Associated Press
Home prices are back to near-record highs across the U.S. amid rising demand and supply constraints, a sign that the lopsided housing-market recovery of the past five years is gaining some strength.
The S&P/Case-Shiller national home-price index, released Tuesday, has clawed its way back to within 4% of its 2006 peak, a steep rise from the near 30% decline at the bottom in 2012.
U.S. new-home sales, meanwhile, in April posted their strongest month in more than eight years, with a nearly 17% jump from a month earlier, the Commerce Department said last week.
After years of volatility, home prices have grown at a rate around 5% since early 2015. That bodes well for sellers heading into the peak home-selling season in May and June but could pose challenges for buyers, especially first-timers who may be priced out of the market as supply, particularly among starter homes, remains thin.
But the rise in prices comes amid lingering weakness in some parts of the market. Overall sales volume and new construction remain well below their pre-crisis peaks. And a broader collection of figures point to an uneven recovery that has seen a flourishing market at the high end, mainly in big U.S. cities, while the lower end lags.
Despite the unbalanced recovery, Federal Reserve officials have seen housing as a bright spot for the U.S. economy in recent years. Residential construction has contributed to overall economic output for eight straight quarters, expanding at a 17% annual rate in a first quarter marked by slow growth in other sectors.
Yet while sales are increasing, they have nonetheless been stymied by a lack of new inventory and first-time home buyers. Sales of existing homes, which account for the bulk of the overall market, clocked in at a 5.45 million seasonally adjusted annual rate in April, the second consecutive monthly increase but below the peak seen during the last decade’s boom.
The S&P/Case-Shiller national index rose 5.2% in March. But that is mainly because of a lack of inventory, economists said. When adjusted for inflation the S&P/Case-Shiller index remains about 20% below its peak reached in 2006.
Building activity, meanwhile, remains muted compared with normal markets. April’s single-family housing starts were at a seasonally adjusted annual rate of 778,000 units, down from a more than five-decade average of about 1.03 million, according to Census data.
Still, several markets have surpassed their 2006 price peak, prompting concerns about a bubble.
In Dallas, where prices have returned to record levels, first-time buyers have struggled to get into the market. Shriveling inventories of starter homes have driven up prices and led to bidding wars, while wealthier buyers enjoy a better selection of luxury properties to choose from.
That has made it difficult for buyers like Jeremy Ponce and his wife, Lyndel, who started looking to purchase a home in Dallas last spring after living in a rental apartment.
They were hoping to find a smaller starter home in the urban center, but quickly realized how competitive the market had become. With inventories at nearly three-decade lows in Dallas, most of the homes in their price range required too many repairs.
“The price they wanted just didn’t seem realistic,” said the 31-year-old Mr. Ponce, who works as a project manager for a company that builds rail cars. “Some of them were only a little bit bigger than our apartment.”
The couple widened their search away from downtown, but it still took about six months to find what they were looking for: a 3-bedroom, 3½-bath home that was about a five-minute drive from popular entertainment districts. They put in an offer of $417,000, above the asking price of $399,000. Yet Mr. Ponce said they considered themselves lucky.
Homeownership has been declining since the peak of the housing bubble. The national rate slipped in the first quarter to a near four-decade low of 63.5%, according to the Commerce Department. The homeownership rate for households headed by someone under 35 years old fell to 34% in the first quarter of this year, the lowest level since at least 1994.
One main culprit: stricter lending standards since the financial crisis, which have made it tougher for lower earners to qualify for mortgages.
That, in turn, has prompted builders to focus their efforts on the higher-end segment of the market.
New homes under $200,000 made up 19% of U.S. sales last year, down from 38% four years earlier, according to U.S. Census data.
An influx of high-earning workers to big U.S. cities is magnifying the imbalances by driving up rents and setting off a scramble among developers to build luxury condominiums and apartment buildings.
The S&P/Case-Shiller index covering the 20 largest U.S. cities rose 5.4% in the 12 months ended in March, outpacing the overall market.
In the hottest regions in the country, primarily on the West Coast, prices rose at a double-digit pace in March, with Portland, Ore., reporting a 12.3% year-over-year gain, Seattle showing a 10.8% gain and Denver logging a 10% increase.
Portland has been one of the nation’s most robust real estate markets over the last few years as its growing technology sector attracts workers. That has created strong demand for available parcels of land, driving up the individual lot prices—and thus the asking price for a new home.
Jim Chapman, president of Legend Homes, said lenders often are only willing to finance surefire projects at the higher end of the price spectrum.
“Even if you have a lender who will loan you money to operate with, you have to show that that project is actually going to make a profit,” Mr. Chapman said.
Mr. Chapman said he is spending between $250,000 and $350,000 just to acquire and develop the land, before even starting to build the home.
“You can’t build a house that’s going to sell for $299,000 to an entry-level market if you spent more than that for the land,” he said.
The Bail-In: Or How You Could Lose Your Money in the BankBy: David Chapman
What that means is that shareholders, bondholders and depositors, rather than taxpayers, are responsible for the bank's risks in the event of a failure. During the 2008 global financial crash, banks that were deemed "too-big-to-fail" were bailed out by the government, meaning the taxpayer footed the bill. None of the banks were Canadian banks, but it does need to be noted that Canadian banks received some $114 billion from Canada's federal government. This was against the background of Canadian banks being declared "the most sound banking system in the world." At the time, the government denied there was any bailout, preferring to use the term "liquidity support." To put the amount in perspective, $114 billion is roughly 7% of Canada's GDP.
The 2016 budget notes that in implementing a "bail-in" regime, it will strengthen the bank resolution toolkit in Canada and ensure Canadian banking practices are consistent with international best practices endorsed by the G20. Bail-in regimes are being instituted in the Western economies especially - in the EU, the USA, Japan, Australia and, of course, Canada.
This isn't the first time that a bail-in has been introduced, as the previous government came forward with one in 2013, and in 2014 presented a consultation paper. Initially it was thought that depositors would be excluded.
Surprisingly, in the budget, depositors are not mentioned specifically. It should be noted, however, that depositors have paid a price in bail-ins that have already occurred in Cyprus and in Italy. So the risk to depositors cannot be ignored.
First of all let's dispel a myth surrounding bank accounts. Most Canadians hold their funds in chequing and savings accounts. These are known as "demand" deposits. Most people mistakenly believe that their monthly bank statements show them how much they own. Au contraire. They are in fact a statement of what the bank owes its clients.
Under Canada's fractional reserve system, the banks promise to keep some cash on hand in the event of withdrawals, but the reality is that they lend out the funds or use the funds to purchase assets or incorporate into their global trading operations. The funds on deposit are no longer the property of the depositor. Instead the depositor becomes an unsecured creditor or lender to the bank. Banks pay you interest, but their real purpose is to use your funds to earn a spread.
They put your funds at risk in the global markets through lending, syndication and trading.
If things do go wrong, depositors get nervous and run to the bank to withdraw their funds. This is known as a "bank-run." A "bank holiday" could also be declared in the event of a massive bank-run. What happens, essentially, is that the bank closes its doors and the ATM machines.
This happened during the Great Depression, and also happened most recently in Cyprus.
Effectively what happens with a bank holiday is that the bank bails itself in. And even that was insufficient to save many banks in the Great Depression and in Cyprus.
Canada does have an insurance safety net to protect depositors from bank failures. In 1967 Parliament created the Canadian Deposit Insurance Corporation (CDIC). The CDIC is a federal crown corporation similar to the Federal Deposit Insurance Corporation (FDIC) in the US. The CDIC is charged with maintaining public confidence in Canada's financial system.
It pays to know which financial institutions are covered and which ones are not. Most Canadian banks, loan companies and trust companies are CDIC members. Some banks and credit unions, and foreign banks that have branches in Canada, are not covered. Check the CDIC's website if you are unsure www.cdic.ca.
The CDIC covers up to $100,000 in deposits. That could include individual accounts, joint accounts, trust accounts and bank savings in a registered retirement savings plan (RRSP), registered retirement income funds (RIFs) and savings to pay realty tax on mortgage payments. Diversifying accounts among financial institutions helps ensure as wide a coverage as possible.
Eligible products include chequing and savings accounts, guaranteed investment certificates (GICs) and term deposits that mature fewer than five years from date of purchase, money orders and drafts, certified cheques and traveler's cheques. It doesn't cover foreign currency accounts, GICs that mature more than five years from date of purchase, government bonds, treasury bills, mortgage backed securities (MBS), stocks, mutual funds and gold certificates issued by a Canadian bank. Note that it covers deposits only in Canadian dollars.
Canada does not have an extensive history of bank failures, not even during the Great Depression. Banks or financial institutions tend to be merged or taken over, even ones that could be on the verge of failure. The last failures were Northland Bank and Canadian Commercial Bank in 1985. Prior to that, the last one was Home Bank in 1923. Confederation Life Insurance Co. (CLIC) collapsed in 1994, but that was an insurance company.
Canadian banks are generally well rated, but they are not what one would call AAA. The following are the credit ratings of Canada's banks (Standard & Poor's):
Toronto-Dominion Bank (TD) - AA-
Royal Bank of Canada (RBC) - AA-
Bank of Nova Scotia (BNS) - A+
Canadian Imperial Bank of Commerce (CIBC) - A+
Bank of Montreal (BMO) - A+
National Bank of Canada (NBC) - A
Caisse centrale Desjardins (Caisse) - A+
Laurentian Bank of Canada (Laurentian) - BBB
Canada Western Bank (CWB) - Not rated
Canadian banks are regulated by the Office of the Superintendent of Financial Institutions (OSFI), which regulates and supervises not only banks but also trust and loan companies, insurance companies, cooperative credit associations, fraternal benefit societies, and private pension plans. The OSFI does not regulate the securities industry or the mutual fund industry. The OSFI reports to Parliament through the Minister of Finance.
Those at risk of a bail-in in the event of a failure are subordinated debt holders, bondholders, preferred shareholders and any accounts in excess of $100,000 not covered by CDIC insurance. Their bonds, preferred shares, deposits etc. would be converted to capital to re-capitalize the banks.
According to the financial statements of the CDIC, they insured some 30% of total deposit liabilities, or $684 billion, as of April 30, 2014. The remaining 70% not insured would primarily be large depositors, including both large and small businesses, and other banks and financial institutions.
Depositors can avoid problems in a bail-in regime, but to do so they must be aware of the rules and have taken steps to ensure the safety of their funds. The bail-in regime would only apply to eligible Canadian banks and financial institutions. As was noted, it would not cover brokerage accounts, pension funds and mutual funds.
Some steps that an investor might take: diversify savings across banks and even countries; look carefully at the health of your bank or financial institution; own assets outright and reduce or avoid risk to custodians and trustees; avoid investments where there is significant counterparty risk, such as exchange-traded funds (ETFs) or structured products; avoid banks with large derivative or mortgage books; and be aware of your bank's or financial institution's credit.
Finally, it would be wise to own physical gold in fully allocated accounts where you are the owner. Gold, unlike banks, has no liability.
Don't Jump Into Gold Just Yet
by: Hebba Investments
- The big Friday in gold was not included in the latest report and thus investors will need to wait until next week to see the resultant positions.
- While the COT wasn't interesting, the weak jobs report showed the power of the Fed on the gold market.
Investors need to be patient because despite the weak jobs report we think the Fed is still committed to a June or July rate hike.
The COT report is issued by the CFTC every Friday, to provide market participants a breakdown of each Tuesday's open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. In plain English, this is a report that shows what positions major traders are taking in a number of financial and commodity markets.
Why Your Pension Could Be Reduced to “Virtually Nothing”
If you or a loved one has a pension, please read this Dispatch closely.
As we’re about to show you, America’s pension system is close to collapsing. When it does, millions of Americans will lose a huge part of their life savings.
Many folks will be unable to retire. Some will need government assistance just to make ends meet.
It wasn’t always this way. For years, America’s pension system worked fine. Employees would pay into the pension during their working years. When they retired, the pension would send them a check every month. Folks could count on their pension to be there when they needed it.
Those days are over.
• One of America’s largest private pension funds is running out of money…
The Central States Pension Fund manages nearly $18 billion for 400,000 workers in 37 states.
Like many pension funds, it’s running out of money. It pays out about $3.50 for every $1 it takes in. It doesn’t take a math whiz to realize that’s a serious problem.
In February, the fund announced plans to cut benefits by as much as 61%. A retiree receiving $3,000 a month would only get $1,180 after the cuts go into effect.
The fund sent out letters warning pensioners that their benefits would be drastically cut.
• Dan Steinhart, executive editor of Casey Research, says the story hit close to home…
A close family member of mine got one of those scary letters in the mail.
He’s 78 years old and retired. He worked as a truck driver for a large, well-known company for 40 years. For most of his career, he paid into the pension.
The pension promised to pay him about $2,500/month ($30,000/year) when he retired. Not a ton of money. But combined with Social Security and what he saved up for retirement, it would have been enough to live on.
Well, he recently got this letter in the mail. It essentially says the pension will go broke unless it drastically reduces his payments. Here’s a copy of the actual letter, with his personal information blacked out:
If you can’t make out the text, here’s the most important part:
The Plan’s actuary has calculated that if the proposed reductions are not implemented, then the Plan is projected to be insolvent and unable to pay benefits when due during the plan year starting February 1, 2017.
In other words, the fund will go broke if it doesn’t greatly reduce payments to retirees.
• Before the cuts go into effect, the government needs to approve them…
According to CNNMoney, the Treasury Department rejected the plan because “it would not actually head off insolvency.”
Now, the fund’s only chance at survival is if the government rescues it. CNNMoney reported last month:
The Central States Pension Fund has no new plan to avoid insolvency, fund director Thomas Nyhan said this week. Without government funding, the fund will run out of money in 10 years, he said.
At that time, pension benefits for about 407,000 people could be reduced to "virtually nothing.”
• Four other multi-employer pension funds have announced benefit cuts since December…
Many more funds will likely do the same.
According to the Pension Rights Center, 58 multi-employer plans are in “critical and declining” status, meaning they might have to cut benefits to survive. Seven of these funds have warned that they could go broke within eight years.
• Many pensions are recklessly trying to close their “funding gaps”…
As we said earlier, a pension collects money from workers. But it doesn’t just stick this money in a vault. It invests it.
Until recently, pension funds invested almost exclusively in bonds.
Generally speaking, bonds are less risky than stocks. When a company issues a bond, it promises to pay back the loan amount plus interest. When a company issues stock, it doesn’t make any promises like this. Instead, stock investors get a share of a company’s profits…that is, if it makes any profits.
Bonds are also less volatile than stocks. They performed much better than stocks during the last two financial crises. The Wall Street Journal reported on Tuesday:
[I]n 2002, safer corporate bonds returned about 11%, while U.S. stocks fell roughly 22%…
But during the 2008 crisis, stocks fell more than 37% and higher-quality bonds declined 3.3%.
• Thanks to the Federal Reserve, most bonds pay next to nothing these days…
As Dispatch readers know, the Fed has held its key interest rate near zero since 2008. This has made it extremely hard to earn a decent stream of income.
In 2007, a 10-Year Treasury yielded 4.6%. These days, it pays 1.8%. And 10-year, high-quality corporate bonds yield about half of what they did in 2007.
• Yet, most pension funds still have wildly optimistic investment targets…
Most expect to make between 7% and 8% returns on their money each year.
They can’t do that owning bonds alone. They have to own riskier assets. The Wall Street Journal reports:
To even come close these days to what is considered a reasonably strong return of 7.5%, pension funds and other large endowments are reaching ever further into riskier investments:
adding big dollops of global stocks, real estate and private-equity investments to the once-standard investment of high-grade bonds. Two decades ago, it was possible to make that kind of return just by buying and holding investment-grade bonds, according to new research.
• Most pension funds are falling well short of their investment goals…
Last year, the average pension fund made just 0.30%.
These funds are making almost nothing while risking billions of dollars. That’s because the stock market is a very dangerous place to be in right now.
As Dispatch readers know, U.S. stocks are expensive. Corporate earnings are falling. And many important stocks are trading like a financial crisis has begun.
• A stock market crash would accelerate America’s pension crisis…
It would lead to billions of dollars in losses. It would force many more pension funds to slash benefits. And it would almost certainly cause some funds to fold.
To make matters worse, the government won’t be able to bail out broke pension funds. The Washington Post reported on Monday:
The Pension Benefit Guaranty Corp., which insures private pensions, is dealing with long-standing financial woes with the fund that protects multi-employer pension plans. The program, which some experts say wasn’t really intended to be used, was set up more than four decades ago to serve as a backstop for private-sector pension plans. But it has been relied on more than expected by large plans on unsteady financial footing.
The fund’s deterioration could pose a threat to the 10 million people in multi-employer plans who could soon be left without a safety net for their pensions.
• Millions of Americans could see their life savings disappear…
We encourage you to take control of your financial future whether you have a pension or not.
U.S. pension funds are the single largest pool of money in the world… If they collapse, the global financial system collapses.
We urge you to own cash and physical gold. Right now, the global financial system is incredibly fragile. Setting aside cash will help you avoid losses if stocks fall. This will also put you in a position to buy stocks when they get cheaper.
Physical gold will also help you preserve wealth. Gold has served as real money for centuries because it has a rare set of qualities: It’s durable, easily divisible, and easy to transport. You can take a gold coin anywhere in the world and folks will recognize its intrinsic value.
Gold is also a safe haven asset. Its value often soars when the economy or financial system runs into serious trouble.
Casey Research founder Doug Casey thinks the price of gold will “go to the moon” in the coming years. In short, Doug believes we’re about to get hit by a major financial crisis. When this happens, “paper currencies will fall apart, as they have many times throughout history.”
This crisis will impact every American. It won’t matter if your money is in a pension, the stock market, or even one of America’s “too-big-to-fail” banks.
Chart of the Day
If you want a decent return these days, you'll have to own risky assets.
Today’s chart shows the “basket of assets” a typical investor would need to own to earn a 7.5% return. Remember, most pension funds aim for annual returns of between 7% and 8%.
In 1990, you could make this by owning just bonds. These days, you have to own stocks, real estate, and other risky assets to have a shot at a 7.5% return.
This is what the mainstream media calls “reaching for yield.” It’s why so many investors could lose a fortune during the financial crisis. Again, you can thank the Fed for this.
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Las convicciones son mas peligrosos enemigos de la verdad que las mentiras.
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
No soy alguien que sabe, sino alguien que busca.
Only Gold is money. Everything else is debt.
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Quien no lo ha dado todo no ha dado nada.
History repeats itself, first as tragedy, second as farce.
We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.
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