Sentiment Extremes - Thinking Ahead
A:I see that I didnt miss much while I was away when it comes to the outside world. Sentiment remains aggressively optimistic, the fed engineered bank recapitalization environment is powering bank earnings, gold is inching higher and just seems on a much higher path, uber liquidity is powering equities and other asset classes, and there is little action by the fed to pull away the punch bowl - Ben is clearly thinking inflate, inflate, inflate our way out of this debt deflationary episode. Can't fight the momentum and this move can last a lot longer than many believe. In my humble opinion, with a few quarters of great data ahead the biggest risk to the markets now is a suprise move by the fed to remove liquidity from the marketplace. When China announced they may constrain bank lending a few months ago, it was good for a 23% correction in just over 3 weeks. That right there is a glimpse of how markets can react when talk of removing the punch hits the headlines. For now, it remains Miller Time!
Jeff's piece in early August, "Here Comes the Long Hangover..But First a Few More Drinks", still seems especially relevant some 10 weeks later:
That attitude unfortunately seems to embody a relentless optimism that still lurks in the American psyche - one that I am not sure is justified, given the financial pickle we're in. I see this optimism in banks that are routinely reporting much higher non-performing assets, but raising their charge-offs much less than those increases. It seems that they think that when they get the properties back and sell them, they will end up being made whole. This thinking rests on the idea of a durable recovery that boosts rents and convinces buyers to lower the risk premium they are currently demanding to provide liquidity of any kind in this environment. It also embodies a belief that debt to bolster purchases of assets will be made available, by someone whose balance sheet hasn't blown up.We are in that period of time where earnings estimates are reflecting the uber stimulus (both fiscal & monetary), uber liquidity facilities, inventory restocking, and increase in confidence that comes with an increase in asset prices across the board. Stocks are a proxy for everything and fears of a second hit to the economy, whether it be CRE or Option Arm recasts or FHA bailouts, are not even getting a worthy glance right now. It seems to me that complacency is starting to set in and the upcoming data will likely reinforce these emotions further that its party time forever!As I have discussed here recently ("Every Upturn Starts with Restocking") it's going to take quite a restocking effort to get back to a reasonable rate of economic activity despite the actual decline in consumer purchasing power. Not only that, as Greenspan pointed out in the interview, consumer purchasing power is highly variable, as the stock market has just re-instated some $3 trillion of consumer wealth that was previously taken away.
It is for this reason that I believe that we will see at least a couple of more quarters of strong economic rebound and one to two quarters of public companies surprising to the upside on earnings estimates. My guess is that the stock market will begin to figure out that the opposing forces at work in the economy will result in very slow GDP growth and a modest future outlook, sometime before year-end and markets will begin to adjust. I don't think it will look anything like the bear market we have just been through, but it could be the beginning of a multi-year period of ups and downs, like the 1970s or the last Japanese decade. But first let's party like it's 1998, just one more time.
It was the punch bowl that contributed to getting us into this mess, it was the punch bowl that helped to get us out of the mess (eliminating systemic banking failure risks and fears of 2008 and early 2009), and I believe it will be the removal of the punch bowl that will trigger the unintended consequences to the mess we got into. First the fed will rein in the emergency credit facilities and lifelines, then the markets will force their hand and they will raise rates (with talk of it being premature of course compared to unemployment situation), then they may have to drain liquidity through permanent open market operations (years out) so that now idle excess reserves don't pour into the economic system, and finally, they may have to raise reserve requirements as part of regulatory reform so that this doesn't happen again.
None of this has happened yet, and rather, world markets are reacting to the most opposite environment today. I guess that is why they call them, unintended consequences. I really wonder when the markets may start to force the feds hand to remove liquidity from the system?
You see, the fed thinks they are king of the hill, lord of the manor right now. Markets are reacting and emotions/expectations have shifted. But that is when something unexpected happens. Maybe decreasing maturity debts will may make the treasury market get hairy:
"...the maturity of Treasury debts is decreasing, from 6 years in 2000 to 4 years today, and dropping towards 2 years. As Karl Denninger comments, this places Treasury in an untenable position: it has to roll over the whole deficit every four years PLUS tack on new debt to cover the deficit. Why would the maturities decrease? Maybe that is all our trading partners will take, since they are rolling out of the Dollar into the YE$ basket. By reducing their exposure to long-term Treasuries they better prepare to get out if the US Peso continues to fall.We know higher rates are coming, what we don't know is when and how fierce the initial adjustment to yet another new world might be. You can't time these things. Perhaps it will be if/when commodities get silly again? How quickly we forget how we all felt in early to mid 2008 when commodities went berserk.When something cannot go on, it doesn’t."
Comments (16)
Map of Current Unemployment Levels in Metro New York City
http://www.localetrends.com/st/ny_new_york_home.php?X=-74.00639&Y=40.71417&ZL=11&MAP_TYPE=curr_ue&CITY_DATA=New York_new_york_current_unemployment_level_heat_map
versus Unemployment 1 year ago
http://www.localetrends.com/st/ny_new_york_home.php?X=-74.00639&Y=40.71417&ZL=11&MAP_TYPE=m12_ue&CITY_DATA=New York_new_york_year_over_year_unemployment_level_heat_map
Posted by Paul | October 14, 2009 2:58 PM
interesting...so we are between 8-12%, I think the last official word was 10.3% or so wasnt it?
Posted by Noah | October 14, 2009 3:28 PM
Lots of talk about Wall Street bonuses now that we are back into earnings season. Any opinion on if that will have a significant effect on NYC real estate? Do you think this is a 1 year pop from all the gov't help and market volatility or is this a return to the 2003-07 party years?
Posted by JR | October 14, 2009 3:46 PM
JR - its a great question. The most direct change I have seen recently, as in the past few months, was a decline in sales volume as sell side optimism seems to be outpacing the increase in buy side confidence for a reflation trade and a sustainable uptrend in prices going forward. Its not that buyers think the market will tank, it did that already, and its not that they are unwilling to improve their bids from 6-8 months ago when fear was high, I find they will do this. However, they will not chase and simply agree to pay a price that was similar to mid/late 2006 up to peak pricing in early to mid 2007. Thats the thing.
Sellers whose properties were trading down 30%, but have since improved and are now trading down 20% or so (meaning that is where the highest and best bids are coming), the improvement as fear was priced out of the market, are now expecting to close a deal for only down 10% or so. And buyers are not budging much more. So we may be in early stages of another minor disconnect out there where buyers say the seller is delusional and sellers say the buyers are unrealistic.
I think its an instant jolt that will ultimately prove to save our markets from a much more sustainable and fierce correction if there was deeper damage to wall street and banking system. The fed simply removed systemic risk and has engineered an environment to save banking system and nurse them back to health. So much liquidity, I wonder if the ultimate exit strategy will prove constraining enough to dampen more sustainable improvement in bids over the next 2-4 years. 2003 - 2005 did not yet see the euphoric move in prices so its hard to compare to back then considering the change in credit, lending, consumer balance sheets, outlook for the asset class, etc..
Posted by Noah | October 14, 2009 4:36 PM
Just look at what happened this week w/treasuries.
The steepener crowd killed the flattener crowd (which includes Bill Gross) these past 5 trading days.
Note how yields sold off and fueled a stock market rally once the TNX bounced off the 200 MA. Looks like we have resistance at the 50 MA level though. I would not be surprised if equities corrected once the TNX hit 3.4%.
http://stockcharts.com/h-sc/ui?s=$TNX&p=D&b=5&g=0&id=p00710260226
Posted by In Debt We Trust | October 14, 2009 6:40 PM
Noah,
i think stock market is inflated and not based on fundamentals. JPM is chaos. How they can make so much money in this market?
They cook the books. And we all know that is inflated earnings.
I think smart guys do not buy into this. When an average guy things that economy is getting better and start buying yahoo like in dot com bubble, market starts to crash!
NYC real estate prices are inflated too. I do not see smart guys with money paying almost 2007 prices per sf.
Buyers including me, having all patience in the world. We are not in rush to buy cause it just does not feel right.
Every single big city in the USA crashed (real estate) and NYC is holding up. But for how long?
Posted by Joe D | October 14, 2009 8:18 PM
well stocks are and always will be irrational. Its a liquidity driven marketplace that is equalizing to a world without systemic risk that was priced in before. the markets have been pricing that out.
who knows what the right level is. complacency certainly does seem to be settling in but then again, still many out there dont believe the rally, so maybe it has more legs.
as for manhattan real estate, I think the biggest move down we will see in this cycle occurred already. Since, bids have improved. But now what? Sellers expect bids to improve more, buyers are getting a bit less optimistic to chase and pay near peak levels. Trades seem to still be occuring in that comfort zone down from peak, but at better levels than 7-8 months ago. Sellers need to understand that but they get caught up in euphoria too and expect more.
Posted by Noah | October 15, 2009 7:58 AM
A friend of mine bet me yesterday that next Fed meeting rates will go up. I gave him the China example of what happened and he quickly had to lower his bet.
re: Disconnect: As the NJ guy, we got some great news yesterday. Wall St. was moving 1,600 jobs to Jersey City's Newport section in exchange for $90 million in tax incentives over 20 years. http://www.newjerseyrealestateguys.com/business-finance/wall-street-jersey-city/
My office got an unusual amount of calls yesterday after the news from sellers either thinking about an offer they received or those whose homes were listed. They wanted to know if they should wait for a better offer. If I told the potential buyers that, they would walk. Problem = Disconnect. This will be an issue for a couple years.
Posted by Scott | October 15, 2009 8:52 AM
Scott - always enjoy your NJ comments. How have bids improved since 7-8 months ago? Is it tiered based on price point as Manhattan is with lower end way more active than high end (3-5M+)?
Where is your market seem to be trading in relation to peak, and in relation to fear trades earlier in 2009?
Thanks
Posted by Noah | October 15, 2009 8:59 AM
Noah -
Good question. It's been night and day different. I did some numbers the other day actually. Bids are certainly higher now, but here's a good stat on closings:
From Jan 1 thru Feb 28, 57 units sold in Hoboken and the sellers got an average of 88% of the most recent listing price.
From Aug. 1 thru Sept. 30, 134 homes sold (235% increase!) sellers got an avg. of 95% of their most recent listed price.
Big difference in a high end market. Tax credit, lending leniency with FHA jumbos, and confidence was key.
Posted by Scott | October 15, 2009 9:21 AM
Here's an inverse indicator for unemployment that few have thought about:
Military recruiting. Recruiters generally have an easier time signing up disenfranchised youth during hard times than during boom times.
I would not be surprised if they met all their quotas for this year - even in the light of increased chances of death in the war torn Middle East.
Posted by In Debt We Trust | October 15, 2009 12:53 PM
In Debt,
That's a very interesting insight that the media outlets seem to have missed. I wonder if Obama's advisors will weigh that dynamic while he contemplates the imminent crucial decisions coming up over Afghanistan....
Posted by Former Seller | October 15, 2009 6:20 PM
Invest in your real estate investment education. You must devote the time in order to obtain the information you need for your education. Visit the leading blogs in the field and make comments. Find message boards at which real estate gurus post on.
Posted by london ontario real estate | October 16, 2009 3:49 AM
Former Seller,
Here is the Washington Post story on military recruiting:
For the first time in more than 35 years, the U.S. military has met all of its annual recruiting goals, as hundreds of thousands of young people have enlisted despite the near-certainty that they will go to war.
http://www.washingtonpost.com/wp-dyn/content/
article/2009/10/13/AR2009101303539.html
Posted by In Debt We Trust | October 16, 2009 4:24 PM
Should be interesting politically if the president goes with a military type surge plan; he could use this data to support his decision, but it would be very tricky to explain this publicly.
Posted by Former Seller | October 16, 2009 5:06 PM
Good post and commentary. I think Realtors internet marketing is great but people
are getting way to caught up with it and think that if you
are great at blogging and marketing…the $$ just rolls in.
Posted by Alexis Jameson | October 16, 2009 11:10 PM