Two months ago I answered the query, Is There A Bubble In The Canadian Condo Market? for my subscribers. The missive started off like this: 

The Canadian condo market is running into a precarious over-supply situation with large inventories slated to be entering the market in 2014 and 2015. Major centers such as Vancouver, Montreal and Toronto are witnessing a rapid pace of condo construction, despite falling sales. The demand for housing overall is slowing down, with sales in the last few months of 2013 falling on y-on-y basis. In most major Canadian markets there is an increase in listings and decrease in sales (even though prices are still somehow rising, which should in and of itself be indicative of a problem). 

Well, the Financial Times is now weighing in on the issue... Canada’s housing market teeters precariously

Robert MacFarlane, a long-time crane operator, surveys his empire from the top of one of Toronto’s flashy new apartment buildings. “I can see more than 50 tower cranes,” said Mr MacFarlane, whose bird's-eye photography from the country’s tallest crane has gained him online notoriety as interest in Toronto’s property sector escalates.

These cranes – which can offer clues to bubble-like conditions – emerged in response to lofty demand for condominiums from investors and homebuyers taking advantage of Canada’s ultra-low interest rates.

This is a fact. I've observed this in the bubble markets that I've personally experienced: Miama, NYC, DC - cranes and construction galore. In retrospect it appears virtually impossible for anyone NOT to realize we were in a bubble.

But as home prices rally and construction projects proliferate – particularly in Toronto, Montreal and Vancouver – industry analysts say the country’s property sector is perched precariously at its peak.

David Madani, economist at Capital Economics, believes the nation is on the verge “of what will prove to be a prolonged correction”.

“Canada’s housing market exhibits many of the symptoms that preceded disruptive housing downturns in other developed economies, namely overbuilding, overvaluation and excessive household debt,” he adds.

Mr Madani’s comments chime with a chorus of policy makers, rating agencies and hedge fund managers who have warned of the risks posed by Canada’s overheated housing market.

Alongside Norway and New Zealand, Canada’s overvalued property sector is most vulnerable to a price correction, according to a recent OECD report. It is especially at risk if borrowing costs rise or income growth slows.

And why in the world would borrowing costs rise with all of the world's most powerful central banks pushing #ZIRP4EVA???

In its latest monetary policy report, the Bank of Canada, the nation’s central bank, noted: “The elevated level of household debt and stretched valuations in some segments of the housing market remain an important downside risk to the Canadian economy.”

The riskiest mortgages are guaranteed by taxpayers through the Canada Mortgage and Housing Corporation, somewhat insulating the financial sector from the sort of meltdown endured by Wall Street in 2007 and 2008. But a collapse in home sales and prices would be a serious blow to consumer spending and the construction industry that employs 7 per cent of Canada’s workforce.

But isn't that a circular argument???

...the flipside of a low interest rate policy designed to buttress the economy has meant that household debt levels have hit record highs as homebuyers stretched themselves to jump into the housing market. That in turn propelled demand and prices.

... Household debt has risen to 163 per cent of disposable income, according to Statistics Canada, while separate data show a quarter of Canadian households spend at least 30 per cent of their income on housing. This is close to the 1996 record when mortgage rates were substantially higher.

On a price-to-rent basis, which measures the profitability of owning a house, Canada’s house prices are more than 60 per cent higher than their long-term average, the OECD says.

... Year-to-date new home sales in the Greater Toronto Area – an area accounting for a fifth of Canada’s home building activity – are down by half from two years ago, according to the Building Industry and Land Development Association.

... Mr Madani forecasts a market correction in home prices over the next few years, predicting a 25 per cent drop.

But those that are bullish on the market point to resilient regional data. October sales of existing homes rose 38 per cent in Vancouver and 19 per cent in Toronto.

“It’s a mistake to think that what happened in the US will happen in Canada,” said Gregory Klump, CREA’s chief economist said.

Yes, because this time it's different!!!

... Mr MacFarlane too has yet to be convinced of an imminent slowdown. “In the past when things have slowed down, there has been a distinct ‘feeling’ from the boots on the ground perspective. I don’t really sense that right now.”

Nothing like that good 'ole empirical forensic analysis to make an investor feel all warm and cozy, right?!

All paying subscribers, feel free to download.

File Icon Is There A Canadian Condo Bubble? (Residential Real Estate)

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More on this topic...

    1. The Canadian Real Estate Bubble? Featured -Jul 25, 2012 - Below is an email that I recieved from a reader: RIO Canada is one of the biggest reit's in Canada I know some of there management and from 

...

Published in BoomBustBlog

I like Professor Shiller and respect his work. Really, I do, but... Massive bubbles, the sort of the proportion of the 2008 crisis, are nigh impossible to miss if you can add single digits successfully and are able to keep your eyes open for a few minutes at a time. Yes, I truly do feel its that simple. I saw the property bubble over a year in advance, cashed out and came back in shorting - all for a very profitable round trip. Was I a genius soothsayer? Well, maybe in my own mind, but the reality of the situation is I was simply paying attention. Let's recap:

  1. The housing market crash in the spring of 2006 and publicly in September of 2007:Correction, and further thoughts on the topic and How Far Will US Home Prices Drop?
  2. Home builders falling and their grossly misleading use of off balance sheet structures to conceal excessive debt in November of 2007 (not a single sell side analyst that we know of made mention of this very material point in the industry): Lennar, Voodoo Accounting & Other Things of Mystery and Myth!
  3. The collapse of Bear Stearns in January 2008 (2 months before Bear Stearns fell, while trading in the $100s and still had buy ratings and investment grade AA or better from the ratings agencies): Is this the Breaking of the Bear?

We all know what happened after this part. Well, 5 years later, before we even ran off the effects of the last crash, things are looking bubblicious again and again very few are facing facts. Reuters/CNBC reports "Nobel Prize Winner Says Housing Market Looking A Little Bubbly":

Robert Shiller, who shared the 8 million Swedish crown ($1.25 million) prize with fellow laureates Eugene Fama and Lars Peter Hansen, said the U.S. Federal Reserve's economic stimulus and growing market speculation were creating a "bubbly" property boom.

You think so?!

The Royal Swedish Academy of Sciences lauded the economists' research on the prices of stocks, bonds and other assets, saying "mispricing of assets may contribute to financial crises and, as the recent global recession illustrates, such crises can damage the overall economy."

This was the case in the collapse of the U.S. housing market, which helped trigger the 2008-2009 global financial crisis. Markets are at risk of committing the same error now, Shiller told Reuters after learning he had won the Nobel prize.

"This financial crisis that we've been going through in the last five years has been one that seems to reveal the failure to understand price movements," Shiller said.

Bubbles are created when investors fail to recognize when rising asset prices become detached from underlying fundamentals.

Shiller and other economists warn that prices in some markets have risen too far, too fast due to the Fed's ultra-easy monetary policy. The benchmark U.S. Standard & Poor's 500 index hit a record in September, though it is generally not considered overvalued based on expectations for corporate earnings results or economic growth.

Shiller's work led him to suggest in 2005 that the U.S. housing market might be overheating. He helped create a closely watched gauge of housing prices, the S&P Case/Shiller Index.

In June this year, he pointed to a potential new housing bubble in some of America's largest cities. 

"It is up 12 percent in the last year. This is a very rapid price increase right now, and I believe that it is accelerated somewhat by the Fed's policy," he said.

China, Brazil, India, Australia, Norway and Belgium, among other countries, were witnessing similar price rises. "There are so many countries that are looking bubbly," he said.

The Fed has held U.S. interest rates near zero since late 2008 and almost quadrupled its balance sheet to around $3.7 trillion through a campaign of bond buying, or quantitative easing, to hold down long term borrowing costs.

Bloomberg TV & Reggie Middleton on the Flawed Case Shiller Index: "That's what they said in Japan about 12 years ago, look where they are now!"

Previous opinions on the topic...

Is There A Bubble In The Canadian Condo Market? We Drill Down Into The Facts To Find Out

The Canadian condo market is running into a precarious over-supply situation with large inventories slated to be entering the market in 2014 and 2015. Major centers such as Vancouver, Montreal and Toronto are witnessing a rapid pace of condo construction, despite falling sales....

20130406 FBC371

Bernanke's Bluffing Because A True QE Pullback Will Cause Fundamentals To Reassert In Banking Sector

A little over two years ago I queried "Is Another Banking Crisis Inevitable?". This post attracted the attention of certain ING executives who apparently were asking themsevles the same question. I was invited as the keynote speaker at their valuation conference in Amsterdam wherein I dropped the negative reality bomb! Interest rates were GUARANTEED to spike and when they do, those banks with fictitious bank sheet values and business models predicated upon credit bubble metrics were GUARANTEED to start collapsing. 

It's not just the European banks either. In 2009 I queried "Why Doesn't the Media Take a Truly Independent, Unbiased Look at the Big Banks in the US?". Then there's real esate in both the US... CNBC's Fast Money Discussing Hopium in Real Estate...

 

hat visual relationship is corroborated by running the statistical correlations...

Reggie Middleton ON CNBC's Fast Money Discussing Hopium in Real Estate

 

Crain's New York illustrating Reggie's BoomBustBlog and the followup article in Crains illustrating his accuracy in calling real estate and the European debt debacle,"

“His work is so detailed, so accurate, it's among the best in the world,” says Eric Sprott, CEO of Sprott Asset Management, a Toronto firm that manages about $5 billion and subscribes to Mr. Middleton's research.

Published in BoomBustBlog

The Canadian condo market is running into a precarious over-supply situation with large inventories slated to be entering the market in 2014 and 2015. Major centers such as Vancouver, Montreal and Toronto are witnessing a rapid pace of condo construction, despite falling sales. The demand for housing overall is slowing down, with sales in the last few months of 2013 falling on y-on-y basis. In most major Canadian markets there is an increase in listings and decrease in sales (even though prices are still somehow rising, which should in and of itself be indicative of a problem).

However, what is holding the housing market from the “steep and prolonged fall” that the American and periphery EU markets experienced is the extremely low interest rate offered by the banks in a bid to maintain their top line and bottom line. (Note: ~>70% of the mortgages in Canada are insured by Canada Mortgage and Housing Corporation.  The banks therefore are more than motivated to lend for home mortgages). This “ZIRP” (Zero Interest Rate Policy) environment portends material volatility when it comes to an end, either voluntarily through the prospect of organic economic growth, or involuntarily through natural market forces coming to bear. The reason is that at no time in the history of the developed world has interest rates been this low for this long.

20130406 FBC371

The caveat is, economic growth, the primary reason for cutting rates this low for this long – has never materialized, dispute the flood of free or even negative interest rate money that's been flooding the markets. 

When (and that's "when", not "if") risky asset prices decide to revert to mean the snapback to bank balance sheets and economic profit has the potential to be devastating. Yes, even to those conservative Canadian banks.

Click to enlarge, and study carefully...

Reggie Middleton Canadian Condo Bubble

... and on the topic of "Bail-ins"

All paying subscribers, feel free to download.

File Icon Is There A Canadian Condo Bubble? (Residential Real Estate)

Non-subscribers can purchase this report through a day pass subscription via PayPal or Credit Card

Published in BoomBustBlog

A little over two years ago I queried "Is Another Banking Crisis Inevitable?". This post attracted the attention of certain ING executives who apparently were asking themsevles the same question. I was invited as the keynote speaker at their valuation conference in Amsterdam wherein I dropped the negative reality bomb! Interest rates were GUARANTEED to spike and when they do, those banks with fictitious bank sheet values and business models predicated upon credit bubble metrics were GUARANTEED to start collapsing. 

It's not just the European banks either. In 2009 I queried "Why Doesn't the Media Take a Truly Independent, Unbiased Look at the Big Banks in the US?". Then there's real esate in both the US... CNBC's Fast Money Discussing Hopium in Real Estate...

That visual relationship is corroborated by running the statistical correlations...

The relationship is obvious and evident! In addition, we have been in a Goldilocks fantasy land for both interest rates and CRE for about 30 years. CRE culminated in the 2007 bubble pop, but was reblown by .gov policies and machinations. The same with rates. Ever hear of NEGATIVE interest rates where YOU have to PAY someone to LEND THEM MONEY!!!

So, BoomBustBloggers, where do YOU think rates are going to go from here? Up of Down???

and Europe...

 

Those who wish to download the full article in PDF format can do so here: Reggie Middleton on Stagflation, Sovereign Debt and the Potential for bank Failure at the ING ACADEMY-v2.

 

Published in BoomBustBlog

Here's proof, pulled off of the St. Loius Fed's site, and espoused in front of the actual entrance to the NY Fed.

More on the matter...

Bernanke's Lying Through His Teeth and Not A Single Pundit/Analyst/Banker Has Called Him On It!!!

Is The New US Consumer Consumption Bubble Primed To Pop? Yes, There's A Bubble!!!


Recent and related research

Below are three companies that probably will not do well even with Bernanke's machinations. When and if Bernanke fails, look out below.... Click here to subscriber!

Retailer Preliminary Analysis 08/03/2012
Published in BoomBustBlog
Thursday, 03 May 2012 10:03

US Employment Hopium Smoking Idealists?

All over the MSM today, we here Jobless Claims in U.S. Fall More Than Forecast, presented as good news. Of course, a little digging finds that not only was the jobless rate from last month adjusted upward retroactively (as it nearly always is), but "Too-Sick-to-Work Americans Shrink U.S. Labor Force". In other words “With a rising number of disability beneficiaries, there are both lower unemployment rates and lower participation rates.” As reported by Bloomberg, and to wit:

The number of workers receiving SSDI jumped 22 percent to 8.7 million in April from 7.1 million in December 2007, Social Security data show. That helps explain as much as one quarter of the decline in the U.S. labor-force participation rate during the period, according to economists at JPMorgan Chase & Co. and Morgan Stanley.

Expiring Benefits

The participation rate -- the share of working-age people holding a job or seeking one -- was 63.8 percent in March after falling to a three-decade low of 63.7 percent in January. Disability recipients may account for as much as 0.5 percentage point of the more than 2 point drop since the end of 2007, the economists calculate, and that contribution couldgrow when some extended unemployment benefits expire at the end of this year.

“How we measure and understand what’s going on in the economy can be influenced by the degree to which various public- support programs are available and being used,” said Michael Feroli, chief U.S. economist at JPMorgan in New York. “With a rising number of disability beneficiaries, there are both lower unemployment rates and lower participation rates.”

Bloomberg also reports U.S. Productivity Falls, but I must say non-sequitur... It simply does not follow...

The productivity of U.S. workers fell in the first quarter, indicating businesses are reaching the limit of how much efficiency they can wring from the workforce.

The measure of employee output per hour declined at a 0.5 percent annual rate after a 1.2 percent gain in the prior three months, figures from the Labor Department showed today in Washington. Expenses per worker increased at a 2 percent rate, less than estimated.

Employers had to take on more staff at the start of the year even as growth slowed, signaling they can no longer count on existing staff to meet demand. A government report tomorrow may show payrolls increased again in April, according to the median forecast of economists surveyed by Bloomberg News.

Okay, so growth slowed after 4 years of the deepest, widest, most global fiscal stimulation exercise in the history of... well... The globe! One would assume this slowing growth trend will accelerate as the stimulus is unwound due to a variety of common sense reasons, starting with...

  1. It just didn't work, and following up with...
  2. the potential to incite the inflationary fires, and ending up with...
  3. many countries simply can't afford the Ponzi scheme, trashy asset merry-go-round game thingy anyomore.

Even if stimulus is not lessened, we still can't ignore the plain and simple fact - it ain't working. Growth has slowed any way and quite a few developed nations who shepherded the global stimular cartel are now stating they're back in recession - depsite the fact that I made clear to my subscribers that they never left recession in the first place. Now, as growth continues to slow, what exactly does the astute pontificator think will happen to employment demand???????????????????????????????? Well, it's a positive omen as long as you only live your life a fiscal quarter at a time. Just don't look past 2 or 3 months or so, and you're straight, right????????????????

“This slowdown in productivity is a positive omen for the labor market,” Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, said in a research note. He correctly projected the drop in productivity. “It suggests that additional increases in output will necessitate a faster pace of hiring than what has occurred thus far.”

Now reference my comments from exactly this time last year, in "On Employment and Real Estate Recovery":

A regular commentator on BoomBustBlog has been attempting to make the case for a housing recovery based upon rising employment metrics. He has, particularly, pointed out rising hourly earnings. I thought I would take this time to point out that average hourly earnings can rise due to the fact that less people are working. The aggregate employment in the US has literally fell off of a cliff. Since you know that I love pictures, let's do this graphically...

Below you have a chart of total hours worked in the US with the average hourly earnings superimposed on top. As you can see, two and a half years and trillions of dollars of stimulus and QE later, we have barely budged. There was no multiplier effect. In essence, what you had was a divisor effect, and the money would have shown up more on a dollar for dollar basis if it was simply given to the populace! Of course, that wouldn't have kicked the inevitably deflation of the banking system down the road, now would it have?

Notice that despite the severe drop in total hours worked, average hourly earnings have increased. This can easily mislead someone who is not paying attention. Read more on this topic here:  

It's all HOPIUM, which is a tad bit stronger than that typical sticky sesimilia many are used to...

Reggie Middleton ON CNBC's Fast Money Discussing Hopium in Real Estate

 

Now that I have (quite honestly) issued my most sincerest thanks, let's attempt to remedy the shortcoming of the limited amounted of time that I had. You see, after the 3 minute hit ended there was a brief discussion of commercial real estate in which I didn't get to participate, thus I will take the liberty of doing so through this medium.

 

Yes, commercial real estate has shown some marginal increases in the last quarter, and REITs have been on fire. The issue is, many publicly traded equities have detached from their underlying fundamentals. Let's reference “A Granular Look Into a $6 Billion REIT: Is This the Next GGP?” The following are excerpts from it:

Read More

image001.png 

You have to factor in non-market factors that have gone into supporting CRE prices. We have government bubble blowing where you can see where property prices were in a massive bubble, they rose and that bubble popped, and they were artificially supported and that bubble was partially reblown. Yes, the bubble was purposefully reblown, reference Buried Deep Within The Files That The Federal Reserve Released On Thier MBS Purchase Program, We Found TARP 2.0!!! More Taxpayer Money To The Banks!:

We have conducted analysis on all MBS sale and purchase transactions conducted by the Fed whose data was recently released. Of the total 10,058 MBS transactions, 72% were done at a yield of less than 5% (5% below yield of 4.0%, 32% between 4.0%-4.5%, 35% between 4.5-5.0%) with an average yield of 4.75% on all MBS transaction. The table below presents the number of transactions under their respective yield category.

We have also analyzed the yield on MBS purchased and MBS sold, looking for price discrepancies between MBS purchased and MBS sold. The data points out that the average yield on MBS purchased was 4.71%, 29bps lower than average yield for MBS sold, thus implying MBS purchased were at a higher price than MBS sold. You know that old government adage, buy high and sell low!

Yield on sale: 5.00%
Yield on purchase: 4.71%
Difference in bps: 29.1

Now, imagine this artificial suppression, both in the form of MBS purchases (which are supposed to be over) and QE in the form of Treasury Ponzi purchases, are overpowered by the market driven rate storm brewing ahead. You also have the government looking the other way at depreciating asset values, see FASB Appears to Have Bent Over For The Final Time & Accuracy In Financial Reporting Dies An Ignominious Death!!!:

The Fed, Barney Frank, et. al., and the Treasury colluded to lift the prices of equities, real assets. government bonds, and the derivatives based upon them to considerably above their fundamental values in an attempt to reflate the bubble and pull the country out of recession the “stanky” way.
A natural result of this is that banks can easily hide the true condition of their holdings from most investors. Reference The Financial Times Vindicates BoomBustBlog’s Stance On Goldman Sachs – Once Again! wherein I detailed this occurrence:

fasb_mark_to_market_chart.png

I declared insolvency throughout the banking system, and it looked as if I was wrong for some time, then the truth’s ugly head started peaking out. See The Financial Times Vindicates BoomBustBlog’s Stance On Goldman Sachs – Once Again!

Goldman Sachs has revealed details of about $5bn in investment losses suffered during the crisis for the first time this week, in a move that will deepen the debate over companies’ financial disclosures. The figures, issued as part of internal reforms aimed at silencing Goldman’s critics, show that the bank suffered $13.5bn in losses from “investing and lending” with its own funds in 2008. But Goldman’s regulatory filings and its executives’ comments to investors at the time pointed to about $8.5bn of losses arising from its investments in debt and equity, as markets were rocked by the turmoil.

Hmmmm! I walked through this in explicit detail in “When the Patina Fades… The Rise and Fall of Goldman Sachs??? and I did it without being privvy to Goldman’s financial innards. Long story short, practically all of the major banks are lying about the value of some of the largest assets on their books.

How many institutional and/or retail investors will be able to ferret out such? Or more importantly, why should they have to? It is the reporting company’s responsibility to report, not to obfuscate. The big problem with this “hide the market marks” thing is that markets tend to revert to mean.Unless said market values fundamentally catch up with said market prices, you will get a snapback. That is what is happening in residential real estate now. That is what happened in Japan over the last 21 years!!! That’s right, it wasn’t a lost decade in Japan, it was a lost 2.1 decades!

This has been the first balance sheet recession that the US has ever had, but there is precedence to follow. Japan had a balance sheet recession following their gigantic real asset bust. They made a slew of fiscal and policy errors, which essentially prolonged their real asset recession (now officially a depression) for T-W-E-N-T-Y  O-N-E long years! For those that may have  a problem reading that, it is 21 long years. What did the Japanese do wrong?
  • They refused to mark assets to market
  • They attempted to prop up zombie banks
  • They failed to promptly clean up NPAs in the banking system
  • They looked the other way in regards to real estate value shenanigans

 

 

 

 

 

 

Published in BoomBustBlog

 reggie_speaks

A 7 minute video of my opinions on Greek haircuts, US and Manhattan real estate overvaluation, China bubble busting and hard landings, Case Shiller shortcomings and Germany's penthouse suite in the EU roach motel.

 Below I have aggregated hours worth of related content via video, blog postings and subscriber research...

 Related Videos

The First Major Real Estate Collapse In Europe? I've Found The EU Equivalent Of GGP, The Largest Real Estate Failure In US History Monday, 19 December 2011

What many do not understand is that the real estate crash of the previous decade is far from over, because The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance. This is true for not only the US, but the EU countries as well. Unlike our European and Asian counterparts, many US investors are much too detached to what occurs overseas, quite possibly from a hubristic, apathetic or even ignorant stance that what happens over there has little effect on us stateside. Unfortunately, that is not the case. What do you think, pray tell, happens when the liquidity starved, capital deprived, overleveraged banks fail to roll over all of that underwater Eu mortgage debt?

Slide21

Investors seeking safety in Germany, the UK and France may truly be in for a rude awakening!

Slide22

 

Interesting Documentary on the Power of Rating Agencies, Reggie Middleton Excerpts

Reggie_VPRO_Ratings_agencies

Continuing my rant on the effectiveness (not) of the ratings agencies, I bring to you an interesting documentary on the rating agencies' effect on the sovereign debt crisis in Europe, produced by VPRO Tegenlicht out of Amsterdam. You can see the full video here, but only about half of it is in English. I appear in the following spots: 4:00, 22:30, 40:00...  Reggie Middleton Discussing the Rating Agencies effect on Sovereign Europe

 Subscriber Research

Published in BoomBustBlog

Roughly a year ago, I explained to those who subscribe to BoomBustBlog that NYC real estate ever finished correcting. As a matter of fact, it has some ways to go, as does DC real estate. The reason why NYC and DC markets levitated was because the Fed pumped trillions into Wall Street to reflate the bubble which was (and still is) the zombie banking system. DC saw federal spending attempt to replicate organic economic growth. Are any of these methodologies sustainable or practical. Do bulldogs have pleasant breath?

Bloomberg reports The Riskiest Bank on the Street and it goes a little something like this: Morgan Stanley Said to Limit Cash Bonuses, Increase Deferrals

Morgan Stanley (MS), owner of the world’s biggest brokerage, is capping immediate cash bonuses at $125,000 as the firm curtails pay and defers more compensation for senior executives, according to a person briefed on the plans.

Members of the company’s operating committee, led by Chief Executive Officer James Gorman, 53, won’t get any immediate cash, said the person, who declined to be identified because the plan hasn’t been made public. Mark Lake, a spokesman for the New York-based bank, declined to comment.

The decision comes after a fourth quarter that some analysts predicted was the worst for trading and investment- banking revenue since the financial crisis. Increased salaries and previous moves toward deferring more pay have limited investment banks’ flexibility to cut compensation costs, analysts including Atlantic Equities’ Richard Staite have said.

Morgan Stanley’s decision will increase the average amount of pay deferred to about 75 percent, the person said. The firm deferred an average of 60 percent in 2010 and 40 percent in 2009. Deferred cash for 2011 performance will be paid out in two equal installments in the final month of 2012 and 2013, a change from the previous deferral plan that paid out in thirds over 18 months, the person said

Apart from whether said bonuses were ever really deserved in the first place.... Yes, I'll go back thee again, see Wall Street Real Estate Funds Lose Between 61% to 98% for Their Investors as They Rake in Fees!":

Last year I felt compelled to comment on Wall Street private fund fees after getting into a debate with a Morgan Stanley employee about the performance of the CRE funds. He had the nerve to brag about the fact that MS made money despite the fact they lost about 2/3rds of their clients money. I though to myself, "Damn, now that's some bold, hubristic s@$t". So, I decided to attempt to lay it out for everybody in the blog, see "

The example below illustrates the impact of change in the value of real estate investments on the returns of the various stakeholders - lenders, investors (LPs) and fund sponsor (GP), for a real estate fund with an initial investment of $9 billion, 60% leverage and a life of 6 years. The model used to generate this example is freely available for download to prospective Reggie Middleton, LLC clients and BoomBustBlog subscribers by clicking here: Real estate fund illustration. All are invited to run your own scenario analysis using your individual circumstances and metrics....

... Under the base case assumptions, the steep price declines not only wipes out the positive returns from the operating cash flows but also shaves off a portion of invested capital resulting in negative cumulated total returns earned for the real estate fund over the life of six years. However, owing to 60% leverage, the capital losses are magnified for the equity investors leading to massive erosion of equity capital. However, it is noteworthy that the returns vary substantially for LPs (contributing 90% of equity) and GP (contributing 10% of equity). It can be observed that the money collected in the form of management fees and acquisition fees more than compensates for the lost capital of the GP, eventually emerging with a net positive cash flow. On the other hand, steep declines in the value of real estate investments strip the LPs (investors) of their capital. The huge difference between the returns of GP and LPs and the factors behind this disconnect reinforces the conflict of interest between the fund managers and the investors in the fund.

re_fund_returns.pngre_fund_returns.pngre_fund_returns.png

re_fund_returns_tables.pngre_fund_returns_tables.pngre_fund_returns_tables.png

re_fund_returns_tables.png

Under the base case assumptions, the cumulated return of the fund and LPs is -6.75% and -55.86, respectively while the GP manages a positive return of 17.64%. Under a relatively optimistic case where some mild recovery is assumed in the later years (3% annual increase in year 5 and year 6), LP still loses a over a quarter of its capital invested while GP earns a phenomenal return. Under a relatively adverse case with 10% annual decline in year 5 and year 6, the LP loses most of its capital while GP still manages to breakeven by recovering most of the capital losses from the management and acquisition fees..

re_fund_returns_tables3.png

 

Now, that we're on the topic of Morgan Stanlely, real estate, and bonuses, keep in mind that there is never just one roach. If Morgan Stanley is slashing bonuses to this extent, so are the other big banks. Remember, I have warned extensively on Goldman Sachs, the big bank that can't trade...

Reggie Middleton Explains the Travails of the F.I.R.E. Sector on CNBC

Here are some links that you are unlikely to find anywhere else...

Just As I Predicted Last Quarter, The World's First FDIC Insured Hedge Fund Takes A Fat Trading Loss

I'm Hunting Big Game Today:The Squid On The Spear Tip, Part 1 & IntroductionI'm Hunting Big Game Today:The Squid On The Spear Tip, Part 1 & Introduction  

I'm Hunting Big Game Today: The Squid On A Spear Tip

Summary: This is the first in a series of articles to be released this weekend concerning Goldman Sachs, the Squid! In this introduction (for those who do not regularly follow me) I demonstrate how the market, the sell side, and most investors are missing one of the biggest bastions of risk in the US investment banking industry. I will also...

 Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?  

Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?

Welcome to part two of my series on Hunting the Squid, the overvaluation and under-appreciation of the risks that is Goldman Sachs. Since this highly analytical, but poignant diatribe covers a lot of material, it's imperative that those who have not done so review part 1 of this series, I'm Hunting Big Game Today:The Squid On The Spear Tip, Part...

Reggie Middleton Serves Up Fried Calamari From Raw Squid: Goldman Sachs and Market Perception of Real Risks!Reggie Middleton Serves Up Fried Calamari From Raw Squid: Goldman Sachs and Market Perception of Real Risks!

Hunting the Squid Part 3: Reggie Middleton Serves Up Fried Calamari From Raw Squid

For those who don't subscribe to BoomBustblog, or haven't read I'm Hunting Big Game Today:The Squid On The Spear Tip, Part 1 & Introduction and Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?, not only have you missed out on some unique artwork, you've potentially missed out on 300%...
 Hunting the Squid, part 4: So, What Else Can Go Wrong With The Squid? Plenty!!!Hunting the Squid, part 4: So, What Else Can Go Wrong With The Squid? Plenty!!!  

Hunting the Squid, part 4: So, What Else Can Go Wrong With Goldman Sachs? Plenty!

Yes, this more of the hardest hitting investment banking research available focusing on Goldman Sachs (the Squid), but before you go on, be sure you have read parts 1.2. and 3:  I'm Hunting Big Game Today:The Squid On A Spear Tip, Part 1 & Introduction Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To...

About a year ago I penned a piece called...

Dr. Benjamin Shalom Bernanke, AKA Dr. FrankenFinance, Has Successfully Caused NYC Condo Prices To Be The ONLY Major Condo Market To Rise In Price

As excerpted...

Yesterday, I illustrated how NYC is pulling away from all of the other major condo markets - see " ". According to the S&P Case Shiller Condo index, is the only major US condo market that not only has firming prices but is actually increasing in price. Chatter and anecdotal evidence from the ground confirms this as developers and speculators are once again bidding up development land, lots and potential conversion properties.

In the afore-linked piece, I gave what I consider to be the cause of this "newfound", yet hard to come by value. The answer??? Dr. Benjamin Shalom Bernanke. You see, Dr. Bernanke has taken over the helm of the "Great Global Macro Experiment” from Alan Greenspan and has supercharged it to the nth degree - all primarily to save our insolvent banking system. Where is the nexus of banking and finance in this country? Answer, right where you see that little positive blip in a chart of otherwise sharply downward trending assets. Trust me, it is not as if there is any dearth of condo unit supply in our dear city, as can be seen in “Who are ya gonna believe, the pundits or your lying eyes?”.  As excerpted from yesterday's post, here is that same area about a year and a half later...

Now, to remind all exactly how much capital and resources Dr. Bernanke pumped into the NYC area, be aware that this industry was literally on the verge of collapse in 2008 (with two of the five biggest banks literally collapsing and the balance getting bailed out by the government right before they collapsed), yet paid out record bonuses on record earnings less than 8 quarters later. This is even more amazing considering the only fundamental change in to the Frankenstein Monster assets that contributed to these banks [near] demise is that they have further PLUNGED IN VALUE! Yes, I do mean Frankenstein assets. I implore you to delve in further - "Welcome to the World of Dr. FrankenFinance!" and .

Let's revisit the charts from yesterday's  The Latest Case Shiller Index – Housing Continues Freefall In Aggressive Search For Equilibrium, with a few modifications to make the obvious more,,, well, obvious...

Remember, as bearish as this chart looks, it is actually overly optimistic, markedly so. Far be it for me to beggar the obvious, but why in the hell would an environment that causes the worlds largest banks to collapse like anorexics in a Weight Watchers convention, suddenly get  A LOT worse, yet spawn such a surge in the banking industry? Well my dear BoomBustBlogger, its one part regulatory capture (More on Lehman Brothers Dies While Getting Away with Murder: Introducing Regulatory Capture), two parts helicopter stunt man (Great Global Macro Experiment).

On the Regulatory Capture front, let’s revisit the FASB tale: About the Politically Malleable FASB, Paid for Politicians, and Mark to Myth Accounting Rules. Remember, the change of these rules to the status of straight silliness that kicked off one of the greatest bear market rallies in the history of US publicly traded stocks. Now, nearly everything financial (as it relates to M2M) is overvalued.

fasb_mark_to_market_chart.png

I declared insolvency throughout the banking system, and it looked as if I was wrong for some time, then the truth’s ugly head started peaking out. See The Financial Times Vindicates BoomBustBlog’s Stance On Goldman Sachs – Once Again!

As excerpted from Did Bernanke Permanently Cripple the Butterfly That Is US Housing? The Answer Is More Obvious Than Many Want To Believe

This near cessation of foreclosure activity has materially dropped the shadow inventory numbers, but has done so in a way that is quite misleading. Those foreclosures either will happen and become REOs or distressed property sales that are currently averaging a discount of ~25% to conventional retail sales (thus further pressuring sales prices), or will result in the properties being put directly  on the market at steep discount (again, further pressuring sale prices). Basically, the foreclosure backlog is simply accumulating in the background and will print a very sharp spike upwards one way or another once the foreclosure and fraud issues of the banks are sorted out – even if they are sorted out to the detriment of the banks. Despite this reprieve in foreclosures, the ratio of shadow inventory to home sales is not decreasing. This is a double negative, for shadow inventory is decreasing (albeit for very artificial and temporary reasons). The reason for the lack of movement in this very key figure is that housing sales are actually declining both on a seasonally adjusted and non-adjusted basis – and if these figures were to be adjusted for “true” inflation, would look much worse. This leaves the ratio of delinquent and foreclosure activity to sales relatively static. One can surmise what happens when the foreclosure backlog that was caused by the bank’s myriad legal issues clear up.

The most valuable chart in the study just released to subscribers, File Icon Shadow Inventory Update -- March 2011 shows how quickly one can expect the shadow inventory to be consumed by the sale of homes. To make a long story short, we still have quite a ways to go before we reach the pre-bubble levels, and that is without taking into consideration the foreclosure moratoriums. Keep in mind that these numbers do not include the pent up shadow inventory that is being hidden by the foreclosure crisis. That additional inventory on top of a slowing housing sales metric can easily tack one to 4 years onto the inventory numbers.

 

As you can see, the credit (delinquency measures) metrics are actually moderating slightly over the last few quarters, but have increased over the last two. This is a negative sign considering all of the efforts that have been made by the government and the banks to reduce that figure. The foreclosure inventory, although lulled somewhat, is still slightly on the rise. This lull is synthetic and temporary, a by-product of congressional pressure and legal issues pressing the banks to undergo voluntary and involuntary moratoriums on foreclosure activity. The consequent movement to be expected as these moratoriums are lifted, the banks work out their legal issues, and the properties move one way or the other will cause a very dramatic spike in the shadow inventory numbers. This spike will occur on top of slowing housing sales, dramatically reduced housing prices metrics and potentially deteriorating credit metrics (if the most recent trend continues). If that is not enough good news for you, the Goldilocks scenario of the perfect interest rate environment for real estate needs to (and probably will in the near to medium term) come to an end. See The True Cause Of The 2008 Market Crash Looks Like It’s About To Rear Its Ugly Head Again, With A Vengeance Friday, March 11th, 2011. Our calculations available ot subscribers show a very bleak outlook for housing. It is not as if there is no precedence for such. Take a look at the Japanese situation, and this is not taking into consideration the recent issues of the earthquake, tsunami and radiation poisoning and nuclear meltdown. Few things are as detrimental to property values as radiation poisoning!

A lesson to be learned: Beware for when a true black swan event occurs...

Further reading:

    1. Reggie Middleton ON CNBC’s Fast Money Discussing Hopium in Real Estate Friday, February 25th, 2011
    2. In Case You Didn’t Get The Memo, The US Is In a Real Estate Depression That Is About To Get Much Worse Wednesday, February 23rd, 2011
  1. Further Proof Of The Worsening Of The Real Estate DepressionThursday, February 24th, 2011
    1. You’ve Been Had! You’ve Been Took! Hoodwinked! Bamboozled! Led Astray! Run Amok! This Is What They Do! Monday, February 28th, 2011
  2. FASB Appears to Have Bent Over For The Final Time & Accuracy In Financial Reporting Dies An Ignominious Death!!!Wednesday, February 9th, 2011
    1. As JP Morgan & Other Banks Legal Costs Spike, Many Should Ask If It Was Not Obvious Years Ago That This Industry May Become The “New” Tobacco Companies Thursday, January 6th, 2011
  3. The Latest Case Shiller Index – Housing Continues Freefall In Aggressive Search For EquilibriumMonday, February 7th, 2011
    1. As Clearly Forecasted On BoomBustBlog, Housing Prices Commence Their Downward Price Movement In Search Of Equilibrium Scraping Depression Levels Tuesday, December 28th, 2010
Published in BoomBustBlog

I have been a staunch critic of the National Associaton of Realtors (NAR), their various renditions of Chief Economists, and the laughable jokes that they attempt to pass as objective analysis. What is alarming is the fact that the joke that is the NAR gets constant MSM airplay and front page print exposure - credibility be damned. For a glimpse of my real opinions on the matter, see below then reference the nuggest of truth that actually fell out of the MSM yesterday. 

Peruse each link below, for they contain more than enough info to identify the NAR for the joke that it is...

Now reference excerpts from this story ran by CNN/Money yesterday - Existing home sales to be revised lower:

 If you thought the U.S. housing market couldn't get much worse, think again.

Far fewer homes have been sold over the past five years than previously estimated, the National Association of Realtors said Tuesday.

NAR said it plans to downwardly revise sales of previously-owned homes going back to 2007 during the release of its next existing home sales report on Dec. 21.

NAR's existing home sales numbers, released monthly, are a closely followed gauge of the health of the housing market.

While NAR hasn't revealed exactly how big the revision to home sales will be, the agency's chief economist Lawrence Yun said the decrease will be "meaningful."

"For the real estate business, this means the housing market's downturn was deeper than what was initially thought," Yun said.

Yun said the database NAR uses to track existing home sales, the Multiple Listing Service (MLS), has led the real estate agency to over-count existing home sales for several reasons.

The MLS database only includes home sales listed by realtors, and excludes homes listed by owners, providing a very narrow view of the market. And because more people are using realtors to list their homes instead of selling them independently, realtor-listed sales numbers have become artificially inflated, said Yun.

In addition, some of the assumptions NAR used in calculating its data have become outdated, since they were based on 2000 Census data.

...The MLS has also been expanding its geographic coverage, so it may have appeared that there were more home sales simply because data from new areas were starting to show up. Also because of this geographic expansion, the system has been double-counting sales of some homes that can be considered part of multiple regions.

"Colorado Springs has their own database, but because the Denver market is nearby they may also list that home in the Denver database, so when the home gets sold, both Denver and Colorado Springs will say sales rose -- so that's genuine double-counting," said Yun.

Yun said NAR realized this upward "shift" in data during its most recent re-benchmarking process this year. With the help of the government, economists and other real estate groups, NAR has now taken these factors into account and will issue revised numbers on Dec. 21 at 10 a.m.

 

 

Published in BoomBustBlog
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