CNBC reports US home prices rise 5.9 percent to 31-month high in January according to S&P; CoreLogic Case-Shiller. This puts the 20 city index close to an all time high, including the 2007 bubble.

Incomes have increased as well. As a matter of fact, you can see that consumers bore the brunt of rising housing costs in previous bubbles-cum recessions. Not this time though. 

Don't be fooled by the debt service payments ratio. Housing pricesa are clearly outstripping income growth and incomes...

Are you wondeing how housing prices are still rising? Well the answer is two fold. Lean supply in the low to middle markets...

So, I'm sure many of you query, "Who's paying for all of these increased housing prices if debt service is actually decreasing at the same time that housing prices are increasing? Well, the answer is in the (sythetic, highly manipulated, and unsustainable) interest rates.

The Fed ballooned its balance sheet to unprecedented levels, and continues to maintain such a balloon through steady MBS asset purchases even as it moves to raise its benchmark interest rates. 

There is absolutely no way that the Fed can unwind this self-induced bubble without popping the housing market bubble. Absolutely no way. I've said this many times in the recent past.

  1. It's the Real Estate Crash That I Warned You About (again)housing (look here and here), homebuilders (look here), commercial real estate (look here and here and here and here and there) and ban ...Created on 20 March 20172. 
  2. The Fed Raises Rates While Still Baby Feeding the MBS Market With Billions in Monthly Purchases The Fed has raised rates, officially making real what was mere signaling of the end of its expansionary era... Or is it? You see, from a practical perspective, QE is still in full effect. The US housing ...Created on 17 March 20173.
  3.  (Retail Lite Subscription Content)... risk in the world of a housing bubble, followed closely by Hong Kong. The UK Housing Market Observatory report compiled by Lancaster University came to the same conclusion in their 2015 Q4 estimate, that ...Created on 31 January 20174. 
  4. Increasing Debt Burden Combined with Peaking Housing Prices Don't Mix Well With Capital Controls (Retail Lite Subscription Content)... of Canada along with many foreign investors have exposure in mortgage lending and related investment activities like mortgage bonds Housing Market in Canada: Movement in residential ...Created on 27 January 20175. 
  5. Ten Years Since BoomBustBlog Was 1st Published & That Initial Research Still Relevant Today  in 2007. Here's my very first article - The Real Trend in US Housing Prices.... Yeahh, that's right. It's real estate. I posted very briefly on that topic last week, before we officially restarted t ...Created on 09 January 20177. 
  6.   ...it’s not uniform across the board. For instance, NYC has condo bubble (from new construction being priced above income growth, yet getting purchased anyway) but single family detached housinghasn’ ...Created on 04 January 2017

Click here to subscribe to BoomBustBlog research and opinion. For $11 per month you get to pick my brain in groud discussion through this site. Our higher tiers allow you to direct research and get access to me and my staff over the phone.

The Asset Securitization Crisis of 2007, 2008 and 2009 led to the demise of several global banks and institutions. Central bank induced risky asset bubbles gave rise to, what was popularly considered and reported as through the popular media, a rapid recovery. The reality was that the insolvencies that marked the crisis were passed on, in part, to the sovereign nations that sponsored the Crisis, and as the chickens came home to roost the Asset Securitization Crisis has now blown into a full Sovereign debt crisis.

The Pan-European Sovereign Debt Crisis, to date (free):

  1. The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem, not a

    Latest Pan-European Sovereign Risk Subscription Research – The Good Stuff!!!

    Actionable Intelligence Note For All Paying Subscribers on European Bank Research

    A Review of the Spanish Banks from a Sovereign Risk Perspective – retail.pdf

    A Review of the Spanish Banks from a Sovereign Risk Perspective – professional

    Ireland public finances projections

    Spain public finances projections_033010
    UK Public Finances March 2010

    Italy public finances projection

    Greece Public Finances Projections

    Banks exposed to Central and Eastern Europe

    Greek Banking Fundamental Tear Sheet

    Italian Banking Macro-Fundamental Discussion Note
    Spanish Banking Macro Discussion Note

    • Deutsche Bank vs Postbank Review & Summary Analysis - Pro & Institutional
    • Deutsche Bank vs Postbank Review & Summary Analysis - Retail
    • Sovereign Contagion Model - Retail (961.43 kB 2010-05-04 12:32:46)
    • Sovereign Contagion Model - Pro & Institutional
    • Irish Bank Strategy Note
    • Euro Bank Soveregn Debt Exposure Final -Retail
    • Euro Bank Soveregn Debt Exposure Final - Pro & Institutional


    Online Spreadsheets (professional and institutional subscribers only)

    • Greek Default Restructuring Scenario Analysis
    • Greek Default Restructuring Scenario Analysis with Sustainable Debt/GDP Limits and Haircuts
    • Portugal's Debt Ridden Finances: An Analysis of Haircuts, Restructuring and Strategy - Professional Analysis
    • The Spain Sovereign Debt Haircut Analysis for Professional/Institutional
    • Ireland Default Restructuring Scenario Analysis with Sustainable Debt/GDP Limits and Haircuts
    • This is the professional addendum to the Sovereign Debt Exposure of European Insurers and Reinsurers Insurer and Reinsurer Sovereign Debt Exposure Worksheets - Professional

    localized one.

  2. What Country is Next in the Coming Pan-European Sovereign Debt Crisis? – illustrates the potential for the domino effect

  3. The Pan-European Sovereign Debt Crisis: If I Were to Short Any Country, What Country Would That Be.. – attempts to illustrate the highly interdependent weaknesses in Europe’s sovereign nations can effect even the perceived “stronger” nations.

  4. >The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries

  5. The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!

  6. The Beginning of the Endgame is Coming???

  7. I Think It’s Confirmed, Greece Will Be the First Domino to Fall

  8. Smoking Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer Beware!

  9.  

    Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?
  10.  

    Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!
  11. Germany Finally Comes Out and Says, “We’re Not Touching Greece” – Well, Sort of…

  12. The Greece and the Greek Banks Get the Word “First” Etched on the Side of Their Domino

  13. As I Warned Earlier, Latvian Government Collapses Exacerbating Financial Crisis

  14.  

    Once You Catch a Few EU Countries “Stretching the Truth”, Why Should You Trust the Rest?
  15. Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!

  16. Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe

  17. Moody’s Follows Suit Behind Our Analysis and Downgrades 4 Greek Banks

  18. The EU Has Rescued Greece From the Bond Vigilantes,,, April Fools!!!

  19. How BoomBustBlog Research Intersects with That of the IMF: Greece in the Spotlight

  20. Grecian News and its Relevance to My Analysis

  21. A Summary and Related Thoughts on the IMF’s “Strategies for Fiscal Consolidation in the Post-Crisis

  22. Euro-Gossip Debunked, Courtesy of Trichet and the IMF!

  23. Greek Soap Opera Update: Back to the Bailout That Was Never Needed?

  24. Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ!

  25. As I Explicitly Forwarned, Greece Is Well On Its Way To Default, and Previously Published Numbers Were Waaaayyy Too Optimistic!

  26. LTTP (Late to the Party), Euro Style: Goldman Recommends Betting On Contagion Risk In Portuguese, Spanish And Italian Banks 3 Months After BoomBustBlog

  27. Beware of the Potential Irish Ponzi Scheme!

  28. The Daisy Chain Effect That I Anticipated Appears To Have Commenced!

  29. How Greece Killed Its Own Banks!

  30. Introducing The BoomBustBlog Sovereign Contagion Model: Thus far, it has been right on the money for 5 months straight!

  31. With Europe’s First Real Test of Contagion Quarrantine Failing, BoomBustBloggers Should Doubt the Existence of a Vaccination

  32. What We Know About the Pan European Bailout Thus Far

  33. As I Warned Yesterday, It Appears the Market Is Calling the Europeans Bluff – It’s Now Put Up Or Get Put Down

  34. How the US Has Perfected the Use of Economic Imperialism Through the European Union!

  35. The Greek Bank Tear Sheet is Now Available to the Public

  36. BoomBustBlog Irish Research Becomes Reality

  37. PIIGSlets in a Bank: Another European Banks-at-Risk Actionable Research Note

  38. Sovereign debt exposure of Insurers and Reinsurers

  39. As We Have Warned, the Fissures Are Widening in the Spanish Banking System

  40. “With the Euro Disintegrating, You Can Calculate Your Haircuts Here”

  41. What is the Most Likely Scenario in the Greek Debt Fiasco? Restructuring Via Extension of Maturity Dates

  42. The ECB and the Potential Failure of Quantitative Easing, Euro Edition – In the Spotlight!

  43. Introducing the Not So Stylish Portuguese Haircut Analysis

  44. A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina

  45. Osborne Seems to Have Read the BoomBustBlog UK Finances Analysis, His U.K. Deficit Cuts May Rattle Coalition

Follow the UK and Eurozone topic list for our latest analysis of Pan-European issues.

This is the professional addendum to the Sovereign Debt Exposure of European Insurers and Reinsurers (439.61 kB 2010-05-19 01:56:52)

I Suggest Those That Dislike Hearing "I Told You So" Divest from Western and Southern European Debt, It'll Get Worse Before It Get's Better!

So, S&P finally gets around to

Ireland's financial headache worsened on Wednesday after Standard & Poor's cut its credit rating in a move criticized by the country's debt management agency.

...

The premium investors demand to hold Ireland's 10-year bonds over German bunds has been steadily widening in the past few weeks and remained elevated at 327 basis points on Wednesday.

The spread finished at 330 bps on Tuesday, its highest level since the Greek financial crisis broke in May.

Brenda Kelly, an analyst at CMC Markets, said she expected Irish borrowing costs to climb on the back of S&P's move.

"I think we are going to have to an awful lot more in interest payments," she said.

Although Ireland has raised virtually all of the 20 billion euros of long-term debt targeted for 2010, S&P's move may make it more difficult for the country's banks to extend the maturity of their funding later this year and eventually wean themselves off a state guarantee on their debt.

...

S&P cut Ireland's long-term rating by one notch to 'AA-', the fourth highest investment grade, and assigned the country a negative outlook late on Tuesday saying the cost to the government of supporting the financial sector had increased significantly.

Rating agencies have been steadily hacking away at Ireland's credit rating and S&P's is now on a par with Fitch and one notch below Moody's, which cut its rating to Aa2 last month.

S&P said it expects Ireland will need to spend 90 billion euros to support its banking system, up from its prior estimate of 80 billion euros including capital used to improve the solvency of financial institutions and losses taken from loans the government acquired from banks.

Ireland's budget deficit ballooned to 14 percent of gross domestic product, the highest in Europe, last year due to the cost of propping up nationalized lender Anglo Irish ANGIB.UL and it could climb higher if Dublin injects an additional 10.05 billion euros into the bank...

I'm not going to say I told you so, but I did throw some pretty strong hints...

On April 29th, I was quite blatant in stating "Beware of the Potential Irish Ponzi Scheme!", urging my susbscribers to review thetask=doc_download&gid=308&Itemid=104" target="_blank" rel="noopener noreferrer"> Irish Bank Strategy Note and the alt="File Icon" border="0" /> Ireland public finances projections that I made available earlier that month. You see, unlike many of the pundits in Europe who state that Ireland has moved beyond the worst of its problems and is an example of how austerity should work, I believe that Ireland is in very, very big trouble and I outlined the reasoning behind such in my very first posts on the .

image009.png

At the very beginning of the year, I visually illustrated how bad off Ireland was, with considerably more that 6% of its GDP being mired in bank NPAs (non-performing assets). This number is quite conservative, for my research team only canvassed the larger banks in Ireland - you can rest assured that the smaller ones contain a similar (if not greater) proportion of NPAs to total assets. Add to this the fact that these banks are probably overstating assets and understating liabilities and you can probably throw another 150 basis points on top of the figures above and still be a tad bit conservative.

As a matter of fact, I went further into the topic in mid-April with Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ! where I showed that Ireland is heavily leveraged into the problems of the PIIGS group faced. A picture (and/or graph is worth a thousand words! From the afore-linked post...

For the most part, Ireland has considerable embedded risk through both foreign claims on troubled countries (ex. PIIGS) and significant bank NPAs as a percent of its GDP.

ireland_claims_against_piigs.jpg

Below is an excerpt from our recent forensic Ireland analysis. Subsccribers, please download the most recent report Ireland public finances projections_040710:

A deteriorating external environment and a correction in the domestic housing market made 2009 a difficult year for the Irish economy. Ireland’s GDP growth registered a fall of 7.5% (the highest rate of decline since the country’s records have been compiled) with a fiscal deficit of 11.7% of the GDP for 2009.

I then followed up with a recap of my findings along with a snapshot of the social unrest that economic turmoil is bound to bring about in BoomBustBlog Irish Research Becomes Reality...

Banks protesters storm Irish parliament

Wednesday, 12 May 2010

 

Gardai Clash with protestors marching against government cutbacks outside the Gates of Leinster House in Dublin tonight

Have they read my report?

The title of my research really says it all (Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ!), yet the pictures really do drive the point home.

So if Ireland is really that bad off, what's up with that tall stalk next to it in the bank NPA chart at the beginining of the post? Oh, those are the guys (and gals) who lent Ireland all of that money, and Ireland's issues are probably a significant portion of those NPAs you see towering over that of Ireland. Here's a look at their public finances (for subscribers only UK Public Finances March 2010). I am not picking on Ireland and the UK, for much of Europe suffers from similar anathema, reference Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe, wherein I delve into this topic in detail.

It is not as if no one could see the Euro-bank issues coming. In January of 2009, I explained to readers that the real estate bust in Spain could not be avoided by the banks and there will be a time when the piper comes a callin' (see The Spanish Inquisition is About to Begin…, and then Spanish Banking Macro Discussion Note 2010-02-09 02:48:06 519.40 Kb).). This, of course, will be subsidized by the Spanish state, as subscribers can reference out study of the Spanish Government's Public Finances This didn't just start with Greece, although I Think It’s Confirmed, Greece Will Be the First Domino to Fall.

So what does it all mean?

Well, from my point of view, things rarely happen in a vacuum. Many European nations are over leveraged, overbanked, highly indebted, social powder kegs literally and economically sitting right next to each other. Lord forbid someone inadvertantly lights a match! Whether that match be of financial or economic origin (see Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?) a very unpleasant domino effect will ensure. On that note, we revisit a BoomBustBlog proprietary stratagem... >Introducing The BoomBustBlog Sovereign Contagion Model: Thus far, it has been right on the money for 5 months straight!

The BoomBustBlog Sovereign Contagion Model

Nearly every MSM analysts roundup attempts to speculate on who may be next in the contagion. We believe we can provide the road map, and to date we have been quite accurate. Most analysis looks at gross claims between countries, which of course can be very illuminating, but also tends to leave out many salient points and important risks/exposures.

In order to derive more meaningful conclusions about the risk emanating from the cross border exposures, it is essential to closely scrutinize the geographical break down of the total exposure as well as the level of risk surrounding each component. We have therefore developed a Sovereign Contagion model which aims to quantify the amount of risk weighted foreign claims and contingent exposure for major developed countries including major European countries, the US, Japan and Asia major.

I.          Summary of the methodology

  • We have followed a bottom-up approach wherein we have first identified the countries/regions with high financial risk either owing to rising sovereign risk (ballooning government debt and fiscal deficit) or structural issues including remnants from the asset bubble collapse, declining GDP, rising unemployment, current account deficits, etc. For the purpose of our analysis, we have selected PIIGS, CEE, Middle East (UAE and Kuwait), China and closely related countries (Korea and Malaysia), the US and UK as the trigger points of the financial risk dissemination across the analysed developed countries.
  • In order to quantify the financial risk emanating in the selected regions (trigger points), we looked into the probability of the risk event happening due to three factors – a) government default b) private sector default c) social unrest. The probabilities for each factor were arrived on the basis of a number of variables determining the relative weakness of the country. The aggregate risk event probability for each country (trigger point) is the average of the risk event probability due to the three factors.
  • Foreign claims of the developed countries against the trigger point countries were taken as the relevant exposure. The exposures of each developed country were expressed as % of its respective GDP in order to build a relative scale for inter-country comparison.
  • The risk event probability of the trigger point countries was multiplied by the respective exposure of the developed countries to arrive at the total risk weighted exposure of each developed country.
  • Sovereign Contagion Model – Retail – contains introduction, methodology summary, and findings
  • Sovereign Contagion Model – Pro & Institutional – contains all of the above as well as a very detailed methodology map that explains what went into the model across dozens of countries.

My next post on the Pan-European Sovereign Debt Crisis will outlined the likely haircuts many investors will take on their European debt, using our proprietary in-house models. Interested parties can to our research materials.

This is our Q4 analysis of Deutsche Bank. When analyzing and valuing entities such as banks and platform-driven tech companies, perception is always key. You see, what one maverick or true contrarian may see, very few others can perceive. The difference, oft times, is sometimes as simple as... They were looking. 

While many analysts and investors may be focusing on its solvency and progress with litigation, there's one thing that I think many are missing. Investment banks are not like manufacturing companies or other industrials, where there's a heavy investment in plant and equipment and process. They are dissimilar to biotech or software companies where significant value lay in intellectual property. Investment banks are not even like retailers, who have established distribution channels that may be difficult to replicate. As a matter of fact, even those things that are listed on the typical investment bank's balance sheet don't include the only real, true asset that any investment bank actually has. The only thing that they cannot do without.

Although investment banks may list many of these things on their balance sheet...

 What is never carried on the financial statements, whether at book value or economic value, is the investment banks only real asset...

 

You see, investment banks are nothing but licensed, leveraged capital and people. Licenses can literally be bought, and capital is sloshing around everywhere today - at negative yields to boot. So, the only thing that can differentiate a bank is its people. As industry culture would have it, Wall Street is notoriously highly (over)paid. Thus, when banks get in trouble (and that's exactly what DB has been in), they tend to cut head count. Since the industry pays about 50% of net revenues out in compensation, that amounts to a serious cost savings. 

Wait a minute! In business, if you sell your assets to save money, exactly how do you make money? Hmmm...That's the conundrum that DB finds itself in. DB CEO John Cryan has prided himself in cutting costs and headcount, and he has. Look...

... and he's succeeding in shrinking the company's balance sheet. Look...

But... If you remember what I said in the intro, the only truly valuable asset of an investment bank is not even listed on its balance sheet. My Cryan is getting rid of these guys and gals, but he's really not saving any money! As excerpted from our paid subscriber report - pdf DB Earnings Review 4Q 2016 Feb, 2016 ( 1.07 MB ) :

  • Compensation expense decreased in 4Q2016 and for the full year 2016 due to lower payouts for performance related compensation, but this can be very misleading. Although DB has succeeded in reducing compensation expense in aggregate euros, it’s compensation ratio is much less impressive due to the fact that it’s not cutting compensation as fast as revenues are decreasing. Long story, short – it’s employees are still overpaid relative to what the company can afford. Any further decrease in compensation will likely lead to additional mass exits of the most valuable talent (which is likely already happening), thus closing off the most probable avenues to reverse the downward trend in revenues. This is a very serious development, for the only real operating asset that a bank truly has (from a practical perspective) is it’s talent.

'Nuff said.

Be aware, we can spend a lot of time analyzing this bank, and with the repeal (before it even began) of the Fiduciary Rule which required advisors of qualifies money to actually put their clients interests first (god forbid!) and the general disappearance of the sell side analysts (reference FT.com's Final call for the research analyst? there are a lot of pitfalls for buyside institutions, institutional investors, and HNW parties to avoid and/or potentially fall into. DB is not easy to analyze correctly, and to be frank, they are loose and wild with their assumptions and reporting. Reference this glaring FIVE BILLION EURO, or so, error (to the upside, of course) in their published financial statements. Of course, not a single sell side analyst or investor has noticed this, because we're the only one's who ever looked at it, and we aren't analysts, we're investors!

Thus, there's likely little surprise that DB's credit rating is dropping faster than Donald Trump's stance in approval polls.

The only surprise may very well be how late to the party the ratings agencies are, yet again, when dealing with these banks.

We have created a 15 page summary analysis of DB's Q4 and full year results for paid subscribers. You can subscribe here. Current subscribers can access the report here pdf DB Earnings Review 4Q 2016 Feb, 2016 ( 1.07 MB ) . As a backgrounder, our risk analysis report from last year can fill in many gaps pdf Derivative Exposure of Global Banks ( 11.90 MB )

 

 

More on the Creatively Destructive Pace of Technology Innovation and the Paradigm Shift known as the Mobile Computing Wars!

More on the Creatively Destructive Pace of Technology Innovation and the Paradigm Shift known as the Mobile Computing Wars!

  1. There Is Another Paradigm Shift Coming in Technology and Media: Apple, Microsoft and Google Know its Winner Takes All
  2. The Mobile Computing and Content Wars: Part 2, the Google Response to the Paradigm Shift
  3. An Introduction to How Apple Apple Will Compete With the Google/Android Onslaught
  4. Don’t Count Microsoft Out of the Ultra-Mobile Computing Wars Just Yet
  5. This article should drive the point home: An iPhone 4 Recall Will Hurt Apple More By Opening Additional Opportunity for Android Devices Than Increased Expenses
  6. A First in the Mainstream Media: Apple’s Flagship Product Loses In a Comparison Review to HTC’s Google-Powered Phone
  7. After Getting a Glimpse of the New Windows Phone 7 Functionality, RIMM is Looking More Like a Short Play
  8. RIM Smart Phone Market Share, RIP?
  9. Android is gaining preference as the long-term choice of application developers
  10. A Glimpse of the BoomBustBlog Internal Discussion Concerning the Fate of Apple
  11. Math and the Pace of Smart Phone Innovation May Take a Byte Out of Apple’s (Short-lived?) Dominance
  12. Apple on the Margin
  13. RIM Smart Phone Market Share, RIP?
  14. Motorola, the Company That INVENTED the Cellphone is Trying to Uninvent the iPad With Android
  15. Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space
  16. There Goes Those Fancy eBook Aspirations from Apple, Barnes and Noble, and Amazon: 100,000’s of FREE eBooks from the Public Library
  17. How Google is Looking to Cut Apple’s Margin and How the Sell Side of Wall Street Will Enable This Without Sheeple Investor’s Having a Clue
  18. Empirical Evidence of Android Eating Apple!
  19. More of the Android Onslaught: Increasing Handset Revenues and Growth
  20. Many More Black Eyes for the Blackberry? A Complete Forensic Analysis of Research in Motion
  21. The BoomBustBlog Multivariate Research in Motion Valuation Model: Ready for Download
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