Wednesday, January 4, 2017

Will the global House of Cards tumble….

Fears of a 'massive' global property price fall amid 'dangerous' conditions and market slow-down

"Property prices have climbed to dangerous levels in several advanced economies, raising the risk of massive price falls if markets overheat, according to the Organisation for Economic Co-operation and Development (OECD)."

Posted by pete green @ 10:16 AM (15776 views)
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17 thoughts on “Will the global House of Cards tumble….

  • When you look at those stats, New Zealand and Canada look peaky, particularly Canada in light of the commodities crash. UK however, looks below average and the States seems very stable.

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  • I think you are looking at the charts Libby. They are all based at 2002 so I’m not sure you can infer valid conclusions just from that. Of course anything bubblelicous can become more so.

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  • I just returned from Poland. In the early 2000’s farm land was 5000 zloties an acre. It is now 30,000. Farmers are struggling as they now have to comply with all EU regulation and the German super farms. What this has done has meant that no one new could ever go into farming. The only people that can make it work are those already with land. A little bit like the London housing markets. Assets all over the world are out of kilter with reality. I don’t know, whether this is the new reality or whether all bubbles are being set up for a massive crash, . In history bubbles always crash, but we have never had central bank collusion n an international scale like we have today.

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  • Yes BB – all the future subsidies just where capitalised into the purchase price & then added to by those who speculators drawn to the bubble, such is Ricardo’s Law which Libby has such issues with. Essentially the same has happened to the UK just over a longer period. Which farmland prices drop like a stone if we start to withdraw farm subsidies.

    “Agricultural subsidies tend to be capitalised into the purchase and the rental price of agricultural land. Because of higher incomes farmers are prepared to bid more to rent in or purchase extra land. But given that the overall supply of land is fixed, farmers will bid against each other up to the point where the entire increase in profitability is dissipated by the higher cost of land. Thus, it is landowners who are the main beneficiaries of farm support policies.”
    Alan Matthews, CapReform.EU, More on who benefits from farm subsidies, October 14 2007: http://capreform.eu/more-on-who-benefits-from-farm-subsidies/

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  • It doesn’t take Ricky from East Enders to tell me that agricultural subsidies lead to higher agricultural land prices!

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  • bb said “Assets all over the world are out of kilter with reality. I don’t know, whether this is the new reality or whether all bubbles are being set up for a massive crash, . In history bubbles always crash, but we have never had central bank collusion on an international scale like we have today”.

    We could add fiscal to monetary policy (and other government policies too) driving the trend in asset bubbles. There are such bubbles around the world, including in assets other than land and housing. This is the perspective and scale on which we should focus. There’s rising inequality (in income and assets/capital gains) in just about every country and this fuels the 1% and their speculation in financial assets. When The Big Orange won the US presidential election the Dow Jones shot up in part because of his promise of low taxes on repatriated profits, fuelling more companies with cash to buy back their own stock to raise share prices. Stocks doing particularly well include those of environmental rapists and polluters (another type of government policy which can inflate asset prices).

    Global races to the bottom in standards and wages (enabling countries to advertise themselves as business friendly) also inflate asset prices, as does the related neoliberal ‘opening up of markets’ e.g. India’s recent mammoth ‘demonetisation’ push that is taking about 80% of banknotes out of circulation (ostensibly with the ludicrous purpose of curbing corruption, ‘black money’ and the funding of terrorism). This kills local agricultural economies (which do everything in cash, as do other companies which are being hard hit) and opens India even more to agribusinesses and their fertilisers, pesticides, weedicides and patented seeds producing massive job losses, degraded soils and highly processed, de-nutrified, genetically altered food contaminated with chemicals. The assets of these companies, as well as those of MasterCard, Visa, eBay, Amazon Citi and other cashless, online companies will grow with this ‘demonetisation’ while smaller Indian retailers will shrink.

    So the question of sustainability of asset bubbles resolves itself to some extent into how far the rich can push the not-so-rich and the poor.

    (Co-incidentally Indian demonetisation has hit the property market because about 20% of money going into it was for the purpose of laundering black money – but predictably the smaller builders, more cash-transaction-dependent than the big developers, will lose most.)

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  • last para: “20% of money going into it was in cash………”

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  • @6 interesting re share buybacks. It’s insane that execs can hit their targets by buying back shares, e.g. EPS target of £7.50 for big comp trigger. Looks like it’ll be closer to £7.40 so just buy back enough shares to bring the figure up! So the company gets loaded with more debt and/or invests less, and the cash goes out the door and invariably a lot of it into property. I’m amazed that shareholders haven’t demanded share buyback agnostic performance measures.

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  • mombers – the money goes to dividends and exec bonuses as well as boosting share prices, so shareholders are happy enough. This is mainly a US thing. A lot of the borrowing for this purpose has come from (underfunded) public pension funds that are under pressure to maximise returns, leading them to buy into levered credit funds (like the 1990s Long-Term Capital Management scam) which buy enormous amounts of corporate bonds. This cash is used to jack up share prices through buybacks or M&A. Over half a $ trillion a year goes into these buybacks. Returning profits to shareholders through buybacks and dividends accounts for 95 percent of all corporate earnings, leaving v little for re-investment. Why go for re-investment when you can go for the quick fix – borrow, boost the stock price and laugh…bank? Before Reagan this scam was avoided because execs would have been prosecuted for market manipulation. The name of the game now is leverage the company to the eyeballs, skim the cream off the top and stuff the proceeds into an unmarked account in a small, sunny island.

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  • Fears? I find the prospect positively thrilling!

    I own a house mortgage-free and frankly want its value to be very low so I can pass it on without worrying about IHT.

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  • sneaker – Tuesday, January 10, 2017 06:00PM – you can pass the house on without worrying about IHT irrespective of it’s value, you simply need to make the appropriate plans now.

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  • @9 yes share buybacks do benefit shareholders but if a share buyback of £100m triggers an exec compensation bill of say £1m, shareholders only get 99% of the £100m and also suffer the consequences of financial engineering vs investment in the business.

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  • mombers – a lot depends on how it’s done. Certainly shares will go up in the short/medium term (e,g, by reducing the number of outstanding shares) and if some of the company’s own cash (assets) is used then metrics (ROA, ROE, EPS) will look good and an ailing stock can be propped up. Then there’s the tax question – shareholders may also benefit from the share price boost of a buyback if the tax on the capital gain is lower than the tax on dividends. Given the amount of borrowing for buybacks it’s all been very Ponzi, so shareholders could cash out before the s hits the f.

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  • @13 many ways to skin a cat but ceteris paribus, a share buyback will push up EPS. If this artificially triggers an exec comp bill of £1m, that’s a loss to shareholders, albeit small. If the perf metric is increasing earnings per share, it should be measured in a way that can’t be rigged by a buyback

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  • Going back, the main point I was making was that there are many ways to support asset prices and in the US especially share buybacks have been used extensively to inflate that particular asset class for over six years. Shareholders gain as long as they aren’t holding the parcel when the music stops (more likely that role will go to bondholders who loaned the companies the money the latter used for this purpose – because the former thought that would be safer than the stock market !!) but exec compensation packages have been by far the biggest winner. The crisis of income inequality in the US is caused more by buybacks than by tax avoidance by the rich. This mechanism has transferred the best part of a $trillion a year from wages and investment to corporate profits, depressing consumer demand, investment in company growth and public infrastructure and the economy in general.

    Both major activist shareholders, borrowing @ 1% to buy stock yielding 5%, and institutional shareholders put enormous pressure on the company CFOs….”if you don’t believe enough in your stock to buy it back why should we buy your shares?” People arguing against this artificial inflation of the stock price usually lose the argument. So shareholders can benefit from dividends and capital gains as long as the company can keep borrowing…..

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  • Surely for share buybacks funded by borrowing, in normal times it would be just an accounting exchange because there are fewer shares holding a less valuable company because it now has debt. For those left holding shares, yes they have a bigger share but their increased share would be exactly offset by the increased debt, or decreased value if you like of the company.
    I see the share buybacks as taking advantage of artificially low interest rates which is why doing so is profitable.

    http://www.zerohedge.com/news/2016-04-25/ecbs-visible-hand-unilever-issues-debt-0-coupon-006-yield

    Look at the above example, does anybody believe that usa inflation is less than 0.06 through to 2020? I doubt it. The buyback companies are taking advantage of a borrowing stipend from the central banks.

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  • @16 – In the medium/long term the use of debt for buyback purposes could lower the value of the company if its credit rating is lowered (variables include tax-deductibility of interest on the debt). Nevertheless many creaky companies have used this approach to give their shares a short-term steroid shot – so there’s a timing issue too. There’s no automatic mechanism that lowers a company’s value immediately after it borrows. So execs who have used leveraged buybacks to boost EPS and their own comp can cash out. Why else has there been such a gargantuan appetite for leveraged buybacks?

    Central banks? In addition to ZIRP they’re major investors in equities (mainly to re-balance portfolios on low-yielding bonds they bought to re-capitalise banks) but nowhere near as big as company buybacks.

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