Market Observations 03/19/09
From JP Morgan Asset Mgmt Ins & Outs March 16th: Chinese exports, which were reported last week to have declined 25.7% in February from a year earlier, even weaker than January’s 17.5% decline.
China is building spare capacity in order to maintain economic activity in the short term, while positioning itself for future growth.
But, if such timely growth in demand does not materialize, these policies are likely to feed a traditional supply-induced deflation.
If such a deflationary dynamic does indeed materialize, its effects are likely to be exported,
since China is a major provider of goods and services to the rest of the world, and other exporters may respond by competitively lowering their prices.
This could lead to increased pressure on debtor nations for whom deflation would effectively increase the burden of their foreign debt,
and increase the likelihood of their entering into a classic liquidity trap.
The Nattering One muses: something I have been nattering about for a long time, this is a world awash in excess capacity.
Price deflation will lead the Chinese to keep factories producing, even at a loss. The Chinese have to keep the factories open and operate at a loss.
Keeping their people employed and fed to avoid a revolution is job number one. This will be China’s number one export for the next decade: Price deflation.
Said price deflation will more than likely cause many debtor nations to enter the liquidity trap.
From Bloomberg: The Fed yesterday said it will buy up to an additional $750 billion of agency mortgage-backed securities to support home lending.
That would increase its commitment to as much as $1.25 trillion.
The central bank is trying to lower rates by reducing the supply of outstanding mortgage bonds, boosting their prices and thus lowering their yields.
That allows banks to reduce the rates on new mortgages and still ensure profitable sales of the securities.
The Fed announced a program in November to buy $500 billion of mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae.
The Nattering One muses: Due to the sheer amount of bonds being sold to finance the printing of new money to recapitalize the system, keeping interest rates low will be a major task for the Fed.
We could see it all in mortgage rates over the next few years, the lowest since 1947; 4.5% and the highest since the Carter years; 15%.
From Bloomberg: There’s little relief in store for investors in U.S. shopping center and mall landlords even after the shares plummeted 80% from their February 2007 highs.
U.S. mall owners are coming off their worst-ever year of stock market losses as consumers cut spending and retailers shut stores.
Vacancies at malls and shopping centers approached 10- year highs in the fourth quarter and will rise further.
General Growth, the owner of more than 200 malls in 44 U.S. states will file for bankruptcy in the near term.
Westfield Group, Centro Properties Group and Lend Lease Corp. in February reported $3.4 billion of losses as property values and retail sales plunged.
Westfield, the world’s biggest shopping center developer by market value, last year cut operating hours at most of its 55 U.S. malls and sold shares to cut debt. Centro has ceded control to its bankers.
The Nattering One muses: We’re going to see increased corporate bankruptcies and continued unemployment well in to 2010.
Thousands of shopping centers will close as ghost malls and vacant strip centers will populate many cities.
Reit stocks will only suffer further with Retail REITs being worse off because they borrowed more heavily than apartment and health care landlords.
Prices will be driven by refinancing risks rather than value as survival of the fittest will go to those that have a healthy balance sheet.
Re: the current market rally… JP Morgan: There is a considerable chance that this ultimately turns out to be just another bear-market rally.
The Nattering One muses: Odds are this is a bear market rally AKA just another dead cat bounce,
even Morgan Stanley has predicted that the SP500 will touch a low of 560, before rallying to year end.
We don’t see any rally in the cards as home prices need to stabilize, financial firms must report smaller losses, earnings at U.S. companies have to improve, and...
a durable economy has to rise from the ashes of an emasculated outsourced job base, which will take years of repatriation of outsourced jobs.
It took 25 years to destroy this economy, it will take decades to rebuild it.
China is building spare capacity in order to maintain economic activity in the short term, while positioning itself for future growth.
But, if such timely growth in demand does not materialize, these policies are likely to feed a traditional supply-induced deflation.
If such a deflationary dynamic does indeed materialize, its effects are likely to be exported,
since China is a major provider of goods and services to the rest of the world, and other exporters may respond by competitively lowering their prices.
This could lead to increased pressure on debtor nations for whom deflation would effectively increase the burden of their foreign debt,
and increase the likelihood of their entering into a classic liquidity trap.
The Nattering One muses: something I have been nattering about for a long time, this is a world awash in excess capacity.
Price deflation will lead the Chinese to keep factories producing, even at a loss. The Chinese have to keep the factories open and operate at a loss.
Keeping their people employed and fed to avoid a revolution is job number one. This will be China’s number one export for the next decade: Price deflation.
Said price deflation will more than likely cause many debtor nations to enter the liquidity trap.
From Bloomberg: The Fed yesterday said it will buy up to an additional $750 billion of agency mortgage-backed securities to support home lending.
That would increase its commitment to as much as $1.25 trillion.
The central bank is trying to lower rates by reducing the supply of outstanding mortgage bonds, boosting their prices and thus lowering their yields.
That allows banks to reduce the rates on new mortgages and still ensure profitable sales of the securities.
The Fed announced a program in November to buy $500 billion of mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae.
The Nattering One muses: Due to the sheer amount of bonds being sold to finance the printing of new money to recapitalize the system, keeping interest rates low will be a major task for the Fed.
We could see it all in mortgage rates over the next few years, the lowest since 1947; 4.5% and the highest since the Carter years; 15%.
From Bloomberg: There’s little relief in store for investors in U.S. shopping center and mall landlords even after the shares plummeted 80% from their February 2007 highs.
U.S. mall owners are coming off their worst-ever year of stock market losses as consumers cut spending and retailers shut stores.
Vacancies at malls and shopping centers approached 10- year highs in the fourth quarter and will rise further.
General Growth, the owner of more than 200 malls in 44 U.S. states will file for bankruptcy in the near term.
Westfield Group, Centro Properties Group and Lend Lease Corp. in February reported $3.4 billion of losses as property values and retail sales plunged.
Westfield, the world’s biggest shopping center developer by market value, last year cut operating hours at most of its 55 U.S. malls and sold shares to cut debt. Centro has ceded control to its bankers.
The Nattering One muses: We’re going to see increased corporate bankruptcies and continued unemployment well in to 2010.
Thousands of shopping centers will close as ghost malls and vacant strip centers will populate many cities.
Reit stocks will only suffer further with Retail REITs being worse off because they borrowed more heavily than apartment and health care landlords.
Prices will be driven by refinancing risks rather than value as survival of the fittest will go to those that have a healthy balance sheet.
Re: the current market rally… JP Morgan: There is a considerable chance that this ultimately turns out to be just another bear-market rally.
The Nattering One muses: Odds are this is a bear market rally AKA just another dead cat bounce,
even Morgan Stanley has predicted that the SP500 will touch a low of 560, before rallying to year end.
We don’t see any rally in the cards as home prices need to stabilize, financial firms must report smaller losses, earnings at U.S. companies have to improve, and...
a durable economy has to rise from the ashes of an emasculated outsourced job base, which will take years of repatriation of outsourced jobs.
It took 25 years to destroy this economy, it will take decades to rebuild it.
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