A post I'd made in a different blog is something I wanted to repost today. The remaining pieces of the wall at Potsdamer Platz, Berlin. And behind it, a symbol of what Germany has grown to become.
(And right in front of it, is a woman wondering why her crazy husband is taking so many pictures)
Due to an unexpected outbreak of rationality (and perhaps embarrassment), the Treasury department has rejected requests of Goldman Sachs and Berkshire Hathaway to purchase Tax Credits from Fannie Mae.This is probably the toughest stance I've seen Barry taking; but it is disgusting that people are taking the system for a royal ride. Goldman is considered scum anyhow, so their doing this isn't all that surprising. But Buffet? He does well with straight talk, but the walk isn't quite that straight, it seems.This paper transaction would have provided precisely zero value to the taxpayers, and allowed these firms to add to the piles of bailout monies already received by avoiding billions of dollars in taxes otherwise legally owed. It would have been a license to steal.
The sheer arrogance, the colossal gall involved boggles the mind.
And while we expect this sort of behavior from the Vampire Squid — they take pride at Goldman in not just being whores, but in being the highest paid callgirls in town — it is stunning to see such behavior from the usually politically astute Oracle Tentacles of Omaha. For Warren Buffett’s Berkshire Hathaway to team up with Goldman Sachs (which he now owns a healthy chunk of) is a bit of a revelation: We have been spun by his genteel manner, his aw shucks down-home-isms, his off Wall Street, less bloodthirsty approach to investing, into somehow believing he was different.
We have been duped.
We should not have been. Buffett has been the biggest shareholder in Moody’s — a collection of filthy whores and pederasts who were one of the main contributors to the economic collapse — should have raised serious questions as to his judgment in our minds. That he sat by silently as they did their worst, sodomizing the nations credit system for fun and profit was a powerful indictment of Buffett as someone far different than his public persona. In retrospect, as Moody’s was helping to destroy America’s financial system, his merely spouting off aphorisms about about Financial WMDs now looks too cute by half.
Those of you who used to respect Warren Buffett might consider moving him off your increasingly short list of participants in the marketplace who behave ethically. This crude attempt to steal billions — coming on the heels of the bullshit about “Investing in America” by buying Railroads — is a shock to me; perhaps that is a testament to my naivete.
Perhaps the Oracle of Omaha has been infected by a new flu variant, the H1N1 GS mutation. It is usually non fatal to the host, but destroys its reputation . . .
Barry also references a Rolfe Winkler post I'd spoken about and got some tough comments on. It's becoming more evident now that Buffett, for all his talk, isn't quite the saint he's made out to be.
Berkshire made a healthy profit this quarter, though that's a mark-to-market game; the real businesses seem to show slack and he's trying to keep it lean there.
If the anger against these people trying to game the system doesn't blow up, we'll see the Buffetts and Goldmans make even more money at the cost of a lonely taxpayer. But the anger's just starting to show - probably a year more of this craziness will be needed before someone gets really ticked off. It's starting to appear slowly - Elizabeth Warren, Chairman of the Congressional Oversight Panel, is appalled that "financial institutions could think that they could take taxpayer money and then turn around and act like it's business as usual. I don't understand how they can't see that the world has changed in a fundamental way, that it is not business as usual when you take taxpayer dollars.".
It's disconcerting that the lessons of this crisis are all screwed up, and that people are still taking advantage of the now explicit taxpayer backstop. We're learning to lie [let's not mark to market], to fabricate positive news out of the most negative [US Unemployment at 17%? Dress it up as better than something else] and to cow down to threats that banking failures will crush everyone. If there ever was a time that thieves can look back and remember fondly, this is it.
Now the RBI is paying hard cash for the gold, meaning they won't pay using IMF Special Drawing Rights or any such. There's speculation that the RBI sold US T-Bills to pay for it. Which causes people to think the US will get all jittery because oh my god, people are running away from the dollar!
That is just silly.
India has 280 billion dollars of reserves. This $7 billion deal is like a drop in the ocean. There are not that many 200 ton deals to go around, and we can't diversify enough using gold, and if we tried too hard every country will do it and drive the price of gold to crazy levels.
Which is good for my son's education fund. But I digress.
Gold is around 6% of our total forex reserves - less than $15 billion. That the RBI is buying is interesting but only on influencing sentiment. There is simply no way to diversify the $280 billion easily. China's got about 3 times our Gold reserves, and has been stockpiling commodities for a long time. Still, that doesn't make a dent on their dollar dependance.
So it might be just posturing. With the US Fed saying things like "Exceptionally low rates for extended periods of time", there is probably a fear that the dollar will be toilet paper except toilet paper is cleaner. This could be a signal that more of such measures will be taken. But the US will be hardly bothered about a piddly 7 billion - in fact they'll probably not be bothered until it's too late. In the interim, it's better to do larger diversifications (set up infra funds using the reserves, buy different currencies, lend money to companies here and buy lots of companies abroad).
Gold, though, is an interesting interim play. I'll stay long on it for a bit.
Here's a chart of credit growth in the last three years:
(Click for a larger image)
Now it's possible there's a seasonal impact; Diwali last year was in November and this year, it was in October. Credit should usually peak during Diwali, one would think.
If you take monthly averages (the reports are fortnightly so usually two figures are available per calendar month), there isn't too much of a visible impact of seasonality - or you would see spikes in Oct/Nov. This year has been bad throughout, but look at October, it's a two story building in a land of skyscrapers.
(Click picture for a larger image)
The underlying figures show food credit dropping by 6,000 cr. and non-food credit dropping 15,000 cr. in the fortnight from Oct 9 to 23. That's not great news, considering Diwali was on the 17th. What, people took loans and paid them back just after Diwali? I don't think so!
The drop in credit growth isn't quite followed by a drop in deposits - which dropped only 8,000 cr. Banks are still parking upwards of 1 lakh crore - a trillion rupees - every single day in the reverse repo window. This doesn't make sense - the reverse repo pays 3.25%, a lot lesser than deposits demand.
RBI is trying to push for credit growth, but at the same time wants to control inflation if it rears its ugly head. For that, the Statutory Liquidity Ratio, or what is mandated for banks to invest in Government securities, is back to 25%, a 100 bps revision upwards. And importantly, windows that were opened for NBFCs to borrow directly from the RBI have been closed. (Normally, only banks can borrow from RBI)
More importantly perhaps, is the increase of provisioning for commercial real estate loans. To simplify: when a bank lends money it is required to "provision" some of that money from capital against that loan.(not from the deposits or any other money it borrows, but it's equity). This used to be 0.4% for Commercial Real Estate loans - it's now 1%. That should scare off banks from overlending to this sector, just a little bit.
But all of this was done after Oct 23 - the date of the last available credit growth statistic. In about 15 days we'll see how banks have lent AFTER the RBI policy change; it's horrific to see a sub 10% credit growth number when your economy is supposed to be growing at 6% (typically credit grows a 2.5 to 3x multiple of GDP growth).
I'll do another post on bank results - they seem to have done lousy in the banking area and well in the trading area, which reflects in credit statistics; after all, if you're making enough money trading, why bother to lend? This sounds like it applies universally. But these are famous last words...
After the sharp decline in the fall of 1929, the S&P 500 rallied 46% from its low in November to the rally high of April 12, 1930. It then, of course, fell by over 80%. But on April 12 it was once again overpriced; it was down only 18% from its peak and was back to the level of June 1929. But what a difference there was in the outlook between June 1929 and April 1930! In June, the economic outlook was a candidate for the brightest in history with effectively no unemployment, 5% productivity, and over 16% year-over-year gain in industrial output. By April 1930, unemployment had doubled and industrial production had dropped from +16% to -9% in 5 months, which may be the world record in economic deterioration. Worse, in 1930 there was no extra liquidity flowing around and absolutely no moral hazard. "Liquidate the labor, liquidate the stocks, liquidate the farmers"2 was their version. Yet the market rose 46%.Grantham's letters are always great reads!How could it do this in the face of a world going to hell? My theory is that the market always displayed a belief in a type of primitive market efficiency decades before the academics took it up. It is a belief that if the market once sold much higher, it must mean something. And in the case of 1930, hadn't Irving Fisher, arguably the greatest American economist of the century, said that the 1929 highs were completely justified and that it was the decline that was hysterical pessimism? Hadn't E.L. Smith also explained in his Common Stocks as Long Term Investments (1924) - a startling precursor to Jeremy Siegel's dangerous book Stocks for the Long Run (1994) - that stocks would always beat bonds by divine right? And there is always someone of the "Dow 36,000" persuasion higher prices in previous peaks must surely have meant something, and not merely have been unjustified bubbly bursts of enthusiasm and momentum.
Today there has been so much more varied encouragement for a rally than existed in 1930. The higher prices preceding this crash (that were far above both trend and fair value) had lasted for many years; from 1996 through 2001 and from 2003 through mid-2008. This time, we also saw history's greatest stimulus program, desperate bailouts, and clear promises of years of low rates. As mentioned six months ago, in the third year of the Presidential Cycle, a tiny fraction of the current level of moral hazard and easy money has done its typically great job of driving equity markets and speculation higher. In total, therefore, it should be no surprise to historians that this rally has handsomely beaten 46%, and would probably have done so whether the actual economic recovery was deemed a pleasant surprise or not. Looking at previous "last hurrahs," it should also have been expected that any rally this time would be tilted toward risk-taking and, the more stimulus and moral hazard, the bigger the tilt. I must say, though, that I never expected such an extreme tilt to risk-taking: it's practically a cliff! Never mess with the Fed, I guess. Although, looking at the record, these dramatic short-term resuscitations do seem to breed severe problems down the road. So, probably, we will continue to live in exciting times, which is not all bad in our business.
Indian markets have fallen some 12% in the last 10 days and such a feeling is probably past us. But the whole articles is worth reading, in any frame of mind.
On Sept. 10, China Overseas Land and Investment, a Hong Kong-listed company and a subsidiary of state-owned China State Construction Engineering Corp., purchased a prime piece of real estate in the Putuo district in downtown Shanghai. The company paid 7.006 billion yuan ($1.026 billion) for the undeveloped property, which will amount to an average of 22,409.3 yuan ($3,283.9) per square meter of floor space (just in land costs) once the designed residential building is constructed.Heh. BPTP had bid just about that much - 5010 cr. or $1 billion - for a 95 acre plot in Noida, but it decided it didn't quite want to pay that much, a little while later. Just sayin'.
The government began this [real estate] privatization process by making a private dwelling a “commodity” and granting the purchaser the right to own a newly built house for 70 years. (Likewise, the developer who buys the property on which residential or commercial buildings are to be constructed may own that property for 70 years.) Home ownership in China could now be a sound financial investment.That's about Rs. 3000 per square foot - prices easily payable in "second tier" Indian cities of Bangalore, Pune and Hyderabad, especially in 2007.Thus, the residential real estate market would boom in almost every urban area in China — and particularly in the “first-tier” and “second-tier” cities (only Beijing, Shenzhen, Guangzhou and Shanghai are in the first tier, with more than 20 cities, and mostly provincial capitals or coastal ports are in the second tier). But rising land prices would eventually put housing prices out of reach for the general public. In Dongguan, a coastal second-tier city in Guangdong province, land prices averaged 4,957 yuan ($726.42) per square meter in 2007, a more than 500 percent increase from 2003, while personal disposable income increased 24 percent during the same period (from 20,526 yuan [$3,008] to 27,025 yuan [$3,960] per year).
A 2006 survey conducted by the National Development and Reform Commission showed that the average ratio between housing prices and income was approaching 12:1 in many large and middle-size cities in China (in Beijing it had reached 27:1). Twelve to one is significantly higher than the World Bank’s suggested affordability ratio of 5:1 and the United Nations’ 3:1. The problem was compounded by the fact that, of the more than 80 percent of Chinese who owned their own homes in urban areas (generally considered cities with populations of more than 20,000), 54.1 percent were making monthly mortgage payments that constituted 20 percent to 50 percent of their monthly incomes.Er, let's see the situation in India. For a standard 5:1 price to income rate, a person earning Rs. 12 lakh can afford a property worth Rs. 60 lakh. With 10% down and a loan of Rs. 54 lakh at 9%, the person will pay 48.5K per month, or 48.5% of his monthly income. (oh and tax will take away another 15-20%, so the person isn't left with nearly enough)
At 12:1 people in India won't be able to afford loans at our interest rates - China's interest rates must be abysmally low. I'm trying to get sources of loan-to-income or price-to-income in India, but there's not much out there that is unbiased.
As housing prices continue to rise, a parallel trend is manifesting itself — rising vacancy rates in urban areas. A 2009 report by the Shanghai Yiju Real Estate Research Institute revealed that, by the end of 2008, the average vacancy rate for “commodity housing” (as opposed to welfare housing) in Beijing was 16.64 percent, and vacancies reached as high as 30 percent in some districts. Most of these vacant houses, however, are not unsold ones. They have been purchased by investors as speculative investments. While there are fewer and fewer ordinary people who can afford to buy houses, there is still excessive demand for investment housing — pressure that continues to drive up the prices.Anecdotal evidence: This is quite the case in India as well. Mumbai's land mafia keeps land and apartment supply limited, and there's widespread collusion with government officials. In Gurgaon, a broker told me that a new project by a certain builder was not selling because some of his other projects in the vicinity had still some listed flats with investors looking to sell at low prices. So the builder purchased all such flats to push up the price of a "new" project - a strategy that's useful once in a while but fails when everyone overbuilds.This closed loop in the Chinese real estate market is facilitated by the country’s political and bureaucratic system. In China, all land is initially owned by the state, and local governments have the sole authority to sell it. And income from property taxes and land sales are a primary source of revenue for local jurisdictions. According to estimates by the State Council’s Development and Research Center, tax revenue from the land in some jurisdictions accounts for 40 percent of the local budget. Moreover, net income from land sales accounts for more than 60 percent of the local governments’ extra-budgetary revenue. The soft budget and lack of accountability to the people reinforces the local governments’ incentive to expand their real estate investments without much concern for cost or impact on public services.
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One typical strategy is for a developer to buy a big chunk of urban land from the local government but leave the land undeveloped, or build on only a small portion of it, thereby keeping the housing supply limited. Despite various state policies to lower land prices in order to make homes more affordable, local government officials and real estate developers control the land auctions. When a lower sale price is dictated from above, it is easy enough for the local sponsors to officially deem the auction a failure. Even when the developer does build houses on the property, a speculative investor, working hand in hand with the developer and government officials, can bribe both parties to ensure that he can buy all the houses at a low volume price and keep them off the market, thereby maintaining a limited supply and high prices.
With 70 percent of real estate investment in China coming from bank loans, a dramatic drop in land values could send shock waves throughout the economy. There are already signs of decline. In Shenzhen, one of China’s first-tier cities, real estate prices have been dropping for the past two years (30 percent for housing), and many developers and speculators have suffered great losses. The threat looms in other large cities such as Beijing and Shanghai and may be emerging in many second-tier cities as well.It's useful to keep in perspective India's bubble as well. While real estate has been going up the last few months, and more IPOs are on the anvil, there is a significant chance that the bubble that didn't quite burst in the last two years is on its way to a final hurrah. Like balloons, you never know how much they'll grow before they pop - and like balloons, it's safer to watch from a distance.
Copyright (C) Deepak Shenoy 2005-2012
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