Global property markets Part I

According to an article published in the Economist of May 18th,STOCKMARKETS around the world have been stimulated by ultra-loose monetary policy. The response of property markets—the biggest asset class of all—has varied. Whereas the housing boom before the financial crisis was remarkable for its global reach, the recovery after the bust is uneven.
 Among the 18 countries comprised in this article, prices have risen over the past year in 12. The biggest increase has been in Hong Kong, where house prices are up by 24.5%. The biggest faller is Spain, where prices are down by 7.7%.
  Prices have forged ahead by 11.1% in South Africa. They have also been buoyant in two big emerging economies included in our compilation for the first time: Brazil (up by 12.8%) and India (10.7%). China’s house prices have increased modestly, by 3.3%.
  Housing markets are notoriously prone to boom and bust. To judge whether prices are at sustainable levels we use two criterion. One is the ratio of prices to disposable income per person, a measure of affordability. The other is the price-to-rent ratio, in how many years you recover your investment in a house,if you rent your property.
   If these ratios are higher than their historical averages, property is overvalued; if they are lower, it is undervalued.
  On this basis Canada’s market is especially vulnerable. A large bubble now looks set to burst. Home sales in March were 15% down on a year earlier. Buyers are in short supply. A recent poll showed that only 15% of Canadians are likely to buy a home in the next two years, down from 27% last year—the steepest decline in the 20-year history of the survey. After a big boom, the housing bust will be a wrenching affair.

Asian Emerging markets looking fragile

According to an article, published today in the Wall Street Journal "Major emerging markets in Asia plunged Monday on growing concerns among foreign investors that many of the region's largest economies look increasingly fragile as a period of global easy money appears to be coming to an end.The Indonesian rupiah fell to its lowest level in four years and the Indian rupee hit a fresh low adding to signs the emerging market selloff from this summer is deepening.

Global investors are betting the U.S. Federal Reserve will soon start winding down its massive bond-buying program, a view that got a boost from encouraging U.S. employment data last week.

  Global investors are already thinking that the Fed will start to taper its bond buying program.The encouraging data of U.S. initial claims added to this view".

"That belief already has pushed up long-term interest rates and drawn billions of dollars in capital back to U.S. assets. On Monday, the yield on 10-year benchmark U.S. Treasury notes hit a fresh two-year high".

Markets are not convinced by EU Central Bank and Bank of England, forward guidance on monetary policy.

A rise in market interest rates in the euro zone and the U.K. in recent weeks suggests investor confidence in central banks' forward-guidance plans may be on the wane, just weeks after the European Central Bank and the Bank of England pledged to keep interest rates lower for longer.

U.K. government bonds have slumped to their lowest levels in two years and German Bunds are trading at a 16-month low. Contracts tied to European money-market rates that are used to price trillions of euros and sterling worth of assets from corporate loans to mortgages, are predicting that interest rates for borrowers may start rising, if only moderately, as early as 2015.

Even allowing for the fact that holiday-thinned trading conditions have been magnifying moves, it is likely that the two central banks had hoped for a more favorable market response, when they followed the U.S. Federal Reserve in giving an indication to the market that interest rates were unlikely to climb unless the economic recovery appeared more robust.

The fact that bond yields are on the rise and traders have advanced their expectations of rate increases despite soothing words from the ECB and the BOE may force central banks to step in, some investors say.

Precious Metals Prices 7.15 a.m Eastern Time

Gold Price Futures         3 months   US$  1,375.26

Silver Price Futures       3 months   US$      23.29

Chile's Unidad de Fomento Index to express Real State prices

Chile’s Unidad de Fomento
The Unidad de Fomento (UF) was introduced in Chile in January 1967 by the
Suprintendencia de Bancos e Instituciones Financieras, a government regulatory agency.
As far as I have been able to determine, the UF is the world’s first successful indexed unit
of account. That is, it is the first time that indexation was achieved by quoting prices in a
money-like unit, rather than relying on an indexation formula.
Chile had issued an earlier unit of account in 1960, the Unidad Reajustable or UR,
which was based both on price and wage indices, but it was not very successful. The UF
was and is an amount of currency related to the Indice de Precios al Consumidor (IPC), the
consumer price index for Chile. Originally, the UF was calculated three times a year, and
was calculated monthly between 1975 and 1977, but daily adjustments in the UF have been
made since 1977. The UF is now a lagged daily interpolation of the monthly consumer price
index. The formula for computation of the UF on day t is:
        UFt = UFt–1 x (1+y)1/d      1/d (means exponential days)

where y is the inflation rate for the calendar month preceding the calendar month in which
t falls if t is between day ten and the last day of the month (and d is the number of days in
the calendar month in which t falls), and is the inflation rate for the second calendar month
before the calendar month in which t falls if t is between day one and day nine of the month
(and d is the number of days in the calendar month before the calendar month in which t
falls). Since the inflation rate for a calendar month is computed using the consumer price
index for that month and for the preceding month, the UFs within a given calendar month
will depend on the consumer price index for each of the three preceding months (e.g., the
April UFs will depend before April ten on the consumer price index for January and
February, and starting with April ten on the consumer price index for February and March).
The use of the UFs by the public did not become habitual until the early 1980s, about
fifteen years after their introduction, though only a few years after the values were produced
on a daily basis (Levin, 1995). Now, the UF is widely used in Chile.
Most bank deposits in Chile are 30-day nonindexed deposits or 90-day indexed deposits
whose rates are expressed in terms of the UFs. Interest rates on the indexed deposits are
expressed as a premium over the UFs. On maturity, the deposits are converted back to pesos
at the current UF rate. Because indexed and unindexed bank deposits coexist, one might say
that the Chilean banking system is partially indexed using the UFs. Deposits denominated
in US dollars are also permitted for maturities over 30 days. The UF is used in Chile for
nearly all mortgages, car loans, and long-term government securities. All taxes are
expressed in UFs. Pension payments are automatically tied to the UF. Executive stock
options sometimes have strike prices denominated in UFs. The UF is widely used for rent
payments. Alimony and child support payments are often denominated in UFs. Office
properties for sale are usually quoted in UFs. Houses for sale are often quoted in UFs,
though pesos are also used. However, the UF is not so commonly used for selling prices of
automobiles, nor is it used commonly directly as way of setting salaries. Wages and salaries
are denominated in pesos and only indirectly influenced by the UF, in that the change in the
peso value of the UF is taken into account in wage and salary deliberations.
An indexed unit of account, such as the Unidad de Fomento (UF) in Chile, is a money
analogue that can be used to price items for sale or to specify amounts to be repaid in the
future. While it is in a sense a sort of money, it is not true money since it is not a medium
of exchange, and has no physical embodiment like coins, notes, or reserve balances. An
exchange rate between the unit and the true money or legal tender, in Chile the peso, is
defined using an index number (such as the consumer price index), and payments are
executed in money. Thus, the indexed units of account facilitate payments that are tied to
the index number, without being a means of payment.

Indexed Units of Account:
Theory and Assessment of Historical Experience

by Robert J. Shiller

Japan will cut oil demand by 9% in 2014

Japanese oil refiners will cut their capacity to the lowest in four decades next year to meet a government deadline, slashing the country's Middle East imports and tightening regional fuel supplies.

Imports of crude by the world's No. 3 oil consumer could fall by up to 320,000 barrels per day (bpd) -- down nearly 9 percent on last year -- with Saudi Arabia, the United Arab Emirates, Kuwait and Qatar bearing the brunt of the cuts.The contraction in one of the world's biggest oil markets adds to falling demand from the United States as shale oil output booms, and from the ailing European economy. As import demand elsewhere falls, top oil exporters are competing more intensely for the biggest growth market -- China.
The combination of a declining, ageing population and improved efficiency have cut deeply into Japan's fuel consumption. The decline in 2014 demand is almost as much as the 380,000 bpd by which China's appetite for oil is expected to grow next year.
By March 2014, Japan's total refining capacity will fall to its lowest level since 1970 or just below 4 million bpd, dropping about 1 million bpd -- or 20 percent -- from 2010, when Tokyo issued a mandate to slim down the bloated sector with falling domestic demand.

Japan's refiners will benefit by increasing throughput at remaining facilities, but less spare capacity could lead to a growing dependence on imports of oil products such as kerosene and gas oil to meet peak seasonal demand.

Source: Reuters

Japan planning to cut tariffs on about 80% items in TPP free trade talks

Japanese government officials are planning to propose cutting tariffs on about 80 percent of items in the coming Trans-Pacific Partnership free trade talks.

The officials are drawing up a list from around 9,000 agricultural and industrial products, ahead of the new round of TPP talks starting on August 22 in Brunei.The negotiators are also planning to say that Japan is "undecided" on whether to agree to abolish tariffs on 5 key farm products, including rice and wheat.

News on japan

China: Uneven home price rise in July

Prices of both new and existing homes continued to rise in most Chinese cities in July, according to official data released on Sunday.

According to the bureau, 57 cities reported month-on-month price gains in existing and second-hand homes in July compared to 55 in June, lower than the 64 rises in May.

On a year-on-year basis, new home prices rose in 69 cities last month, the same as the June figure, while 67 reported higher year-on-year prices for existing homes in July, down from 68.

For existing home prices, 25 cities had a lower month-on-month growth rate in July and only one city reported month-on-month growth rate above 1 percent, as opposed to two in June.

The data covers the nation's large and medium-sized cities, including Beijing and Shanghai, provincial capitals, and other municipal cities.

Source: Xinhua

Overcharge taxes by local governments reflects financial pressure

Unwelcome taxes recently exposed all across China are symptomatic of the financial burden that local governments are forced to shoulder against the backdrop of a slowing economy and spiraling debt.

A recent audit from eastern coastal province of Shandong showed that 40 enterprises from 11 counties had been overcharged 573 million yuan (92 millon U.S. dollars) land utilization and value added taxes by the end of 2012.

Six other enterprises had been prematurely levied taxes worth 144 million yuan.

Companies in northern Hebei Province and southern Guangdong complained that they had been levied taxes that they should not have paid or were supposed to be paid in the next fiscal year.

Statistics from the China Iron and Steel Association showed that 80 of its members were supposed to pay 89 billion yuan taxes in 2012, but actually paid 98.4 billion yuan.

"Many local governments have aggressively pursued fiscal revenues and demanded increments in tax income, so the tax authorities have done whatever they could (to levy taxes)," Liu said.

China's economy has shown signs of slowdown since last year, bringing local governments under pressure to reduce their expenses.

Figures released by the Ministry of Finance show China's tax revenue totalled 6.94 trillion yuan in the first seven months this year, up 8.5 percent year-on-year. However, the growth is 0.5 percentage point lower from the same period last year.

In such circumstances, local government debt has become a grave concern in China.

In early June this year, the NAO said a follow-up audit found total debt of 3.85 trillion yuan owned by 36 local governments by the end of 2012, up 12.9 percent from 2010.

Illegitimate taxes can temporarily increase fiscal revenues of local governments but, in the long term, they harm enterprises and inhibit the establishment of a healthy tax system.

Source: Xinhua

China's Merchants Bank H1 net profit higher 12.39% YoY

China Merchants Bank said on Saturday that its net profit climbed 12.39 percent from one year earlier to 26.27 billion yuan (4.24 billion U.S. dollars) in the first half of the year.

The growth was sharply lower than that posted in the same period of last year as the country's financial institutions felt the pinch of a slowing economy.

The bank attributed the increase in profit to net interest income gains and higher commission fees, which grew 8.71 percent and 45.54 percent year on year, respectively.

The value of the bank's total assets amounted to 3.81 trillion yuan as of the end of June, up 11.81 percent from one year earlier.

Its non-performing loans ratio went up 0.1 percentage point from the beginning of the year to hit 0.71 percent at the end of June.

US Investment Banks positive over China´s economy in H2

Foreign-funded institutions are optimistic about China's economic development arguing the country will face less risk of a severe slowdown, the China Securities Journal reported Friday.

JP Morgan Chase & Co. said three factors will support China's future economic recovery. These include robust investment in infrastructure and stable private input in the real estate sector, improving global economic circumstances in the second half of 2013, and the lagged effect of credit growth in the last quarter of 2012 and the first three months of this year.

JP Morgan maintained the forecast of China's yearly economic growth as 7.6 percent in 2013, with a steady and mild recovery in the next several quarters, according to the article.

Credit rating agency Moody's said the worst situation has already passed as July statistics showed that China's economy was returning to normal status, but recovery will be at a slow pace.

Goldman Sachs Group said that the Chinese central government is striving to stabilize the market and sustain economic growth before the approaching third plenary session of the 18th CPC Central Committee, according to the report.

Source:  Xinhua

China's outbound investment into the United States

The investment community has long awaited the growing wave of direct investment by China into the United States. Now, finally, despite continuing challenges, the US is swimming in Chinese capital. The Rhodium Group calculates that total Chinese direct investment in the US last year was US$6.5 billion, the highest ever, and the first half of this year has already seen US$4.7 billion of investment.
The first big wave of China's outbound investing was focused on natural resource and commodities plays. But, with the downturn in China's export economy and the related cooling of world commodities markets, such investments are less important. Today, a more urgent motivation to invest offshore is China's need to diversify its foreign reserve holdings.
The rational choice is for China to allocate more investments to the US, still by far the world's largest and strongest economy. US property markets are recovering, gross domestic product growth is back, employment is improving and US innovation continues to outpace the rest of the world.

Chinese banks face debt problems of local governments

In an article published yesterday in the Wall Street Journal about the financial sector in China says:
"The country's banking sector, a key part of a financial system that has powered China through three decades of breakneck expansion, is feeling the strain of years of rapid credit growth. Bank-fueled lending to state enterprises and local governments has led to overcapacity; serious debt problems for local governments, companies and lenders alike; and numerous white-elephant projects, from nearly empty malls and resorts to bridges to nowhere".
  The weakness at the banks is a major part of broader problems in China's financial sector. Many investors worry about the surge in off-balance-sheet loans employed by banks as a way to get around official lending limits, keeping the credit flowing to local governments and other high-risk borrowers. The surge in such "shadow-banking" activities prompted China's central bank to allow interbank borrowing costs to rise sharply in June—an attempt to rein in reckless lending. 
  The four largest state-owned banks by assets the Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd. and Bank of China Ltd.—recently won board approval to issue up to a total of 270 billion yuan ($44.1 billion) in securities in the next two years.
  But the issue to raise more capital comes at a time of weak market sentiment.
China's banks have provided the resources necessary to finance the remarkable growth
rates of their economy. "In the process they surpassed their western rivals in market value,
as investors wanted a share of the country's growth". Based on market capitalization four
of the 10 largest banks in the world are Chinese.
   Much of that growth was built on politically directed lending. Some of it ended up establishing globally competitive industries ranging from steel to energy to solar panels. But a large portion also was used to build highways, railroads and other infrastructure projects sponsored by local governments.
  Assets in China's banking sector jumped 126.5% to about $21 trillion as of the end of last year from four years earlier, making it the fastest-rising banking system among emerging economies, according to Fitch Ratings Inc. But it also is the most thinly capitalized among those economies, with the amount of equity representing only 6.5% of total assets in China's banking system. By contrast, equity represents an average of 11.2% among 48 emerging economies.
  Most of the securities sales planned by the top four banks involve a kind of debt that banks can use to meet capital requirements and absorb losses from bad loans under new global and Chinese banking rules. The banks are seeking debt that doesn't mature for at least five years, providing a more stable source of liquidity than the short-term funds they lend to one another.

   Source: The Wall Street Journal

US Housing Starts in July

Housing made somewhat of a comeback in July and taking into account wet weather on the east coast should be taken as stronger than face value. Housing starts in July rebounded 5.9 percent after falling 7.9 percent in June. The July starts annualized level of 0.896 million units nearly matched the consensus forecast for 0.900 million units and was up 20.9 percent on a year-ago basis.  The boost in starts was led by a monthly 26.0 percent jump in the volatile multifamily component after a 24.8 percent fall in June. The single-family component dipped 2.2 percent after rising 1.2 percent the month before. By region, the gain in July starts was led by the Northeast with a monthly 40.2 percent surge, followed by gains of 25.4 percent in the Midwest and 7.2 percent in the West. The South declined 7.0 percent on the month. Permits returned to a moderate uptrend. Permits made a 2.7 percent comeback after dropping 6.8 percent in June. July's annualized pace of 0.943 million units was up 12.4 percent on a year-ago basis. Market expectations were for 0.935 million units for July permits. Housing data are weak currently due to atypically wet weather on the east coast and there is uncertainty from mortgage rates going up from worries about Fed tapering. But the trend still appears to be a moderate uptrend-especially as short supply of houses on the market is boosting construction.

Housing starts retrenched sharply in June on a downswing in the volatile multifamily component. And atypically wet weather likely weighed on starts. Housing starts in June fell back 9.9 percent, following an 8.9 percent surge in May. The June starts annualized level of 0.836 million units was up 10.4 percent on a year-ago basis. June's starts level was the lowest since August 2012. The decrease in starts was led by a monthly 26.2 percent drop in the multifamily component after a 28.2 percent jump in May. The single-family component slipped 0.8 percent, following a 0.5 percent rise in May. Permits also dropped sharply on a plunge in the multifamily component. Permits fell 7.5 percent in June after dipping 2.0 percent the prior month. June's annualized pace of 0.911 million units was up 16.1 percent on a year-ago basis. Source  Bloomberg

Fed Bullard hinting small reductions in bond buying

"The Federal Reserve could hedge its bets by making small moves rather than large, aggressive ones when it starts pulling back on its $85 billion-a-month bond-buying program, said James Bullard, president of the Federal Reserve Bank of St. Louis.

"A larger move would be interpreted as a faster pace of reduction," he said Thursday. "A smaller move would be considered a more hedged bet, a slower rate of reduction in purchases."

He didn't elaborate on what amount would constitute a small pullback or a larger one"

Source: WSJ

Once again individual investors flocking into risky new "generation" investment products

According to an article published in the Wall Street Journal today, "individual investors are pouring tens of billions of dollars into a new generation of complex investment products, and regulators are raising concerns that not all buyers understand the costs and risks.
 The products often employ sophisticated strategies that aren't used by traditional stock and bond funds. They include betting against stocks, or shorting them, using derivatives or leverage to amplify bets, and buying unusual assets such as privately issued junk bonds.

A total of $59 billion poured into alternative mutual funds this year through July, according to Morningstar, making it by far the fastest-growing mutual fund category.

The figure reflects new investments into such funds minus withdrawals. The jump in those seven months was bigger than any previous full-year increase. The alternative mutual funds attracted $25.6 billion in additional assets in 2012".

Wall Street regulators are always "concerned" but when they apply regulations they are always too little and too late.

Source: The Wall Street Journal

Precious Metals Prices

Gold Price Futures     3 months        US$   1,368.46

Silver Price Futures    3 months        US$       23.02

China's CNOOC to build first floating LNG terminal in Tianjin

The CNOOC Gas and Power Group, a wholly-owned subsidiary of CNOOC, China's largest offshore oil and gas producer, said Thursday that its first floating liquified natural gas (LNG) project has gone through government approval.

The floating LNG terminal project, located in north China's Tianjin Municipality, will be the first of its kind to be built in the country, the company said.

It said in a statement that it will spend 3.3 billion yuan (534.7 million U.S. dollars) to build the floating LNG terminal, which will ensure fast supplies and shorten the construction period for its Tianjin LNG project by up to four years.

The floating LNG project will supply 3 billion cubic meters of gas each year, according to the company. However, the company did not say when construction on the floating facility will be completed.

Source: Xinhua

China strongly protested visit of Japanese cabinet members to Yakusuni Shrine

China has strongly protested against and condemned the visits of Japanese cabinet members to the controversial Yasukuni Shrine on Thursday.

Vice Foreign Minister Liu Zhenmin summoned Japanese ambassador to China Masato Kitera and lodged representations over the issue, Chinese Foreign Ministry spokesman Hong Lei said.

It is an open challenge to historical justice and human conscience that Japanese cabinet members visited the shrine which honors Class-A war criminals on the 68th anniversary of Japan's surrender in World War II, Hong said. He added that it severely hurts the feelings of people in victim countries in Asia, including China.

The Yasukuni Shrine issue reflects whether Japan can correctly understand its own militarism and history of aggression, as well as respect the feelings of people in victim countries in Asia, Hong said.

"The attitude of those in power in Japan toward historical issues, including the shrine issue, concerns the political foundation of China-Japan relations," Hong said.

In whatever forms and names the Japanese leaders visit the shrine, the nature is that they attempt to deny and glorify the militarism and history of aggression and challenge the results of World War II and the post-war international order. This will draw firm opposition and unanimous condemnation from China and other Asian countries, he said.

Hong reaffirmed that Japan can only face the future by looking in the mirror of history. He urged Japan to deliver their commitment to deeply reflect upon their history of aggression and make real efforts to gain trust from the international community.

"Otherwise, Japan's relations with its neighboring Asian countries will have no future," the spokesman said.

Repeated visits to the shrine by Japanese leaders and lawmakers have become a major obstacle for Japan to mend ties with its neighbors, especially China and South Korea, which suffered from Japan's invasion during World War II.

Government Bonds

Government Bonds

                                                                                Price        Yield
                                                                               Change        %

U.S. 5 Year			0/32	1.526
U.S. 10 Year			-1/32	2.776
U.S. 30 Year			-2/32	3.812
Germany 2 Year			0/32	0.247
Germany 10 Year			0/32	1.888
Italy 2 Year			0/32	1.874
Italy 10 Year			0/32	4.247
Japan 2 Year			0/32	0.114
Japan 10 Year			-4/32	0.758
Spain 2 Year			0/32	1.721
Spain 10 Year			0/32	4.447
U.K. 2 Year			0/32	0.428
U.K. 10 Year			0/32	2.685

Source : WSJ

Japan's Government: Economy approaching end to deflation

Japan is approaching an end to deflation, the government said on Thursday, offering its most upbeat view on prices in nearly four years as a steady pick-up in the economy allows more companies to pass on rising costs to consumers.

The government also revised up its assessment on the job market to say it is "improving," as falls in the yen triggered by Prime Minister Shinzo Abe's reflationary policies boost manufacturers' profits and push down the jobless rate to levels before the collapse of Lehman Brothers.

"Recent price developments indicate that deflation is ending," the government said in a monthly economic report for August, offering a brighter view than last month when it said deflationary pressures were easing.

But it is too early to declare that Japan has made a sustained exit from deflation, according to an official who briefed journalists on the report, noting that doing so would require more lasting rises in consumer prices.

Japanese consumer prices rose in June for the first time in more than a year, although most of the increase was due to higher electricity bills rather than stronger demand that could drive a durable recovery.

The government has described the economy as in deflation since November 2009. Removing the word "deflation" from the report, or declaring that deflation is over, would herald a major success in its battle with price declines.

Source :  NewsOnJapan

Precious Metals Prices

Gold Price Futures        3 months       US$  1,324.66

Silver Price Futures       3 months       US$      21.79

Marc Faber thoughts on the price of gold

 “Maybe gold is signaling a deflationary collapse of all asset prices.

If this were indeed the case I suppose I would rather own gold than

government bonds, high yield bonds and equities. If this scenario were

to pass it would lead to even more money printing around the world,” 

Source:  Marketwatch

US PPI July

PRODUCER PRICE INDEXES - JULY 2013


The Producer Price Index for finished goods was unchanged in July, seasonally adjusted, the 
U.S. Bureau of Labor Statistics reported today. Prices for finished goodsmoved up 0.8 percent 
in June and 0.5 percent in May. At the earlier stages of processing, prices received by manufacturers of intermediate goods also were unchanged in July,and the   crude goods index 
rose 1.2 percent. On an unadjusted basis, prices for finished goods advanced 2.1 percent for the 
12 months ended July 2013.

EU zone economy grew 0.3% in Q2

The euro-zone economy emerged more strongly than expected from its longest postwar contraction in the three months to June, but a resolution to its banking and fiscal crises remains a distant prospect.

The European Union's official statistics agency Wednesday said the combined gross domestic product of the currency area's 17 members was 0.3% higher than in the first three months of the year, but 0.7% lower than in the second quarter of 2012. It was the fastest quarterly expansion since the first three months of 2011.

The median forecast offered by 19 economists who were surveyed by The Wall Street Journal last week was for a quarter-to-quarter expansion of 0.2%, and a year-to-year decline of 0.8%.

The euro zone's return to growth after six

straight quarters of contraction was driven by Germany, its strongest and largest economy. It recorded the fastest expansion among large developed economies during the quarter.

Germany's GDP, the broadest measure of goods and services produced across the economy, swelled 0.7% in the second quarter from the preceding period, in line with economists' forecasts. That equals annualized growth of 2.9%, the statistics office said.

Source: WSJ