Oct 21, 2019

Axios Markets

Dion Rabouin

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Situational awareness:

  • Chile will extend a state of emergency after at least 7 people were killed amid violent clashes and arson attacks stemming from an increase in public transportation costs. (Reuters)
  • Boeing said it told the FAA “multiple times” about the expanded role of the MCAS flight software used in its 737 Max jets that's been blamed for crashing 2 planes and killing hundreds of people. (Bloomberg)
  • Canadians head to the polls today with Prime Minister Justin Trudeau in a dead heat with Conservative leader Andrew Scheer. (Bloomberg)
1 big thing: The missing housing boom

Illustration: Aïda Amer/Axios

The real estate market should be experiencing a boom — but it's not. In fact, the U.S. housing market has been stagnant for the last 3 years and is beginning to turn lower, data shows.

Why it matters: Anyone who bought residential property in the last 40 years, even at the height of a bubble, has been able to count on rising home values. But those days may be over: Real estate prices have far outpaced incomes and lost their correlation to them.

  • For typical homeowners, "wealth will not increase as fast as it did in previous years, as on average the growth in property prices is close to an end," Maciej Skoczek, real estate analyst at UBS Global Wealth Management, tells Axios.
  • "Those who buy a city apartment at current high valuations are likely to have to adjust to a lengthy lean period."

Why there should be a boom: The generation that's reaching prime home-buying age is large by historic measures; mortgage rates are near historic lows; housing price growth has slowed to a standstill; the unemployment rate is the lowest it's been in 50 years; and wages are rising at the fastest pace in a decade.

Yes, but: Instead, there is a serious lack of qualified and/or interested buyers. And even with ultra-low mortgage rates, prices are not falling enough to bring in new customers.

  • There are also meaningful changes in the makeup of the prime-age potential homebuyers — who now have more debt than ever, are more likely than before to live with their parents, and are reconsidering the attractiveness of a mortgage.

And there's an inventory problem. Not enough affordable single-family homes are being constructed, and builders are focusing their efforts on large, expensive projects, Robert Dietz, chief economist for the National Association of Home Builders, argues.

  • Declining worker productivity, labor shortages, and regulatory costs also are putting a dent in housing supply.
  • As older, more skilled workers retire, and younger, less skilled builders take their place, this problem is likely to get worse.
  • "I’ve told the industry we’re going to see worker productivity go down before it goes up," Dietz says.

The combination of inflated prices and overburdened Americans has translated to fewer home sales today than in the year 2000, Lawrence Yun, chief economist at the National Association of Realtors, notes.

  • "We take a survey of consumers and ask the question, 'Is it a good time to buy?' The number of people who say it’s a good time has overall been turning down."

The bottom line: The world is changing. It's "the end of the boom," Skoczek says.

2. The S&P 500 shuffle
Expand chart

Adapted from QAD; Chart: Andrew Witherspoon/Axios

The lifespans of companies on the S&P 500 are expected to continually decrease to the point that time spent on the index could drop by 5 years on average in 2030 compared to 2019, research from QAD finds.

  • The reduced time period is largely due to increased disruption, analysts say. A previous study from Innosight projected that nearly 50% of the current S&P 500 would be replaced over the next decade.
3. Bank heads warn of liquidity crisis looming

A growing number of market analysts are voicing concerns that the repo market shock in September may have been the first signal of a wide-ranging liquidity shortage, and now those warnings are being echoed by the heads of major banks.

  • "Despite the fact that bank balance sheets are quite strong, I think you’ll see more moments like this going forward," Ron O'Hanley, president and CEO of State Street, said during the Institute of International Finance's annual membership meeting on Saturday.

What's happening: Even with the Fed's commitment to pump $60 billion a month into financial markets, there still may not be enough funding because of regulations, changes to market structure, and banks' desire to keep their reserve levels high.

  • Strategist from JPMorgan, Goldman Sachs and Bank of America sent recent notes also warning of the funding issues.
  • Additionally, the increase of passive investments and major flows from pension funds and large asset managers into private equity funds is drying out typical sources of liquidity to the stock market and could mean major outflows in the face of bad news.

What they're saying: Brian Porter, president and CEO of Scotiabank, said he also is worried about the health of the so-called shadow banking sector — firms that are not banks but lend money to consumers for things like auto loans or home mortgages and aren't subject to the same regulations.

The shadow banking sector is largely private and little is known about how much money the insurance companies, hedge funds, private equity funds and payday lenders that make up the industry actually have.

  • "Regulators have been very successful in distributing risk," O'Hanley said. "It’s now been very much deconcentrated. But it hasn’t gone away; it’s been moved."

Don't sleep: IIF president and CEO Tim Adams likened it to the market for mortgage-backed securities before the housing bubble burst in 2007, triggering the global financial crisis.

  • "We used to make the same case on securitization of mortgages — that we could slice them and dice them and we distribute risk globally and it was a safer system because it was distributed," Adams said.
  • "We found out that wasn’t necessarily the case."
4. British pound remains strong despite Brexit drama

The British pound slipped, but was much less volatile than expected after Prime Minister Boris Johnson's Brexit deal was rejected by Parliament on Saturday.

What's happening: The pound fell about 0.7%, but remained above $1.29, near a 5-month high. Big banks in London called in extra staff in anticipation of major market moves that didn't materialize after the first Saturday sitting in the House of Commons in 37 years.

What they're saying: “There is some uncertainty about Brexit, but it may not rattle investors too much because this is not an outright rejection of the deal,” Michael McCarthy, chief market strategist at CMC Markets, told Reuters.

  • “Trading volumes are around 40% of what they would normally be, which shows there’s not a lot of conviction in the market.”

State of play: Parliament rejected Johnson's initial deal, but he may have the votes for a new agreement as members of the opposition Labour party as well as well as 20 former Conservatives are expected to support it.

  • Overall, the market remains on edge, but there appears to be little fear of Britain crashing out of the EU without a deal, as Johnson has threatened to do on Oct. 31.
  • "There was an initial sell-off, but it was much shallower than markets had anticipated," Russell Lascala, global head of FX at Deutsche Bank, told the BBC.
5. CME Group: No "hanky-panky" in futures market

The CME Group responded swiftly and strongly to allegations that traders were using inside information to manipulate the S&P 500 E-mini market and pocket potentially billions of dollars.

Background: A series of massive trades punched in at or near the end of trading that paid off handsomely thanks to unexpected moves from the Trump administration were detailed in a Vanity Fair article last week.

  • The article quoted one "longtime CME trader" who said these were the most suspicious trades since al-Qaida cashed in before initiating the Sept. 11, 2001, terrorist attacks.
  • “There is definite hanky-panky going on, to the world’s financial markets’ detriment,” the anonymous trader said.

CME disagreed.

"CME Group regularly monitors its markets for suspicious activity. As it relates to the Vanity Fair article published on October 17, 2019, regarding activities in the E-mini S&P 500 futures contract, the allegations about the trading activity are patently false."
"These transactions were entered into by a significant number of diverse market participants."
— Full statement from CME Group's website
Dion Rabouin