The Fed's Category Was The Source Of $712 Billion In Capital In Q1

Alchemist

The Fed's Dummy "Household Sector" Category Was The Source Of $712 Billion In Capital In Q1

by Tyler Durden

The "household sector" plug in the Fed's Flow of Funds reports provides some very crude and often inaccurate fund flow data when it comes to the US consumers, but at least one can often get a sense of which way capital is flowing. As we continue spreading the data from yesterday's Z.1, we have initially focused on 'household" financial assets, which at a total of $45.5 trillion, represent two thirds of the total household sector's assets of $68.5 trillion (the balance is tangible assets which actually declined by $67 billion to $22,994 billion: as America gets wealthier, it is increasingly based on intangible "wealth"). The key components of Financial Assets consist of Corporate Equities, Corporate and Foreign Bonds, Treasury Securities, Total Deposits, and Pension Funds Reserves. Below we present the change in time over these asset holdings.

A casual glance at the change in the non-seasonally adjusted household financial assets reveals something strange: even as every tracker of mutual fund flows has repeatedly indicated that US investors are not only not investing in stocks, but are now increasingly redeeming funds from domestic corporate equities, the Fed will have you believe quite the opposite. According to the Z1, the household sector increased its Corporate Equity holdings by $329.4 billion, even as Corporate and Foreign bonds declined by $58.1 billion. Of course, the truth is completely the opposite: non-institutional investors have been taking money out of stocks and investing it in bonds. When one notes that Pension Funds allegedly also saw a $396.8 billion increase in assets, and then the lie is just complete. The question is why is this "plug" category so far off.

If one assumes that households were really at best flat, if not negative, participants toward stocks, then the Fed is essentially saying there was a vacuum of at least $330 billion that came from somewhere. It sure did not come from retail investors!

Continuing with the other imaginary NSA data, Treasury securities (ex. savings bonds) increased by $148.4 billion in the quarter. This is at least a marginally credible number. We will provide the other contributors to the Treasury category shortly. What is most disturbing for banks is that Total Deposits, after increasing by $101.3 billion in Q4 2009, fell by $104 billion in Q1 2010. Summing across these five categories, Equities, Corporate Bonds (decline), Treasury Securities, Total Deposits (decline) and Pension Fund Reserves, and we get a change of $712 billion in Q1 alone. What the source of this three-quarters of a trillion in new capital in the Fed's dummy category is, is yet another secret that the Fed will never disclose. In this market it is best not to ask questions: just take it for granted that somehow almost $1 trillion in purchasing power came in and lifted the market.

Below is the total notional of these abovementioned asset categories:

And below is the quarter over quarter change of categories in which the Fed needed the help of a dummy category to balance capital flows.

Alchemist

Will Anything Stop The Decline of CRE Prices?

From The Daily Capitalist

Fitch reported today that commercial real estate (CRE) values continue to decline giving rise to greater loan losses on CRE. On the average throughout 2009, lenders recovered 43 cents on the dollar on distressed loans. They see the loss rate only going up.

    The average loss severity rate or the ratio of realized loss to liquidation balance for U.S. commercial mortgaged-backed securities (CMBS) loans resolved with losses in 2009 was 57% compared to the 43% rate in 2008, according to new data from Fitch Ratings. Those losses outpace the cumulative historical average of 37.2%.

"Loss severities are expected to remain above the current cumulative average through 2011," said Fitch managing director Mary MacNeill. "Assets liquidated in the current economic environment will be those not likely to see cash flow improvement from an extension or modification."

"Assets will take longer to resolve as special servicers continue to see high volumes of underperforming loans," added Fitch senior director Richard Carlson. "Continued high inventory and the declining frequency of modifications means there is no relief is in sight." ...

"Property value is the barometer of potential losses for CRE debt," [Xiaojing Li, senior debt analyst for CoStar Group] said. "In the first quarter of 2010, there were already $270 million in losses via liquidation. Among the $17.7 billion in loans newly added to special servicers this year, 7% have already had appraisal reductions, threatening a new wave of losses."

Losses by property type were:

* Hotel: 81.9%.
* Multifamily: 58%
* Office: 56.9%
* Industrial: 48.8% and
* Retail: 48.2%.

I am reprinting this refi timeline chart to give you a better idea of the problem:

As you can see, there is a huge problem through 2013. Which translates into fall CRE prices. This price index from Moody's in March:

There are factors that are positive and negative at work in the economy with regard to CRE.

First, lenders are in trouble. CRE is held mainly by local and regional banks. However the very large loans are held by many insurers. S&P and Moody's recently downgraded some insurers as a result of this, despite the fact the insurers had raised $32 billion in capital. Downgraded were:

NLV Financial Corp. and subsidiaries, Pacific LifeCorp and subsidiaries, and Principal Financial Group Inc. and subsidiaries. The ratings on MetLife Inc. and subsidiaries remain on CreditWatch, where they were placed on Feb. 3, 2010. Standard & Poor's affirmed its ratings on Teachers Insurance & Annuity Assoc. of America (TIAA); the outlook on TIAA remains negative.

Only New York Life Insurance Co. was upgraded - to stable from negative and its ratings affirmed. ...

Basically S&P argues that current economic conditions in commercial real estate are tantamount to a 'BBB' scenario and insurers must have fundamentals to withstand even worse economic conditions to get a higher rating. For an insurer to rate a 'AAA' financial strength rating, for example, it would have to withstand the Great Depression - not the one that just past but the one of the early 1930s.

Second, this is why regional and local banks are in trouble. See my article, "How Bad Economic Theory Caused Santa Barbara Bank & Trust To Fail

The other side of the coin is that the vultures are gathering. For example, insurers who have licked their wounds clean are ready to jump back in:

    Hartford Financial Services Group Inc. Chief Executive Officer Liam McGee, who promised to reduce risk when the bailed-out insurer hired him eight months ago, is comfortable enough with his work that he’s looking for deals in the U.S. property market.

    “We’re no longer on our heels when it comes to real estate,” McGee said in an interview yesterday at Bloomberg headquarters in New York. “Our bias going forward would be less about selling and more about realizing value.”

Read this as cherry-picking.

Add to that the pools of capital that local investors are putting together on the sidelines, waiting to jump in as they see values making sense. Based on my knowledge of these markets, this phenomenon is nationwide, and represents a huge pool of capital in the aggregate.

What these buyers will do is act as a backstop to the CRE market. I can't guess what that level will be, but I believe the vultures are getting impatient. I believe there is still a lot of risk in this market, but then I am very adverse to risk. Most of what I hear is anecdotal but investors are chasing yields, and in the right market with the right property that makes sense.

I just don't think we are at bottom yet. And this will continue to harm the small banks. Without the small banks recovering I believe we will continue to have problems with a lack of liquidity, a credit freeze, deflation, and a slow recovery.

Alchemist

If, I mean if, the data are correct, and what they imply are true, then big problems are still there, and may loom collosal in the future. On the other hand, life support will not be removed, and helicopters commanded by Cobra's secretary Ben will keep hovering to spread greenbacks. Under such conditions, what retail investors should do? To B or not to B, I mean, to Buy or not to Buy, that's a question.

AGA7d

图很清楚，CMBS只占一小部份，而且可以买卖，基本不是问题。直接的CRE贷款很多，不少年头在许多地方小银行的PORTFOLIO里50-80%是CRE直接贷款，也是危机以来几百小银行倒闭的原因。因为是FDIC负责补窟窿，除了增加若干失业数，对经济影响不大。