BIS Hunts for ‘Missing’ Global Debt, Inflation (Try Including Housing!)

Just like global central banks, the Bank for International Settlements can’t seem to find inflation and $114 trillion in off-balance sheet FX derivatives.

ZURICH – Nonfinancial companies and other institutions outside of the U.S., excluding banks, may be sitting on as much as $14 trillion in “missing debt” held off their balance sheets through foreign-exchange derivatives, according to research published Sunday by the Bank for International Settlements.

These transactions, which resemble debt but for accounting purposes aren’t classified that way, aren’t new. Rather, researchers from the BIS — a consortium of central banks based in Basel, Switzerland — used global banking data and surveys to estimate the size of this debt for the first time.

The implications for financial stability are unclear because FX swaps are backed by cash collateral and can be used to hedge exposure to currency swings, thus promoting stability. Still, the debt “has to be repaid when due and this can raise risk,” the authors wrote.

According to the paper, published with the BIS’s quarterly update on global financial conditions, non-banks outside the U.S. owed roughly $13 trillion to 14 trillion through foreign-exchange swaps and forwards. That exceeds the nearly $10.7 trillion in dollar debt held on their balance sheets at the end of the first quarter

“Non-banks” include nonfinancial companies, households, governments, and certain financial institutions that aren’t classified as banks and international organizations.

Globally, there are $58 trillion in FX swaps and related exposures, BIS said, which equals about three-quarters of global gross domestic product.

The authors explained that “in an FX swap, two parties exchange two currencies spot and commit to reverse the exchange at some pre-agreed future date and price.” In a forward contract, parties agree to swap currencies at a future date and price. “Accounting conventions leave it mostly off-balance sheet, as a derivative, even though it is in effect a secured loan with principal to be repaid in full at maturity,” the paper noted.

This short-term funding is backed by cash and it carries little credit risk. “Even so, strains can arise,” the authors wrote, citing the funding squeeze experienced by European banks during the global financial crisis.

The BIS’s quarterly review didn’t just examine missing debt, it also examined what it called “missing inflation” in the global economy, which has helped spur risk taking and drove up financial asset values in recent months.

The implications are big for stock and bond markets that have moved largely in tandem, with bond yields staying super low while equity markets reached record highs. Whereas faster growth typically implies higher inflation and central bank rate increases, the prospect of significantly tighter monetary policy in the U.S. and other big economies has receded.

“This puts a premium on understanding the ‘missing inflation’, because inflation is the lodestar for central banks,” said BIS chief economist Claudio Borio.

Annual inflation in the U.S., measured by the price index for personal-consumption expenditures, was 1.4% in July. Annual eurozone inflation was 1.5% in August. Both are well below the 2% rate that most big central banks consider optimal. Economists typically cite sluggish wage growth, heightened global competition, low oil prices and the effects of technological changes as explanations for subdued price pressures.

“Despite subdued inflation in advanced economies, the global macro outlook was upbeat. Market commentators label such an environment the Goldilocks scenario — where the economy is ‘not too hot, not too cold, but just right,'” BIS said.

Still, there are risks if bond yields eventually start to rise on the back of firmer global growth, given the sensitivity of the private and public sectors to debt.

Thus, the absence of inflation “is the trillion dollar question that will define the global economy’s path in the years ahead and determine, in all probability, the future of current policy frameworks,” said Mr. Borio.

Dear Federal Reserve and BIS. Try including house prices which are growing at fantastic rates of growth.

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Tell folks in New Zealand and Australia that there is “no inflation.”

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The US almost looks tame in terms of housing pirces compared to Britain and its former colonies where housing prices are growing over twice as fast as wage growth for the majority of the population.

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New Zealand takes the cake for crazy housing prices, particularly in Auckland, their largest city.

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There BIS. We found your missing inflation. 

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Toronto’s Housing Sales Bubble Bursts as Bank of Canada Raises Rates

Canada’s Central Bank, the Bank of Canada, recently raised its lending rate to 1.25%, matching the US Federal Reserve rate.

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And Toronto just experienced a sales burst (downwards) of epic proportions.

TORONTO, September 6, 2017 — Toronto Real Estate Board President Tim Syrianos announced that Greater Toronto Area REALTORS® reported 6,357 home sales through TREB’s MLS® System in August 2017. This result was down by 34.8 per cent compared to August 2016.

The number of new listings entered into TREB’s MLS® System, at 11,523, was down by 6.7 per cent year-over-year and was at the lowest level for August since 2010.

“Recent reports suggest that economic conditions remain strong in the GTA. Positive economic news coupled with the slower pace of price growth we are now experiencing could prompt an improvement in the demand for ownership housing, over and above the regular seasonal bump, as we move through the fall,” continued Mr. Syrianos.

The average selling price for all home types combined was $732,292 – up by three per cent compared to August 2016. This growth was driven by the semi-detached, townhouse and condominium apartment market segments that continued to experience high single-digit or double digit year-over-year average price increases.

Detached home sales were the worst hit at around 42% decline in sales, even though average sales price rose slightly (0.3%).

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To cool a similar housing bubble in Vancouver, the government of British Columbia had passed a year ago similar legislation with a 15% nonresident foreign speculator tax.  But worried about an outright implosion of the bubble, it has since been subsidizing with taxpayer money down-payments aimed at first-time buyers and condos, which has inflated the condo bubble and condo speculation to new heights.

Bank of Canada’s Governor, Stephen Poloz, has definitely gone bold with BoC’s latest rate increase.

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The Hysteria Curve: US Treasury 10Y-2Y Curve Slope Declines To 78.6 BPs As 10 Year Soveriegn Yields Decline In Americas and Europe

Choose your hysteria to explain the Treasury market: 1) debt ceiling crisis, 2) hurricane (Global Warming) crisis, 3) North Korean nuclear attack crisis, 4) Trump’s Russian collusion investigation crisis, 5) the DACA (“Dreamer”) crisis, 6) Brexit crisis, 7) NAFTA crisis or 8) fill-in-the-blank crisis dejure. Please tune to CNN or MSNBC (and even Bloomberg) for the latest in hysteria.

Which ever portfolio of crises you select, we watching the US Treasury 10Y-2Y curve slope fall below 80 to the lowest slope since September 2016.

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10 year sovereign yields in the Americas and Europe can down with the US falling around 10.1 BPS and Argentina down almost 40 BPS.1010

Gold prices are up since the 2016 election while the US dollar basket is down.

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We are seeing a jump in equity and Treasury volatility, but not much.

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Tune into MSNBC’s Rachel Maddow and Lawrence O’Donnel for particularly entertaining hysterical rants (like about Trump’s 2005 tax return).

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Feeding The Beast: Why Trump and Congress Should Leave The Mortgage Interest Deduction Alone

President Trump and Congress are once again tinkering with the US tax code (rather than just trashing the entire thing and creating something simple like a flat-tax system). There will always be winners and losers when the tax code is altered. This time the target is middle-class homeowners.

Begin the simple premise that the Federal government wants more of your tax dollars to spend. The Federal government is already spending at almost a rate of 2x over current tax receipts.

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And with “mandatory” expenditures expected to keep rising (and discretionary spending expected to decline), the will be increased pressure to find tax revenue from somewhere (or someone) to feed the Federal goverment’s ravenous spending.

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What is in their sights? The mortgage interest deduction (MID) for qualified secured debt. There have been calls by a number of people to get rid of the MID, such as Vice President Pence’s Chief Economist Mark Calabria (formerly of the Cato Institute).

Possilities include Calabria’s call for scrapping the MID, lowering the eligibility from $1 million to $500,000 (allegedly impacting fewer than 6 percent of mortgage holders nationally—and converting the deduction into a credit, allowing an additional 15 million low and moderate income homeowners to get a “much-needed tax break”).

Low and moderate income households are often better-off renting given the standard deduction. And low and moderate income households may not fully benefit from the MID if their joint income is less than $77,714. Households earning less than $77,714 but more that $38,173 pay only 10.47% of total personal taxes paid (in 2014, according to the National Taxpayers Union Foundation). And less than $38,173 pay only 2.75% of total personal taxes paid.

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It’s the most productive members of the middle class that are forced to pay for subsidies in Obamacare and Social Security already. Removing or limiting the MID amounts to a new middle class tax on those who can’t afford to pay off their mortgage, unlike the political elite in both parties who can continue to get the full tax benefit of home ownership by eliminating mortgage debt.

And what about households that purchased a home that are part of the 6% of the population that have a mortgage balance in excess of $500,000? It will produce a major hit of their after-tax income and likely lead to reduction in home prices, particularly in the suburbs of major US cities. Congress could always grandfather in current homeowners, but the number of households trying to purchase those homes would decline.

Homeownership rates are already at early 1960s levels, back to the days of President Lyndon B. Johnson’s “Great Society” social programs. Now the Trump Administration wants to redistribute the advantages of homeownership AGAIN.

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And remember that Canada does not allow MID for homeowners, yet has had explosive home price growth, so thinking that removing the MID will slow the growth of home prices across the board is wishful thinking.

As Kevin Villani wrote in American Banker, “But the “tax loophole” is not the mortgage interest deduction, it’s the failure to tax “imputed rent” from homeownership, i.e., the value of rental services the homeowner receives — done only in Belgium, the Netherlands and Switzerland. This has never been seriously considered in the U.S. because the political, conceptual and methodological problems of taxing farmers for consuming their home grown food — as the U.S. has done — are much greater for homeowner imputed rent.”

And since owners of rental properties get to deduct mortgage interest (as well as depreciation for tax purposes), taking away the MID for households is flat out unfair.

But as I mentioned earlier, Washington DC has to feed “the beast” and its ever-growing expenditures. The simple solution would be to cut Federal spending.

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Toronto Home Prices Crash, Worst Decline in 17 Years (Swings Like a Pendulum Do)

Toronto swings like a pendulum do.

Or what goes up must come down.

Toronto home prices fell 4.6% in July, the biggest decrease in 17 years. Transactions tumbled 40 percent to 5,921, the biggest year-over-year decline since 2009, led by detached homes.

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New listings in Toronto have collapsed.

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Is the west coast of the USA next?

Canadian PM Justin Trudeau visiting “The Great Mall of China.” Psst, Justin. That is a wall, not a mall.

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Oh Canada! Toronto Existing Home Sales Plunge 37% YoY

OTTAWA, July 17 (Reuters) – The resale of Canadian homes fell 6.7 percent in June from May, the largest monthly drop since 2010 and the third straight monthly decline as sales in Toronto plunged, the Canadian Real Estate Association said on Monday.

And they fell 37%, the third straight decline and the most since January 2009. Owners flooded the market with properties, with listings up 16 percent to 19,614.

Average prices dropped 14 percent in the last three months across the Toronto region to C$793,915, reflecting fewer sales of large homes. That compares with a 1 percent rise over the same period last year. Deals for single-family homes in Toronto and its surrounding regions fell 45 percent and average prices dropped 12 percent from April to C$1.06 million.

For all of Canada, YoY existing home sales also declined. But only by 6.7% MoM.