News, Commentary, & Analysis. Jan. 30, 2014. #RealEstate

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1) Dollar Strengthens After Fed as Ruble Weakens, Rand Snaps Slide – Businessweek

2) IMF Book: “Jobs and Growth: Supporting the European Recovery”

3) Our Dangerous Budget and What to Do About It by Jeffrey D. Sachs | The New York Review of Books

4) Stephen S. Roach says that anyone trumpeting a faster US recovery is playing the wrong tune. – Project Syndicate

5) Sizzling San Francisco leasing market off to hottest start since 2000 – San Francisco Business Times

6) NYC Credit Risk | TransUnion Rental Screening Solutions

7) This year looks positive for Atlanta real estate – Atlanta Business Chronicle

8) Safeway to start work on Target-anchored shopping center on Maui – Pacific Business News

9) Building automation systems: Internet of Things meets facilities management

10) How Walking on the Street Converts to Electricity – YouTube

11) In Europe, a Hint of Recovery for Ireland and Spain – Urban Land Magazine

12) Emerging markets causing investor concern: Pro

13) Reuters TV | Breakingviews: Emerging markets face ‘import-lite’ trap

14) Emerging markets: Don’t panic | The Economist

15) Reuters TV | Breakingviews: JPM’s new whale fail

16) Ngaire Woods laments the lack of coordination among global financial regulators. – Project Syndicate

17) BBC News – India raises interest rates rise to stem inflation

18) Developed Economies Seen Fighting Off Emerging-Market Contagion – Bloomberg

19) China’s phony exports return | | MacroBusiness

20) China shields shadow banking with $500 million rescue

  1.    Dollar Strengthens After Fed as Ruble Weakens, Rand Snaps Slide – Businessweek

    The Fed said yesterday it will trim its monthly bond buying to $65 billion from $75 billion, sticking to its plan for a gradual withdrawal from departing Chairman Ben S. Bernanke’s unprecedented easing policy.

    Data in the U.S. today will show gross domestic product expanded at a 3.2 percent annualized pace in the fourth quarter, while private consumption grew 3.7 percent, according to the median forecasts of economists surveyed by Bloomberg.

    However, inventories were over built.

    The Fed tapers again. Emerging markets go down more. Money moves back to the US, strengthening the dollar and weakening inflation.

    So, the Fed is allowing weak economies to be drained to replace the Fed as the US bond market’s underpinning but at the direct expense of the Fed’s inflation target?

    Bond prices will rise due to competition over the move to safety. Yields will fall, which will keep mortgage rates down.

    Does the Fed know what it’s doing?

    We think this is much riskier than maintaining rather than tapering at this point. However, it will allow the Fed to call for greater fiscal action to increase employment since inflation won’t be anywhere in sight, for a while anyway.

    Oh well. It will be interesting to see how this turns out.

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  2.    IMF Book: “Jobs and Growth: Supporting the European Recovery”

    We just finished Chapter 4 of the IMF’s new book: “Jobs and Growth: Supporting the European Recovery.” Here’s their conclusion.

    Many advanced economies face significant challenges in reducing their public debt levels. Although public debt is approaching secular highs, the continued weak medium-term growth outlook complicates the task of putting debt on a clearly declining path. Also, monetary policy is operating at or close to the lower bound and at the same time, there is little to be gained from higher rates of inflation (which would come with risks) or ambitious privatization efforts (which could prove difficult in the current environment). This combination of factors suggests that the burden of lowering debt levels will fall more squarely on fiscal consolidation.

    Successful past debt reversals in advanced economies often began under adverse circumstances. Output growth and fiscal policy were the main drivers behind 26 past successful episodes of public debt reduction. Although some past successful episodes started under challenging initial conditions, strong external demand and an accommodative interest rate environment supported output growth as fiscal consolidation efforts continued.

    The current and expected growth environments, however, might make successful debt reversal even harder to achieve. As a consequence, debt reductions will require both a sustained commitment to fiscal consolidation and careful design. Fiscal consolidation is needed to keep public finances sustainable, but it also diminishes demand and further lowers growth in the short term because of fiscal multiplier effects. Initially, the debt ratio may actually increase. Up-front consolidations, although sometimes unavoidable, can lead to greater output losses than would gradual efforts, but they can also reduce risk premiums more quickly, especially if debt levels are high in itially and the overall magnitude of the needed adjustment is relatively large. Whether front- or back-loaded consolidations lead to more lasting success also depends on political factors, such as the ability to sustain a commitment to consolidation. In any case, positive credibility effects are likely to provide only partial offsets to short-term pain.

    What should policymakers do? For countries with good financial market access, the answer is to consolidate gradually but with a credible medium-term strategy, buttressed by strong budget institutions. This approach will minimize the adverse impact on growth, particularly if multipliers vary over time. In countries in which fiscal accounts are weaker and sovereign borrowing rates are higher, the pace of consolidation has to be more ambitious. In all cases, it makes good sense to plan the adjustment path in structural terms to avoid the procyclical tightening that can accompany a focus on headline deficits. This can be achieved by, for example, focusing on a set of agreed-upon fiscal measures that take into account the need to protect the most vulnerable citizens and safeguard spending programs with strong positive growth effects (e.g., high-return infrastructure projects or key active labor market policies).

    In the medium term, success will be much more likely if consolidation efforts are accompanied by ambitious structural reforms. Growth-enhancing measures, such as selected structural reforms (in particular, in product and labor markets), are important for improving growth potential in the medium term, for mitigating the adverse growth impact from continued fiscal consolidation, and for helping reduce the debt-to-GDP ratio in a durable way.

    What we see is a predisposition to neoliberalism versus MMT (Modern Money Theory; aka Modern Monetary Theory) to which we subscribe more than to neoliberalism.

    Without reading the entire book, however, we can’t say that neoliberalism isn’t mitigated elsewhere in the IMF’s outlook and policy recommendations.

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  3.    Our Dangerous Budget and What to Do About It by Jeffrey D. Sachs | The New York Review of Books

    Jeffrey D. Sachs lays out a cogent argument for reducing waste, fraud, and abuse and for raising taxes. You’d never know it from his scathing but articulate article, but Jeffrey was sent to Russia to install the neoliberal agenda there that crushed the economy when really all the Russians needed was a little help (think the Marshall Plan) from former military adversaries. Jeffery Sachs has undergone an epiphany.

    Despite the endless budget skirmishes, the short-term stimulus packages, and all of Obama’s heartening speeches about investing for the future, the fact is that America is on a path of gutting critical public investments in education, job training, science, technology, and infrastructure. This dark secret has been true since Obama’s original run for the White House in 2008. His campaign pledge to make the Bush-era tax cuts permanent for almost all Americans meant that there never was an Obama plan (or a plan by the congressional Democrats other than a few dozen progressive members) to fund the public investments needed for America’s future.

    … I am worried about the rising ratio of debt to GDP, which has already doubled since 2007, from 36 percent of GDP to 71 percent of GDP. Most importantly, when interest rates return to more normal levels the burden of debt servicing will be quite steep. At 3.1 percent of GDP in 2023, as projected by the Congressional Budget Office, the interest costs would be larger than the projected defense budget and the civilian discretionary budget. Debt servicing will eventually crowd out vital areas of spending. There are also unbudgeted future burdens-in health and retirement programs-that will further exacerbate the debt problems.

    Health care reform would entail forcing today’s doctors and other health care providers to rationalize their pricing and administration, for example by legislating a requirement of one price for all patients, rather than the highly discriminatory pricing arrangements that prevail today, in which many hospitals charge whatever they can get away with, using an opaque and grossly unfair pricing system. We could also lower medical costs by increasing the number of primary-care physicians trained each year, and allowing more procedures to be done by paramedics. Hundreds of billions of dollars of savings would be achieved by cutting back the excess earnings in the health sector, including overpaid specialists, high-cost hospitals, drug companies charging sky-high prices for patent-protected medicines, and private health insurers. The heads of “not-for-profit” hospital systems could no longer expect the multimillion-dollar paychecks they are now collecting.

    As for civilian discretionary spending, the US needs more of it, although better concentrated. Important new civilian programs-such as low-carbon energy, upgraded infrastructure, science and technology, and training for twenty-first-century skills, such as the use of information technologies-will require new partnerships between the government and private investors. …

    … I would also aim to keep interest payments down to 2.4 percent of GDP by running smaller budget deficits than the Democrats now envision. …

    … A majority of public opinion favors action on the issues I have outlined: more taxation of the very rich, and more spending on education, clean energy, and job training. …

    … We’ve been on a thirty-year course of diminished public investments in our future. The dismal results are plain to see. As the historian Arthur Schlesinger Jr. famously noted, we can observe cycles between private greed and public service at roughly thirty-year periods. …

    We don’t agree that we need to raise taxes but rather eliminate the national debt all together via transitioning from Federal Reserve Notes to United States Notes.

    The difference between a United States Note and a Federal Reserve Note is that a United States Note represented a "bill of credit" and was inserted by the Treasury directly into circulation free of interest. Federal Reserve Notes are backed by debt purchased by the Federal Reserve, and thus generate seigniorage, or interest, for the Federal Reserve System, which serves as a lending parent to the Treasury and the public.

    So you see, we could have a currency that does not require taxpayers to pay down any debt of the government: no interest; no national debt.

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  4.    Stephen S. Roach says that anyone trumpeting a faster US recovery is playing the wrong tune. – Project Syndicate

    Stephen S. Roach:

    The American consumer was, in effect, ground zero in this horrific crisis. Far too many US households made enormous bets on the property bubble, believing that their paper gains were permanent substitutes for stagnant labor income. They then used these gains to support a record consumption binge. Compounding the problem, they drew freely on a monstrous credit bubble to finance the gap between spending and income-based saving.

    When both bubbles burst — first housing, and then credit — asset-dependent US consumers were exposed to the American strain of the Japanese disease first diagnosed by Nomura economist Richard Koo.

    Koo has stressed the lingering perils of a balance-sheet recession centered on the corporate sector of the Japanese economy; but the analysis is equally applicable to bubble-dependent US consumers. When the collateral that underpins excess leverage comes under severe pressure — as was the case for Japanese businesses in the early 1990’s and American consumers in the mid 2000’s — what Koo calls the “debt rejection” motive of deleveraging takes precedence over discretionary spending.

    The Japanese parallels do not stop there. As research by the economists Richard Caballero, Takeo Hoshi, and Anil Kashyap has shown, Japan’s corporate “zombies” — rendered essentially lifeless by their balance-sheet problems — ended up damaging the healthier parts of the economy. Until balance sheets are repaired, such “zombie congestion” restrains aggregate demand. Japan’s lost decades are an outgrowth of this phenomenon; the US is now halfway through the first lost decade of its own.

    There’s a great deal of truth in all of that.

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  5.    Sizzling San Francisco leasing market off to hottest start since 2000 – San Francisco Business Times

    The first quarter of 2014 could be San Francisco’s busiest three months of office leasing since the height of the dot-com bubble 14 years ago.

    Just two weeks into the year, the briskest commercial real estate leasing market in the United States has seen three big deals totaling 450,000 square feet of net positive absorption. And it’s likely that the market could see another 400,000 square feet of tenant growth before St. Patrick’s Day. If completed, that would be 850,000 square feet in just the first quarter of 2014 compared to 1.4 million square feet of positive absorption for all of 2013.

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  6.    NYC Credit Risk | TransUnion Rental Screening Solutions

    “When the credit risk of the population improves, property managers may be more inclined to tighten their criteria to ensure they are getting the best possible resident,” said Michael Doherty, TransUnion senior vice president said in a statement. “This is integral because a resident who ‘skips’ out on a lease can cost a property manager thousands of dollars in lost revenues.”

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  7.    This year looks positive for Atlanta real estate – Atlanta Business Chronicle

    Dan Wagner:

    … how do we predict what metro Atlanta commercial real estate market fundamentals will look like in 2014? Recent history, current trends and some forward-looking analysis are helping build a consensus among prognosticators as 2014 begins.

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  8.    Safeway to start work on Target-anchored shopping center on Maui – Pacific Business News

    Safeway subsidiary Property Development Centers plans to hold a blessing and groundbreaking ceremony to kickoff construction of its 275,000-square-foot Target-anchored Puunene Shopping Center in Kahului on Maui on Thursday.

    We bring this up because in our last post, we discussed the general mall crisis.

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  9.    Building automation systems: Internet of Things meets facilities management

    Channel partners see a growing opportunity in deploying integrated building automation systems and bringing the Internet of Things into the realm of facilities management.

    There’s a great deal of positive potential via integration, but a huge, huge concern right now is security. Smart-building systems have been remotely hacked. Considering that the building’s security system itself is part of the network, hackers could make criminal activity at the building site much easier.

    It will be interesting to see how the various insurance companies evolve coverage as these smart-building systems also evolve.

    Wireless is a huge issue. Having these systems accessible via the Internet, wireless or not, is also an issue.

    Liability exposure can be extreme. Shutting down critical systems could present health and even life-threatening risks.

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  10.    How Walking on the Street Converts to Electricity – YouTube

    An ingenious concept turning into reality:

    Laurence Kemball-Cook, CEO & Founder of Pavegen Systems, discusses creating electricity from human kinetic energy as one of the solutions to the urban energy shortage. He speaks on Bloomberg Television’s “The Pulse.”

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  11.    In Europe, a Hint of Recovery for Ireland and Spain – Urban Land Magazine

    Dublin. The biggest winner in this year’s report, the capital of Ireland saw its ranking rise 18 places to second for existing investments and 14 places to become the top spot for new investments. Investors say that 2014 will mark Dublin’s comeback, driven by improving economic conditions, with unemployment at its lowest level since 2009 and with forecasted gross domestic product (GDP) growth of 2 percent this year. However, opportunities for investment will be limited due to the size of the market. Office prices have increased significantly over the past 12 to 18 months in prime locations such as the Docklands, and local investors are predicting a further rise of 10 percent in 2014. Survey respondents said there was significantly more equity available and that bank debt was becoming available again for the right assets and investors. The residential market is also recovering, with prices for well-located properties rising more than 20 percent last year. However, retail is still under pressure, with rents continuing to fall, albeit at a slower pace.

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  12.    Emerging markets causing investor concern: Pro

    Discussing if disappointing Q4 earnings are to blame for the market sell-off, with Christopher Whalen, Carrington Investment Services managing director, and Tobias Levkovich, Citi chief U.S. equity strategist.

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  13.    Reuters TV | Breakingviews: Emerging markets face ‘import-lite’ trap

    Note: You may have to allow the video to load while you have it paused to avoid it stopping in midstream.

    Rich nations are recovering without importing more — and Breakingviews’ Andy Mukherjee says that spells further trouble ahead for many export-dependent developing countries.

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  14.    Emerging markets: Don’t panic | The Economist

    Very interesting commentary:

    When exchange rates plunge, central banks are often tempted to lean against the decline by raising interest rates—potentially squeezing the life out of their domestic economies, worsening the domestic financial climate, and doing little to stem outflows. These moves are often justified by the argument that depreciation sends import prices soaring and presages a jump in inflation. Dangerous inflation pressures have been cited by the central banks of Turkey and India, among others, as reasons for recent interest-rate hikes.

    Yet research by Joseph Gagnon suggests the inflationary consequences of depreciation are overstated. He examines big currency declines between 1970 and 2004 and finds that in most cases—unless inflation expectations are high and rising—government bond yields typically fall amid a depreciation, and inflation rates are “remarkably stable” after currency crashes.

    Central banks should therefore be careful not to make things worse than they need be. Meanwhile, the latest financial-market gyrations would seem like a good time to reinvigorate a discussion on global capital flows that remains woefully incomplete a half decade after the global financial crisis.

    “… inflation rates are “remarkably stable” after currency crashes.” It takes nerve to wait or foreknowledge to stay calm and not overreact.

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  15.    Reuters TV | Breakingviews: JPM’s new whale fail

    In case you didn’t see our earlier “moral hazard” post about this:

    Antony Currie and Jeffrey Goldfarb explain why the bank’s board was wrong to grant CEO Jamie Dimon a 74 percent increase in pay for 2013.

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  16.    Ngaire Woods laments the lack of coordination among global financial regulators. – Project Syndicate

    The Great Recession squandered so far: Ngaire Woods, Dean of the Blavatnik School of Government, University of Oxford:

    … the FSB is not a treaty-based global regulator with enforcement powers. It continues to be a “standard setter” in a world with strong incentives to evade standards and negligible sanctions for doing so. Furthermore, although the FSB’s standards are ostensibly “universal,” it does not represent all countries or have formal mechanisms to inform and consult them.

    Regulators face a Sisyphean task, owing to the absence of strong and consistent political support for reining in the financial titans. A well-resourced financial sector intensively lobbies the most influential governments in global finance. The reforms of the IMF, another pillar of global financial management, cannot be implemented until the US Congress approves them — and there is no sign of that. Even the new Basel 3 banking standards have been diluted and postponed.

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  17.    BBC News – India raises interest rates rise to stem inflation

    The central bank said in its statement that “inflation is also a tax that is grossly inequitable, falling hardest on the very poor”.

    How true.

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  18.    Developed Economies Seen Fighting Off Emerging-Market Contagion – Bloomberg

    The optimistic take is the pain will be limited to a few unbalanced economies — including Turkey and Argentina — with little heft abroad, and developed countries now have domestic sources of growth and support from central banks. The risk is that slowdowns and sell-offs deepen in bigger economies, such as China, infecting the financial markets of industrial nations and depriving them of demand for exports and commodities.

    China’s economy is the world’s second largest, and its share of global GDP has jumped to 14 percent from 4 percent in two decades, she [Michala Marcussen, global head of economics in London at Societe Generale SA] said. That’s a problem if it struggles to refocus demand toward domestic sources, especially after a report last week showed manufacturing may contract for the first time in six months.

    Large imbalances and poor policy choices that drove past crises also are prevalent in Argentina, Venezuela, Chile, Peru, South Africa, Ukraine, Turkey and Thailand, she said. Add Brazil, Indonesia, India and Russia, which have weak spots, and 13 percent of global GDP is in question, according to Marcussen.

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  19.    China’s phony exports return | | MacroBusiness

    “From the last few months’ data, we have seen hints that some Chinese exports are fake and in fact that reflects hot money inflows,” said Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong. The discrepancy will abate as yuan appreciation slows in January and February, said Zhang, who previously worked at the International Monetary Fund.

    China’s exports to Hong Kong in December exceeded the city’s reported imports from the mainland by about 70 percent, the biggest difference since April.

    70% is rather significant. If China lies about exports to Hong Kong, does it lie about exports to other entities and by such an extent?

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  20.    China shields shadow banking with $500 million rescue – Jan. 28, 2014

    The bailout seems to have eliminated that risk. But some analysts argue that a default is needed to demonstrate Beijing’s commitment to allow market forces to play a larger role in the economy, and to send a message to investors that high-yield investments carry significant risk.

    “These bailouts further perpetuate the implicit government guarantee that investors have come to expect when they purchase financial products in China,” wrote analysts at Bernstein Research.

    Unless losses are allowed, investors will continue to pour money into unproductive projects, they added.

    The economy still took the hit; but if the government backed the bailout, the hit is spread across most of the economy. How long can they keep that up? It’s smoke and mirrors.

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