Nov 012017
 
 November 1, 2017  Posted by at 2:44 pm Finance Tagged with: , , , , , , , , ,  7 Responses »


Jean-Léon Gérôme Slave market 1866

 

Here’s the story in a nutshell: Ultra low interest rates mark a shift away from people’s wealth residing in their savings and pension plans, and into to so-called wealth residing in their homes, which are bought with ever growing levels of debt. When interest rates rise, they will lose that so-called wealth.

It is grand theft auto on an unparalleled scale, and it’s a piece of genius, because while people are getting robbed in plain daylight, they actually think they’re winning. But as I wrote back in March of this year, home sales, and bubbles, are the only thing that keeps our economies humming.

We haven’t learned a thing since March, and we haven’t learned a thing for many years. People need a place to live, and they fall for the scheme hook line and sinker. Which in a way is a good thing because the economy would have been dead without that ignorance, but at the same time it’s not because it’s a temporary relief only and the end result will be all the more painful for it.

Whatever Yellen decides as per rates, or Draghi, it doesn’t really matter anymore, this sucker’s going down something awful. This is a global issue. Housing bubbles have been blown not only in the Anglosphere, though they are strong there, many other countries have them as well, Scandinavia, Netherlands, even Germany and France. It’s what ultra low rates do.

First, here’s what I said in March:

 

Our Economies Run On Housing Bubbles

What we have invented to keep big banks afloat for a while longer is ultra low interest rates, NIRP, ZIRP etc. They create the illusion of not only growth, but also of wealth. They make people think a home they couldn’t have dreamt of buying not long ago now fits in their ‘budget’. That is how we get them to sign up for ever bigger mortgages. And those in turn keep our banks from falling over.

Record low interest rates have become the only way that private banks can create new money, and stay alive (because at higher rates hardly anybody can afford a mortgage). It’s of course not just the banks that are kept alive, it’s the entire economy. Without the ZIRP rates, the mortgages they lure people into, and the housing bubbles this creates, the amount of money circulating in our economies would shrink so much and so fast the whole shebang would fall to bits.

That’s right: the survival of our economies today depends one on one on the existence of housing bubbles. No bubble means no money creation means no functioning economy.

 

 

What we should do in the short term is lower private debt levels (drastically, jubilee style), and temporarily raise public debt to encourage economic activity, aim for more and better jobs. But we’re doing the exact opposite: austerity measures are geared towards lowering public debt, while they cut the consumer spending power that makes up 60-70% of our economies. Meanwhile, housing bubbles raise private debt through the -grossly overpriced- roof.

This is today’s general economic dynamic. It’s exclusively controlled by the price of debt. However, as low interest rates make the price of debt look very low, the real price (there always is one, it’s just like thermodynamics) is paid beyond interest rates, beyond the financial markets even, it’s paid on Main Street, in the real economy. Where the quality of jobs, if not the quantity, has fallen dramatically, and people can only survive by descending ever deeper into ever more debt.

 

 

Australia’s housing boom has been a thing of beauty, with New Zealand, especially Wellington and Auckland, following close behind. UBS now says the Oz bubble is over. Prices are still rising quite a bit though.

Fresh New Zealand PM Jacinda Ardern has announced new policies to deter foreign buyers from purchasing more property in the country. She may not like what that does to the country’s economy. Most new Zealanders can no longer afford property in major centers, and forcing prices down this way will expose many present owners to margin calls and foreclosures.

Moreover, because Australian banks own their New Zealand peers, if the Aussie boom is really gone, these banks are going to get hit so hard they’ll take down New Zealand with them. Close your eyes and put your fingers in your ears.

 

Australia’s Housing Boom Is ‘Officially Over’

The housing boom that has seen Australian home prices more than double since the turn of the century is “officially over,” after data showed prices now flatlining, UBS said. National house prices were unchanged in October from September, while annual growth has slowed to 7% from more than 10% as recently as July, CoreLogic data released Wednesday showed. “There is now a persistent and sharp slowdown unfolding,” UBS economists led by George Tharenou said in a report. “This suggests a tightening of financial conditions is unfolding, which we expect to weigh on consumption growth via a fading household-wealth effect.”

An end to Australia’s property boom will be welcome news for first-time buyers, who have struggled to break into the market after surging prices propelled Sydney past London and New York to be the second-most expensive housing market. Less impressed may be property investors, already squeezed by regulatory lending curbs that drove up mortgage rates. The cooling housing market may encourage the Reserve Bank to keep interest rates at a record low. A rate hike would be undesirable as it would put further downward pressure on dwelling prices, said Diana Mousina, senior economist at AMP Capital Investors.

 

 

But perhaps a bigger, and more surprising, story is shaping up in the US. Looks like the American housing bubble is back with a vengeance. It’s always amusing to see claims that this is due to a lack of supply. The real problem is not supply, but artificially fabricated demand. Fabricated by low rates. Though the NAR is not known for its accuracy (it’s a PR firm), this Bloomberg piece is still relevant.

 

Homes Are Getting Snapped Up at the Fastest Pace in 30 Years

Homes are sitting on the market for the shortest time in 30 years, according to an annual report on homebuyers and sellers published today by the National Association of Realtors. The typical home spent just three weeks on the market, according to the report, which focused on about 8,000 homebuyers who purchased their home in the year ending in June. That was down from four weeks in the year ending June 2016 and 11 weeks in 2012, when the U.S. housing market was still reeling from the foreclosure crisis.

It was the shortest time since the NAR report began including data on how long homes spend on the market, in 1987. Buyers are snapping up homes quickly at a time when for-sale listings are in short supply, forcing them to compete. The number of available properties declined in September, according to NAR’s monthly report on existing home sales, marking the 28th consecutive month of year-on-year decline in inventory. In addition to moving fast, buyers also had to pony up to close the deal. 42% of buyers paid at least the listing price, the highest share since the NAR survey started keeping track in 2007.

 

Where the fine bubble plan runs astray is in affordability. Ultra low rates can encourage sales, but that also raises prices, and if and when wages do not keep up there must be a point where you hit a wall. In the US that wall is fast approaching, suggests Tyler Durden:

 

US Homes Have Never Been More Unaffordable

Just under a year ago, US home prices finally surpassed their prior all time highs, one decade after the 2006 bubble… and haven’t looked back since. Which, all else equal, would be great news for America, where the bulk of middle-class wealth is not in the stock market contrary to conventional wisdom, but in its biggest, and most illiquid asset-cum-investment: one’s home. There is just one problem: while house prices are once again hitting new all time highs every month, household incomes have failed to keep up; in fact, as the Political Calculations blog shows, in the past two years there has been a distinct trend in home affordability, or lack thereof.

[..] starting in September 2015, the TTM average median new home sale price in the U.S. has been rising at an average rate of $906 per month. That’s the good news; the bad news is that in terms of affordability, the ratio of the trailing twelve month averages of median new home sale prices to median household income in the U.S. has risen to an all time high of 5.454, which following revisions in the data for new home sale prices, was recorded in July 2017. The initial value for September 2017 is 5.437. In other words, the median new home in the US has never been more unaffordable in terms of current income.

 

 

Never more unaffordable is a bold statement, but it’s probably correct. The graph only goes back as far as 1987, but that should do. Another angle on the same issue, also from Tyler:

Home Prices In All US Cities Grow Faster Than Wages… And Then There’s Seattle

US national home prices are up 6.07% YoY in August – the fastest rate since June 2014. We note this data is for August – before the hurricanes. Seattle (up 13.2%), Las Vegas (up 8.6%), and San Diego (up 7.8%) were the top three cities in terms of year-over-year price appreciation; all cities showed gains of at least 3%. Pushing home prices to a new record high…

“Home-price increases appear to be unstoppable,” David Blitzer, chairman of the S&P index committee, said in a statement. “At the same time, “measures of affordability are beginning to slide, indicating that the pool of buyers is shrinking, and the Fed’s interest-rate hikes are likely to push mortgage rates higher over time, “removing a key factor supporting rising home prices,” he said.

 

 

There’s nothing anyone can do to raise wages, and while Yellen may claim not to understand why wages and inflation refuse to shine, it’s not that hard. Whatever is called a job these days is America didn’t use to be labeled that. We’ve all been conned into redefining what a job is, but the benefits and security and all that have still vanished. So what can people afford? They can’t even afford to rent anymore:

 

Renting In The US Has Never Been More Unaffordable

Over the weekend, when looking at the record high ratio in median new home sale prices to household incomes in the US, we concluded that US homes have never been more unaffordable for the average American. What about renting? Isn’t it intuitive that if buying a house has never been more expensive, then at least renting should be cheap(er). Unfortunately no, because not only is renting not cheap(er) in either absolute or relative terms, but when observed through the prism of the only thing that matters, namely disposable income, renting – just like buying a house – has never been more unaffordable.

 

 

Now remember what I said before: millions upon millions see their savings and pensions melt away before their eyes, while at the same time they are forced to spend ever more on housing costs. And when that scheme hits the wall, the economy will remember it’s alive only because of the housing bubble, and then croak. Leaving both renters and owners without jobs and eventually places to live.

A lovely example of where all this is heading comes from a Statista report on the Netherlands 3 weeks ago. The Dutch have tons of interest-only mortgages, just like the Australians, but you can take this graph as a general model for what many of not most countries that have low interest rates and thus housing bubbles, will face:

 

Heading Towards A Mortgage Crisis In The Netherlands?

Bank it or bust. In October 2017, the Dutch Central Bank (DNB) issued a warning on mortgages in the Netherlands. They claimed that almost 55% of the aggregate Dutch mortgage debt consisted of interest-only and investment-based mortgage loans, which did not involve any contractual repayments during the loan term. As prices in the the European housing, or residential real estate, market increase and mortgage rates decrease due the Asset Purchase Programme (APP) of the ECB, interest-only mortgages became more and more popular.

In addition, the Dutch government encouraged home ownership for many years, offering tax exemptions on Dutch mortgage payments alongside other benefits for homebuyers in the Netherlands. Consequently, the total mortgage debt from households in the Netherlands increased from approximately €548 billion in 2006 to approximately €664 billion in 2016. However, the debts must still be repaid when the interest-only mortgages expire.

The DNB stated there could be a risk that the households in question may not have the means to repay their debts before or when their loans expire, risking a new mortgage crisis. Lenders, they say, must actively alert customers to this risk and help them find a suitable solution. Unfortunately, the value of mortgages in 2017 is forecasted to increase with approximately 3.9% compared to 2016.

 

 

The debt accumulation is insane. Combine that with the wholesale erosion of savings and pensions, and you have an economy with either a lot of foreclosures and homelessness in its future, or a bankrupt banking system. More people should, before purchasing property, be shown graphs like that. But that would kill the bubble scheme, wouldn’t it?

Is there a way out of this mess? Well, there is in theory. Just grow your economy, and your wages etc., by let’s say 6.8% per year for decades on end. Problem with that is it’s possible only in a country like China, and that only because whatever Beijing says the growth rate is, goes. But that doesn’t make it real. Still, it entices Chinese grandmas into buying apartments.

What Beijing doesn’t tell them, or us, is how much debt the grandmas have gone into by now to buy all those new nice and shiny apartments. But since stocks and bonds are still not their thing, it’s all they have. Property in China is all on red. In the US about one quarter of household wealth is in housing, in China it’s three quarters.

 

 

So no, there’s no way out. My best guess is the first country to deal with this in an aggressive manner will be the -relative- winner. All others are goners. The governments and politicians who’ve lured their people into this biggest Ponzi in human history will probably be long gone when the house comes down, and if they know what’s good for them will have moved to some street with no name in a land far away.

 

 

Feb 042017
 
 February 4, 2017  Posted by at 2:43 pm Finance Tagged with: , , , , , , , ,  2 Responses »


Esther Bubley Boy who rides to school daily on Greyhound bus, Washington Court House, Ohio 1943

 

It’s been a while since the Automatic Earth featured an article from Energy Matters, the site run by our longtime friend Euan Mearns, Honorary Research Fellow at The University of Aberdeen, and his co-conspirator Roger Andrews, a British engineer/geophysicist, semi-retired in Mexico. But I read a piece by Roger yesterday that I like, because it allows me to rant against all the false claims emanating from countries and companies about the share of renewable power in their total energy consumption.

Roger focuses on the railway system in the Netherlands, run by NS, which recently claimed that it operates on 100% wind power. This is of course, if you know anything about electricity generation and the grid, a preposterous claim, and that the company has the guts to make such a claim can only serve to prove how little the general public knows about the topic. Or they wouldn’t dare. Green is still so sexy in certain circles, and actual knowledge so poor, that companies like the NS feel no scruples about stretching their ‘greenness’ into absurd theater territory.

Google does something similar. And you might be inclined to think that the topic is so important for both the companies and the people they seek to please with their claims that grossly exaggerating the numbers would be out of the question, but not so. Instead, “Google announced that it will purchase enough renewable energy to match 100% of its operations in 2017”. And that is not the same as running on renewables, which is what is being suggested (in carefully cherry-picked terms). I like this assessment by electronicdesign.com:

Is Google’s Renewable Energy Plan What It Seems?

“Essentially, Google is contracting for green energy from places that can never reach its data centers. If it were as simple as Google claims, it would be easy to build a renewable power sector. New York City could execute a massive number of contracts with wind farms in upstate New York because they are on the same grid.“ [..]

Google is promising to buy—on an annual basis—the same amount of megawatt-hours (MWh) of renewable energy as the amount of megawatt-hours of electricity that it consumes for its worldwide operations. This approach will benefit the renewable energy market even though it is still generating the same amount of greenhouse gas emissions with or without its 100% renewable energy purchasing plan.

Google ‘buys renewable energy’ in various places around the world, but its servers don’t run on it. It’s exactly like companies buying carbon permits from poorer nations; an excuse to keep polluting. As both the permits and the renewables are traded in markets where prices are low and/or heavily subsidized. As for the scale involved, “In 2015, Google consumed 5.7 terawatt-hours (TWh) of electricity, which is nearly as much electricity as the city of San Francisco.” And don’t forget it keeps consuming ever more as the company grows. That’s a lot of fossil fuels. The medieval ‘principle’ of absolution inevitably comes to mind.

As for the Netherlands’ railways, Roger concludes below, after explaining why, that “the Netherlands’ electrified railways continue to be powered dominantly by fossil fuel electricity. The “Harried Dutch commuters” who are “travelling on one of the most environmentally friendly rail networks in the whole of Europe, if not the world” are being sold a bill of goods.”

 

I would like to add that because of continuing issues related to intermittency and baseload, which are nowhere near being solved, the very grid itself that is used to deliver the ‘renewable’ electricity couldn’t exist without fossil fuels. Or, in other words, if there were only ‘green’ sources of electricity, there would be no grid. How much can be moved towards ‘green’ sources is still somewhat debatable, but just like solar panels and wind turbines cannot build themselves but need fossil fuels to be produced, there is a limit far far below the 100% both Google and the Dutch railways are (deceitfully?) toying around with. Here’s Roger:

 

 

a target=”new” href=”https://euanmearns.com/do-the-netherlands-trains-really-run-on-100-wind-power/”>Do The Netherlands’ Trains Really Run On 100% Wind Power?

This question generated a number of comments in the last Blowout so I thought I would take a quick look at it. I find that the electrified portion of the Dutch railway network (Nederlandse Spoorwegen, or NS) runs on grid electricity that comes dominantly from fossil fuel generation (natural gas and coal). NS claims 100% wind power because it has a contract with various wind farms to produce enough energy to power its rail system, but this is just an accounting transaction. Only a small fraction of the power delivered to its trains actually comes from wind.

First some details on the Netherlands’ electricity sector. As shown in the table below installed capacity is dominantly fossil fuel, with natural gas making up 61% of total installed capacity and coal 15%. Wind contributes 4,117MW, representing 13% of the capacity mix. (Data from ENTSO-E ):

No details on the current generation mix are readily available, but as shown in Figure 1 gas and coal supplied around 80% of the Netherlands’ electricity between 2000 and 2013 and it’s likely that this percentage still applies.

Figure 1: The Netherlands’ generation mix 2000-2013. Data from Frontier Economics

How much of the Netherlands’ electricity is supplied by wind? According to Cleantechnica
wind power in the Netherlands generates 7.4 billion kWh (7.4TWh) of electricity annually, and according to BP the Netherlands’ total electricity generation in 2015 was 109.6TWh. However, wind power consumption in the Netherlands in 2015 was 12.5TWh, indicating that about 5TWh of wind power was imported during the year. So while wind contributes about 7% to the Netherlands’ electricity generation it contributes about 11% to the country’s electricity consumption. Either figure comfortably exceeds the amount of electricity NS uses to power its electric trains, which is variously quoted as either 1.2 or 1.4TWh/year.

The Netherlands imports wind power basically because it’s falling behind its EU renewable energy targets. But how does NS know the power it imports is wind? Because Eneco, which contracts to supply NS with wind power, gets a “Guarantee of Origin” from the exporter under which the exporter confirms that the power came from wind and assigns the rights to it to NS. As Cleantechnica puts it: “the GoO system allows for the transfer of the rights to call electricity green from those who actually generate renewable energy to those who don’t but want to classify their power as such. The actual amount of green energy produced is unaffected.”

There is, however, a problem. For NS to use only wind power from wind farms to power its rail system the wind farms must be connected directly to NS’s railways. (Figure 2: Note the dotted lines showing non-electrified track. According to LJ Electrical only 2,231km of NS’s total 3,223km of track is electrified):

Figure 2: The Netherlands’ railway network.

And of course no such connections exist. The two Dutch wind farms that have contracted to sell power to NS (Noordoostpolder and Luchterduinen) are both connected directly to the Dutch grid, along with all the other power plants in the country, and NS draws its power from the grid:

Figure 3: The Netherlands’ electricity grid. Grid connections for the Luchterduinen and Nordpoostpolder wind farms (locations approximate) are shown in black.

When wind power is fed into a grid it becomes inextricably mixed with all the vibrating electrons from other generation sources to the point where there is no way of knowing where any power taken from the grid came from. Grid power in fact reflects the overall generation mix, which in the case of the Netherlands is dominantly gas and coal with only a small contribution from wind. How much wind? Over the course of this year the average will be around 11%, equal to wind power’s share of the Netherlands’ annual grid electricity consumption.

And only half of the wind power NS has contracted for comes from the Netherlands. The other half comes from “newly built wind farms in …. Belgium and Finland”. Wind power now supplies about 10% of Belgium’s electricity, so power imported from the Belgian grid will be about 10% wind. Wind power from Finland can be discounted. Only about 2% of Finland’s generation mix is wind, and by the time it passes through the Finnish, Swedish and German grids on its way to the Netherlands it will effectively have disappeared. Imports from the German grid, however, will contain about 14% wind power, although not wind power that NS has contracted for. Putting these numbers together indicates that only 10-15% of the electricity consumed annually by NS’s electric trains will come from wind, with the rest a mixture that includes mostly Dutch gas and coal plus a small amount of Belgian and German coal, nuclear and lignite – and maybe even a little German solar.

The supply of wind power to the Dutch grid will also not be constant. I have no wind records for the Netherlands but P.F. Bach supplies data for Belgium, which should be a close analogy, and Figure 4 shows Belgian wind generation for September 2014:

Figure 4: Belgian wind generation, September 2014

With an installed capacity of around 1850MW in this month the overall wind capacity factor was 11% and there were a number of occasions on which wind generation fell effectively to zero for hours on end. During these periods wind generation in the neighboring Netherlands would also have fallen to low levels. Were these conditions to repeat themselves now, and if NS’s trains were powered exclusively by wind, they would almost certainly come to a halt. (Although Eneco, NS’s wind power procurer, claims that its “wind farm portfolio guarantees sufficient capacity to cover such eventualities” . Apparently Eneco can make the wind blow to order.)

So how does NS justify the claim that all Dutch trains run on 100% wind power? Well, it actually claims that only the electrified portion runs on 100% wind. Only the Guardian has seen fit to publish a correction:

An earlier version said all Dutch trains were now 100% powered by wind-generated electricity, according to the national railway company NS. The company said all electric trains were now powered by wind energy. (my emphasis)

And how does NS justify this lesser claim? According to Railway Technology because it has a:

“green energy contract – thought to be among the largest yet signed in Europe – between power supplier Eneco and VIVENS, an energy procurement joint venture comprising Netherlands Railways (NS), Veolia, Arriva, Connexxion and rail freight firms”, and because

“NS and Eneco have carefully selected a list of wind farms that fulfil their criteria of being traceable, sustainable – or renewable – and additional, or new”, and because

“This partnership ensures that new investments can be made in even newer wind farms, which will increase the share of renewable energy. In this way, the Dutch railways aim to reduce the greatest negative environmental impact caused by CO2 in such a way that its demand actually contributes to the sustainable power generation in the Netherlands and Europe.”

The first two are “feel good” justifications that have no practical impact. The third – that by purchasing wind power that would otherwise have gone elsewhere NS is leaving the door open for more wind projects and more CO2 reductions – is the only one that offers any tangible benefits. But there is no guarantee that the unfilled demand will be met by renewables, and in any event the 1.2-1.4TWh/year consumed by NS represents barely more than 1% of the Netherlands’ annual electricity consumption and a totally negligible fraction of European consumption. This is hardly enough to make a big deal about.

And meanwhile the Netherlands’ electrified railways continue to be powered dominantly by fossil fuel electricity. The “Harried Dutch commuters” who are “travelling on one of the most environmentally friendly rail networks in the whole of Europe, if not the world” are being sold a bill of goods.