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    America’s rental-market mystery

    During the past few years of inflation, sceptics have insisted that governments are undercounting price rises—usually without much evidence to support their claims. But a new controversy in American economics has highlighted the challenge of accurately measuring prices. Only this time the implication points in the opposite direction, suggesting that inflation may prove a more stubborn foe.At issue is the manner in which housing fits into the consumer-price index. To the surprise of many casual observers, statisticians typically do not include property prices in their inflation gauges since they view housing as an investment good, perhaps a once-in-a-lifetime purchase for homebuyers. However, statisticians do know that housing is a big part of personal budgets and want to track regular changes in the price of shelter, much as they do for other consumer products. So instead of measuring property prices outright, their inflation indices factor in how much people pay for rent—or would pay for rent if they leased their own homes. The latter is known as owners’ equivalent rent (OER).In America OER accounts for about a quarter of the consumer-price index, making it the single biggest component. Direct rent, by contrast, is just 8% of the index, because renting is less common: about two-thirds of American households own the homes they live in. Where things get tricky is estimating the OER value. It is not as simple as totting up all market rents and assuming that homeowners would pay the same. Rather, wonks assign a heavier weight to rental prices for single-family homes, which are similar to the kinds of houses that people own. The problem is that there is a relative dearth of single-family homes for rent, giving statisticians a small sample with which to work.These intricacies have come to the fore as concerns mount about the persistence of inflation in America. In January the consumer-price index rose by 0.3% from a month earlier, above forecasts for a 0.2% increase, suggesting that the Federal Reserve is struggling to tame inflation. But nearly half of the broader inflation increase was attributable to a rise in OER alone. And strikingly, the rise in OER was much higher than the rise in market rents.image: The EconomistThe question is whether OER is being estimated correctly. It is true that single-family homes have commanded larger rent increases than flats recently, a reflection of the fact that few such homes are available to tenants. Moreover, the Bureau of Labour Statistics, which compiles the consumer-price index, tweaked its methodology in January, lifting the weight of detached single-family homes in OER by about five percentage points, part of its constant efforts to capture changes in how people live. The combination of higher rents plus a larger weighting does explain much of the rise in OER. Added to that, though, is the inevitable volatility of extracting prices from the small sample of single-family homes for rent. This raises the possibility that at least some of the high OER reading was a fluke.Still, the bigger picture is that OER inflation is running well above pure rent inflation (see chart). Continued tightness in the market for single-family homes ensures the divergence will probably continue for some time, and this in turn will place upward pressure on general measures of inflation. The details of how to calculate OER can seem abstruse. But the conclusion is clear: by feeding into stickier inflation, it may well deter the Fed from cutting interest rates anytime soon. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

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    Globalisation may not have increased income inequality, after all

    Working out who earns what is surprisingly tricky. Both the very rich, who sometimes try to keep their wealth from the taxman, and the very poor, who are sometimes mistrustful of clipboard-wielding officials, are especially hard to pin down. Nevertheless, before the covid-19 pandemic, household surveys consistently found a fall in the number of people living in poverty. The World Bank counted 659m living on less than $2.15 a day in 2019, down from around 2bn in 1990.Yet this progress came at a cost: a global “precariat” emerged, members of which were barely out of poverty and perilously exposed to shocks, while the top 1% got rich faster. That, at least, is the received wisdom. The World Inequality Database, a project associated with Thomas Piketty and Gabriel Zucman, two economists, combines tax data with other sources of information to estimate the incomes of the uber-rich. They have found that although inequality between countries has fallen, as the rest has caught up with the West, within countries it may have risen. Chinese and Indian elites have done the best relative to their countrymen. American and European plutocrats, who are busy stashing wealth in tax havens, have done well, too.A new paper by Maxim Pinkovskiy, Xavier Sala-i-Martin, Kasey Chatterji-Len and William Nober, economists at Columbia University and the New York branch of the Federal Reserve, challenges this picture. The researchers look at how likely people in different parts of the income distribution are to understate their income. They find that as the poor become richer, they become more likely to do so. Once adjustments are made for this, poverty has fallen faster than previously thought, and inequality within countries has not risen. It may even have fallen slightly.To reach this conclusion, the authors look at the difference between estimates of income from regional household surveys and gross domestic product in the same area. When surveys imply that a region has less overall income than official figures, it suggests more income is going unreported. The researchers find that the richer an area, the larger the gap tends to be. This makes sense, notes Mr Sala-i-Martin. As a subsistence farmer becomes a small business owner or market trader, he develops more complex income streams and has more incentive to mislead the taxman.If the finding holds, it changes the history of globalisation. Rather than a precariat, the researchers conclude that a “true global middle class” has emerged. Its members will not be plunged back into poverty by a financial crisis or a pandemic.Yet the study will not be the final word. Economists have been arguing about trends in global inequality—and the quality of the data that lie beneath them—for decades. When it comes to the world’s richest people, the new research has more to say about the top 10% than the top 1%, who are widely believed to have done so much better than the rest. Like most papers, this one relies on assumptions that could be challenged by other researchers. Working out the global income distribution is one thing; convincing others you have the right answer is quite another. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

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    Why private equity has been involved in every recent bank deal

    The $1 billion-plus injection that New York Community Bank announced Wednesday is the latest example of private equity players coming to the need of a wounded American lender.
    Key to these deals is speed and discretion, according to advisors to several recent transactions and external experts.
    Steven Mnuchin reached out to NYCB directly to offer support amid headlines about the duress it was under, according to a person with knowledge of the matter.

    Federal Reserve Chair Jerome Powell fist-bumps former Treasury Secretary Steven Mnuchin after a House Financial Services Committee hearing on “Oversight of the Treasury Department’s and Federal Reserve’s Pandemic Response” in the Rayburn House Office Building in Washington, D.C., on Dec. 2, 2020.
    Greg Nash | Reuters

    The $1 billion-plus injection that New York Community Bank announced Wednesday is the latest example of private equity players coming to the need of a wounded American lender.
    Led by $450 million from ex-Treasury Secretary Steven Mnuchin’s Liberty Strategic Capital, a group of private investors are plowing fresh funds into NYCB. The move soothed concerns about the bank’s finances, as its shares closed higher on Wednesday after a steep decline earlier in the day.

    That cash infusion follows last year’s acquisition of PacWest by Banc of California, which was anchored by $400 million from Warburg Pincus and Centerbridge Partners. A January merger between FirstSun Capital and HomeStreet also tapped $175 million from Wellington Management.
    Speed and discretion are key to these deals, according to advisors to several recent transactions and external experts. While selling stock into public markets could theoretically be a cheaper source of capital, it’s simply not available to most banks right now.

    “Public markets are too slow for this kind of capital raise,” said Steven Kelly of the Yale Program on Financial Stability. “They’re great if you are doing an IPO and you aren’t in a sensitive environment.”
    Furthermore, if a bank is known to be actively raising capital before being able to close the deal, its stock could face intense pressure and speculation about its balance sheet. That happened to Silicon Valley Bank, whose failure to raise funding last year was effectively its death knell.
    On Wednesday, headlines around noon that NYCB was seeking capital sent its shares down 42% before trading was halted. The stock surged afterward on the news that it had successfully raised funding.

    “This is the unfortunate lesson from SVB,” said an advisor on the NYCB transaction. “With private deals, you can talk for a while, and we almost got to the finish line before there was any publicity.”

    Mnuchin’s outreach

    Mnuchin reached out to NYCB directly to offer support amid headlines about the duress it was under, according to a person with knowledge of the matter. Mnuchin isn’t just a former Treasury secretary. In 2009, he led a group that bought California bank IndyMac out of receivership. He ultimately turned the bank around and sold it to CIT Group in 2015.
    Now, with the assumption that Mnuchin and his co-investors have seen NYCB’s deposit levels and capital situation — and are comfortable with them — the bank has much more time to resolve its issues. Last week, NYCB disclosed “material weaknesses” in the way it reviewed its commercial loans and delayed the filing of a key annual report.
    “This buys them a ton of time. It means the FDIC isn’t coming to seize them on Friday,” Kelly said. “You have a billion dollars in capital and a huge endorsement from someone who has seen the books.”Don’t miss these stories from CNBC PRO: More

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    NYCB shares rebound after troubled regional bank announces $1 billion capital raise

    New York Community Bancorp has agreed to a deal with several investment firms including Steven Mnuchin’s Liberty Strategic Capital, Hudson Bay Capital and Reverence Capital Partners for more than $1 billion in exchange for equity.
    Shares of the bank were down sharply for the day before the announcement.
    A cash infusion would be the latest development in a turbulent start to the year for NYCB, which replaced its CEO last week.

    Struggling regional lender New York Community Bancorp announced a $1 billion capital raise and a leadership shake-up on Wednesday, headlined by former Treasury Secretary Steven Mnuchin, leading to a sharp rebound for its stock.
    NYCB has agreed to a deal with several investment firms including Mnuchin’s Liberty Strategic Capital, Hudson Bay Capital and Reverence Capital Partners for more than $1 billion in exchange for equity in the regional bank, according to a press release Wednesday afternoon.

    Mnuchin will be one of four new members of the bank’s board of directors as part of the deal. Joseph Otting, former comptroller of the currency, is also joining the board and taking over as CEO.
    The stock jumped sharply after the announcement, but trading was highly volatile. Shares were briefly halted, up nearly 30% for the day. They gave back some of those gains when trading resumed and finished the day up more than 7% after several more halts.
    Prior to the press release, the stock was down 42%, amid reports from Reuters and The Wall Street Journal that NYCB was exploring a capital raise.

    Stock chart icon

    Shares of NYCB fell sharply on Wednesday.

    The stock was below $2 per share at its lowest point on Wednesday, the latest negative milestone for a company that began January above $10 per share.
    The cash infusion is the latest development in a turbulent start to the year for NYCB. The bank disclosed in late January that it was dramatically raising the allowance for potential loan losses on its balance sheet, with its exposure to commercial real estate being a potential issue. That was followed shortly by Moody’s Investors Service downgrading the bank’s credit rating to junk status, and NYCB naming former Flagstar bank CEO Alessandro DiNello as executive chairman.

    Then last week, NYCB disclosed that it had “identified material weaknesses in the company’s internal controls related to internal loan review” and announced that DiNello was taking over as CEO, for what proved to be a brief tenure. DiNello will stay on as nonexecutive chairman at the bank, according to Wednesday’s press release.

    The questions surrounding NYCB are reminiscent of those that swirled around Silicon Valley Bank, Signature Bank and First Republic before all three failed in the spring of 2023. They were among several regional banks that struggled as higher interest rates pushed down the value of older Treasury holdings and led some depositors to move their accounts elsewhere.
    With the U.S. economy continuing to show surprising strength and inflation still above the Federal Reserve’s 2% target, traders have been dialing back expectations for interest rate cuts this year. The higher-for-longer rate environment could keep pressure on the banks themselves and on commercial real estate, which is a key business for NYCB and many other regional lenders.
    The struggles for NYCB may have caught regulators off guard as well as investors. The regional lender acquired much of Signature Bank out of receivership from the Federal Deposit Insurance Corporation last March.Don’t miss these stories from CNBC PRO: More

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    Bitcoin’s price is surging. What happens next?

    For a brief moment, everyone who owned bitcoin had made money from it. On March 5th the crypto token rose to an all-time high of just above $69,000—a level sure to delight the meme-loving crypto-crowd—before slipping back a little. The record capped a remarkable comeback from the dark days of November 2022, when interest-rate rises were crushing risk appetite and ftx, a crypto exchange, had just gone bust. At the time, buying bitcoin on such exchanges seemed like little more than a fun and novel way to get robbed.Bitcoin is hardly rallying in isolation: everything is going up. Stockmarkets all over the world are near record highs. So are gold prices. Even bond prices are climbing after a miserable two-year stretch. The catalyst is a combination of artificial-intelligence hype, joy at the state of the global economy and expectations of looser monetary policy to come.Still, bitcoin is doing better than most assets. On January 10th the Securities and Exchange Commission, an American regulator, approved applications by ten investment firms, including BlackRock and Fidelity, to create bitcoin exchange-traded funds (ETFs). These make it easier for everyday investors to buy the cryptocurrency. Rather than setting up an account with a specialist exchange, creating a crypto wallet, making a bank transfer and then finally buying bitcoin, people can now simply log on to their brokerage accounts and purchase an etf. Assets in the ten largest bitcoin etfs now come to around $50bn. And the activity appears to be self-reinforcing: the more money is poured in, the higher the price goes, the more people chatter about bitcoin etfs, the more money pours in and so on and so on.image: The EconomistBitcoin has been in existence for 14 years. The elegant mechanism by which it validates itself and supply grows has never been hacked, meaning that the token is not going anywhere. Yet it is now obvious that it is of pretty limited use for payments, as it is restricted by both the high costs and slow speed of transactions. Those trying to build applications on top of blockchains are not doing so using bitcoin either. With the creation of etfs, it is now clear that bitcoin is an investment asset and nothing more. So after this initial surge of interest, what will its returns look like?It would be foolish to extrapolate from bitcoin’s entire history. Over the past 14 years the cryptocurrency has morphed from a niche cyberpunk idea into something approaching a mainstream financial asset. Its more recent price movements might provide some clues, however. There are two explanations for them. One is that purchases are basically a broad bet on technological progress, with variations that reflect prospects for crypto itself. For instance, even as tech stocks soared in the middle of 2021, bitcoin slumped after Elon Musk posted negative tweets about crypto payments. Prices were depressed in late 2022, too, even as stockmarkets were rallying, owing to ftx’s failure.The other theory is that bitcoin is a kind of digital gold. After all, supply is inherently limited, just as gold supply is restricted by the amount of the metal in the ground. Neither asset pays a yield or earns profits. This theory fell out of favour in 2021 and 2022, as inflation soared and bitcoin collapsed, but last year the cryptocurrency once again moved in line with gold.Perhaps both theories contain elements of truth. And a hybrid tech-stock-crypto-vibes-gold-bet asset could be useful in even pedestrian portfolios, especially if it is only somewhat correlated with other assets an investor might hold. Diversification among uncorrelated assets is the foundational principle of portfolio management. Reallocating, say, 1% of a fund to bitcoin would be a low-stakes hedge.If investors buy this argument, bitcoin’s price is likely to rise for a while yet. What happens, then, when the cryptocurrency’s transition into a standard financial asset is complete? Assume that bitcoin has been added to most investor portfolios. Also assume that crypto tech does not really catch on. In this world, bitcoin’s returns probably do come to resemble those of gold: there is a fixed amount of it, and its price would rise over the long term roughly in line with the stock of money. That implies steady single-digit returns. The creation of a bitcoin etf may have set off a frenzy of eye-popping gains—but the future it portends could be slower and steadier. ■ More

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    What the SEC vote on climate disclosures means for investors

    The Securities and Exchange Commission voted 3-2 on Wednesday to issue a final rule about climate disclosures.
    The regulation requires a baseline transparency around climate risks and greenhouse gas emissions from certain U.S. publicly listed companies.
    It is watered down from the initial version proposed in March 2022. So-called Scope 3 emissions were stripped out, for example.

    Securities and Exchange Commission Chairman Gary Gensler testifies before Congress on July 19, 2023.
    Win Mcnamee | Getty Images News | Getty Images

    Climate disclosures aren’t mandatory under the current regime; companies make them voluntarily. They remain “uncommon in all but a few sectors,” according to S&P Global.
    The largest companies must start making some climate disclosures as early as fiscal 2025 and about greenhouse gas emissions as soon as fiscal 2026.

    ‘A sensible rule to protect investors’

    “Climate risk is financial risk,” Elizabeth Derbes, director of financial regulation and climate risk for the Natural Resources Defense Council, said in a written statement.
    “This is a sensible rule to protect investors: it gives them access to clear, comparable, relevant information on the measures companies are taking to manage climate risks and opportunities,” Derbes said.

    Overall, transparency around climate risk may be essential for investors to gauge if a company’s stock is worth holding or if its stock price is reasonable, experts said — for example, is it too expensive given high exposure to climate risk, or perhaps fairly priced considering it’s well positioned?
    Required disclosures include climate risks that have had — or are reasonably likely to have — a material impact on company business strategy, operations or financial condition, according to the SEC.
    They also include a company’s climate-related goals, transition plans, and costs and losses related to events like hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures and sea-level rise, the SEC said.
    “Investors want to be able to accurately price those risks and opportunities as they look medium and longer term at their investments,” especially retirement investors who may have a timeline decades in the future, Rachel Curley, director of policy and programs at the U.S. Sustainable Investment Forum, recently told CNBC.

    Rule does not include ‘Scope 3′ disclosures

    However, the rule is watered down from its initial version. Derbes and other observers say that dilution hinders investors’ ability to accurately gauge risk.
    For example, the final rule stripped out a requirement to disclose so-called Scope 3 greenhouse gas emissions. Such planet-warming emissions are those along a corporation’s value chain like suppliers of raw material or by customers using a company’s products.
    For many businesses, Scope 3 emissions account for more than 70% of their carbon footprint, Deloitte estimates.

    “This is not the rule I would have written,” Crenshaw said, citing omissions such as Scope 3 reporting. “They are a bare minimum,” though ultimately better than no rule at all, she added.
    Instead, the final rule will require companies report Scope 1 and 2 emissions if they’re deemed material to investors. These are direct emissions caused by company operations and indirect ones from the purchase of energy (from renewable sources or coal-burning power plants, for example).
    Only “large accelerated filers” and “accelerated filers” must disclose Scope 1 and 2 emissions. These categories include corporations with an aggregate global market value of $700 million or more, and $75 million or more, the SEC said.

    Challenges could be forthcoming

    The rule comes as the Biden administration pledged to cut U.S. greenhouse gas emissions in half by 2030. In 2022, President Joe Biden signed the Inflation Reduction Act, the largest federal investment to fight climate change in U.S. history.
    It also follows other U.S. and international climate disclosure regimes, such as in the European Union and rules recently passed in California.
    Congressional and legal challenges to the rule “are likely,” Jaret Seiberg, financial services and housing policy analyst at TD Cowen, wrote last week in a research note.
    While proponents say the SEC rule is well within the scope of its mission to protect investors, others say the agency overstepped its authority.
    The rule is “climate regulation promulgated under the Commission’s seal,” and “hijacks” the agency to promote climate goals, SEC Commissioner Mark Uyeda said before the vote Wednesday.
    Last year, a group of House and Senate Republicans sent a letter to SEC Chair Gary Gensler criticizing the proposal, saying it “exceeds the [agency’s] mission, expertise, and authority.”
    Gensler defended the rule as being consistent with a “basic bargain” in U.S. securities laws.
    “Investors get to decide which risks they want to take so long as companies raising money from the public make … ‘complete and truthful disclosure,'” Gensler said in a written statement following the vote. “Over the last 90 years, the SEC has updated, from time to time, the disclosure requirements underlying that basic bargain.”
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    Powell reinforces position that the Fed is not ready to start cutting interest rates

    In prepared remarks for appearances on Capitol Hill, Fed Chair Jerome Powell said policymakers remain attentive to the risks that inflation poses and don’t want to ease up too quickly.
    “The Committee does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent,” the central bank leader said.
    Powell noted again that lowering rates too quickly risks losing the battle against inflation and likely having to raise rates further, while waiting too long poses danger to economic growth.

    Federal Reserve Chair Jerome Powell on Wednesday reiterated that he expects interest rates to start coming down this year, but is not ready yet to say when.
    In prepared remarks for congressionally mandated appearances on Capitol Hill Wednesday and Thursday, Powell said policymakers remain attentive to the risks that inflation poses and don’t want to ease up too quickly.

    “In considering any adjustments to the target range for the policy rate, we will carefully assess the incoming data, the evolving outlook, and the balance of risks,” he said. “The Committee does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”
    Those remarks were taken verbatim from the Federal Open Market Committee’s statement following its most recent meeting, which concluded Jan. 31.
    During the question-and-answer session with House Financial Services Committee members, Powell said he needs “see a little bit more data” before moving on rates.
    “We think because of the strength in the economy and the strength in the labor market and the progress we’ve made, we can approach that step carefully and thoughtfully and with greater confidence,” he said. “When we reach that confidence, the expectation is we will do so sometime this year. We can then begin dialing back that restriction on our policy.”
    Stocks posted gains as Powell spoke, with the Dow Jones Industrial Average up more than 250 points heading into midday. Treasurys yields mostly moved lower as the benchmark 10-year note was off about 0.3 percentage point to 4.11%.

    Rates likely at peak

    In total, the speech broke no new ground on monetary policy or the Fed’s economic outlook. However, the comments indicated that officials remain concerned about not losing the progress made against inflation and will make decisions based on incoming data rather than a preset course.
    “We believe that our policy rate is likely at its peak for this tightening cycle. If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year,” Powell said in the comments. “But the economic outlook is uncertain, and ongoing progress toward our 2 percent inflation objective is not assured.”
    He noted again that lowering rates too quickly risks losing the battle against inflation and likely having to raise rates further, while waiting too long poses danger to economic growth.
    Markets had been widely expecting the Fed to ease up aggressively following 11 interest rate hikes totaling 5.25 percentage points that spanned March 2022 to July 2023.
    In recent weeks, though, those expectations have changed following multiple cautionary statements from Fed officials. The January meeting helped cement the Fed’s cautious approach, with the statement explicitly saying rate cuts aren’t coming yet despite the market’s outlook.
    As things stand, futures market pricing points to the first cut coming in June, part of four reductions this year totaling a full percentage point. That’s slightly more aggressive than the Fed’s outlook in December for three cuts.

    Inflation easing

    Despite the resistance to move forward on cuts, Powell noted the movement the Fed has made toward its goal of 2% inflation without tipping over the labor market and broader economy.
    “The economy has made considerable progress toward these objectives over the past year,” Powell said. He noted that inflation has “eased substantially” as “the risks to achieving our employment and inflation goals have been moving into better balance.”
    Inflation as judged by the Fed’s preferred gauge is currently running at a 2.4% annual rate — 2.8% when stripping out food and energy in the core reading that the Fed prefers to focus on. The numbers reflect “a notable slowing from 2022 that was widespread across both goods and services prices.”
    “Longer-term inflation expectations appear to have remained well anchored, as reflected by a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets,” he added.
    Powell is likely to face a variety of questions during his two-day visit to Capitol Hill, which started with an appearance Wednesday before the House Financial Services Committee and concludes Thursday before the Senate Banking Committee.
    Questioning largely centered around Powell’s views on inflation and rates.
    Republicans on the committee also grilled Powell on the so-called Basel III Endgame revisions to bank capital requirements. Powell said he is part of a group on the Board of Governors that has “real concerns, very specific concerns” about the proposals and said the withdrawal of the plan “is a live option.” Some of the earlier market gains Wednesday faded following reports that New York Community Bank is looking to raise equity capital, raising fresh concerns about the state of midsize U.S. banks.
    Though the Fed tries to stay out of politics, the presidential election year poses particular challenges.
    Former President Donald Trump, the likely Republican nominee, was a fierce critic of Powell and his colleagues while in office. Some congressional Democrats, led by Sen. Elizabeth Warren of Massachusetts, have called on the Fed to reduce rates as pressure builds on lower-income families to make ends meet.
    Rep. Ayanna Pressley, D-Ohio, joined the Democrats in calling for lower rates. During his term, Democrats frequently criticized Trump for trying to cajole the Fed into cutting.
    “Housing inflation and housing affordability [is] the No. 1 issue I’m hearing about from my constituents,” Pressley said. “Families in my district and throughout this country need relief now. I truly hope the Fed will listen to them and cut interest rates.”
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