QE Program – An Embarrassment Of Stitches

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QE Program – An Embarrassment Of Stitches by Danielle DiMartino Booth

Leonor Jean-Christine Soulas d’Allainval was no Shakespeare. His first play, “L’Embarras des richesses,” was a three-act comedy that premiered in 1726 and was performed only four times in the hopeful playwright’s lifetime. At age 53 he died embarrassingly franc-less at the Hotel de Paris. That’s not to say Soulas did not leave his linguistic mark, however unintentionally. The title of his play directly translates to ‘the burden of wealth.’ But that meaning seems to have been lost in transit across the English Channel courtesy of a Brit.

That Englishman, John Ozell, an accountant and translator died wealthy thanks to his numerical acumen. It was however not his talent for accounting but rather his 1735 translation of Soulas’ play that would prove to be his more lasting legacy, perhaps intentionally. Today, ‘an embarrassment of riches,’ as it’s come to be universally known among idioms, simply means too much of a good thing.

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In the here and now, a recent New York Times article chronicled the sun-setting on the current era of excess that has known no equal, including the Roaring Twenties. “For the ultrawealthy, 2015 was an embarrassment of riches,” the Times’ James Stewart wrote March 11th. He referenced such extravagances as $100 million penthouses, $179 million Picassos, $48 million blue diamonds and $13 million vintage Jaguars.

But something happened towards the middle of last year in this land of excess; embarrassment has given way to anxiety. In an apparent refutation of ‘show don’t tell,’ prospective buyers along Billionaires Row, Manhattan’s 57th Street between Columbus Circle and Park Avenue, have begun to blanch at the idea of movin’ on up. Evidently, the $6,000-plus per square foot price tag was easier to envision when the half dozen rising new towers were just so many deep holes in the ground.

Now that the fabulous-five, 1000-foot tall “supertall” towers are actually scraping the skyline, sales have plunged from their towering great heights. A meagre 189 Manhattan apartments sold last year for $10 million or more, a 12 percent decline from 2014. Similar tales of woe emanate from art and ‘priceless’ car auctions at which the wares on offer appear to indeed have no price, at least for which they’ve sold.

What’s a consignor to do? For starters, pray. Perhaps in Mandarin? A recent report found that despite the country’s well telecast economic slowdown, China now boasts 568 billionaires, topping the United States’ 535. Even on a city-to-city level, Beijing’s 100 billionaires now best New York’s 95.

The good news for Manhattanites with selling on the mind is that the Chinese are game to pay a tasty whim sum just to get their yuan out of the country. If you harbor any doubts as to their intent, just ask a few of the Big Apple’s resident billionaires who run a quaint private equity firm known as the Blackstone Group. These fine gentlemen make up part of the one-in-four American billionaires who work in finance and investments. Bless them.

Blackstone boasts the title of the world’s largest real-estate private equity fund manager by assets. Though the firm is known for holding its properties in portfolio for years, a resent, as in three months, acquisition of a luxury hotel portfolio is presently selling faster than a bell hop looking for a tip. And even for Blackstone, the resulting $450 million profit is nothing to sneeze at. Especially in light of the above mentioned shrinkage in apartment prices.

Plus, word is the buyer, China’s Anbang Insurance Group, is the party that did the approaching. It did seem as though the Waldorf Astoria, which the insurer with close ties to the Chinese government, acquired last year, along with a few Ritz Carltons, Four Seasons, a Hotel del Coronado and the Essex House thrown in for good measure would just about do the trick and appease the firm’s appetite for trophy U.S. hotels.

That is, until the news hit the wires days later that this once obscure Chinese insurer had bid $12.8 billion for Starwood Hotels, which boasts the Sheraton and Westin brands under their banner. It must be buy one, get one at double the price week for those with deep enough pockets, which is saying something about the depth of those pockets considering Anbang has been around for all of 12 years.

If this tale induces a sensation of deja vu a la Rockefeller Center and Japanese buyers circa 1989, don’t let it. Don’t ask yourself whether the enthusiastic buyers are flush or flushing their yuan down the drain. Be comforted by what the cavalcade of bullish real estate strategist assure. The Chinese are not marking a top; they’re making rationale choices based on models that guarantee price appreciation based on recent trends. Hmmm.

The acquiescent acceptance of acquisition valuations makes the Chinese government’s latest stimulus measures that much starker in contrast. While there is unquestionably dry powder with which to sustain the overseas buying spree, there is also festering rot that needs to be cleansed from their domestic banking system.

And so we hear the latest, that the Chinese government will launch its answer to the U.S. TARP program, wherein Chinese commercial banks swap out bad debts to the government in exchange for equity in said bank. Reported non-performing Chinese bank loans rose to $614 billion in 2015, a decade high, even as their economic growth slumped to a 25-year low. Of course, the aim of the package is identical to that of all stimulus measures launched since 2008 — to spur yet more lending to lift economic growth. More and more yet of the same.

Which brings us to the European Central Bank (ECB) which added non-financial corporate bonds to the menu of fixed income instruments it can buy to achieve its goal of flooding the markets with 80 billion in euros every month so as to…drum roll, please…incentive, more lending. It seems that there were simply not enough sovereign bonds and asset-backed securities to get the job done, and that’s before the ECB expanded its QE program from 60 billion euros a month before last Thursday’s meeting

No doubt, with 900 billion euros outstanding, the ECB has an appreciably large pool of assets at which to aim its buyer-not-beware bazooka. A gut check, though, should prompt the question as to why European policymakers are so keen to increase their own QE program when the effort has produced so few results everywhere else it’s been attempted.

A fine point: at roughly $50 billion in outstanding bonds, life insurers top the list of eligible targets for ECB purchases. Just so we understand each other, ECB President Mario Draghi envisions buying non-financial corporate bonds in the sector most damaged by the policies he’s deployed since vowing to do whatever it takes to reignite inflation via record low interest rates. Recall that low interest rates are the bane of insurance companies that depend on reasonably high interest rates to make good on the long-term promises they’ve made to those who pay stiff premiums in exchange for those promises.

All of this is not to say that QE program the world round has not had some redeeming qualities, especially for the uber wealthy who need never deign to Uber anywhere. Tally up China, the United States, India and the rest of the world and you find that worldwide billionaires now number 2,188, up 99 from 2014. Their collective net worth grew nine percent to $7.3 trillion last year alone, a figure that eclipses the GDPs of Germany and the U.K. combined. Jolly right, Herr.

So why is it the world’s central bankers are tripping over each other in an embarrassment of stitches to patch the splitting seams of the world economy with ineffectual sewing tools they’ve determined give new meaning to the other embarrassment, that of riches?

One thing is for certain. All of this quantitative pleasing has done little to lift the spirits of the world’s worker bees. Take the latest report on retail sales here in the U.S., which the Lindsey Group’s Peter Boockvar characterized as “mediocre” at best due to the current level of growth over the last year coming in at 2.9 percent. Not only is it punk compared to the five-year average of 3.5 percent; it’s downright depressed looking further back. In the boom-boom days of the dotcom bubble, spending was running at a 5.4-percent rate. Meanwhile, spending averaged 5.0 percent in the mid-2000s “goosed by mortgage equity withdrawals.”

Clearly, central bankers’ efforts are suffering from the law of diminishing returns, the phenomenon of benefits gained declining as a factor of the amount of money and energy invested. For now, at least, the other major player, the Bank of Japan, is standing down, perhaps because of the huge backlash to negative interest rates in that country. It remains to be seen, though, how long policymakers there will withstand a strengthening yen before succumbing to another stab at stimulus measures.

As for the Federal Reserve, the dichotomous signals the labor market and retail sales data have recently imparted are bound to have made the enunciating of “on the other hand” in today’s FOMC statement that much more challenging and maybe even a little embarrassing. The risk is always acute that the message gets lost in translation from Fedspeak to plain English as translators from days long since gone could easily attest. Perhaps, had central bankers simply taken to heart that well known idiom that cautions ‘a stitch in time saves nine’ early on, they would not now be so franticly stitching such a gaping gash in the world economy.

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