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U.S. stimulus package is biggest ever, but may not be big enough – Kitco NEWS

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BOSTON/WASHINGTON (Reuters) – The Federal Reserve has offered more than $3 trillion in loans and asset purchases in recent weeks to stop the U.S. financial system from seizing up, but it has not yet directly helped large swaths of the real economy: companies, municipalities and other borrowers with less than perfect credit.

That is partly because America’s central bank is not allowed to take much credit risk itself, and loans to lower-rated borrowers have a higher chance of losses. The risk is exacerbated by efforts to stop the spread of coronavirus which have brought economic activity to a screeching halt.

To alleviate that constraint, the U.S. Treasury – whose job it is to manage the government’s finances and help the Fed keep the economy steady – has taken on some of the risk that Fed loans will not be paid back.

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It has contributed about $50 billion from a pool of money called the Exchange Stabilization Fund. That money will be used to absorb losses from Fed loans that go bad. Assuming only a fraction of loans will default, the Treasury contribution has allowed the Fed to lend much more without taking on additional risk.

On Friday, the Treasury got about $450 billion more from Congress as part of a $2.2 trillion U.S. stimulus package, greatly increasing its ability to support the economy. Before the bill passed, the stabilization fund had about $93 billion in assets as of the end of February.

Treasury Secretary Steven Mnuchin told Fox News on Sunday he believed the additional funds could help the Fed and Treasury provide about $4 trillion in loans.

But investors and economists said even this additional money may be insufficient, and Congress will likely need to pony up trillions of dollars more before the Fed and Treasury can make a significant dent in the real economy. If it does not, many U.S. companies and local governments are at risk of defaulting on debt or even going under.

That is because of the sheer size of the world’s largest economy, the unprecedented scale of economic disruption caused by attempts to contain the virus and higher credit losses if the government has to step in to support weaker borrowers, according to these experts.

Scott Minerd, chief investment officer of Guggenheim Partners and member of an investor committee that advises the New York Federal Reserve on financial markets, told Reuters he believes the government needs to give the Treasury about $2 trillion to help prop up the economy.

Using expected losses from companies in the lowest tier of investment grade, Minerd estimates that the money approved last week might be only enough to absorb losses on loans of about $900 billion.

BARE MINIMUM

That is just a fraction of the roughly $9.5 trillion in outstanding U.S. corporate debt, much of which is either in the lowest-tier investment grade rating or already rated as junk, with a higher risk of default. Other areas that need support – such as the commercial paper market where borrowers go for short-term funding or the municipal market that local governments use to raise money for roads and schools – total trillions of dollars more.

“I think we’ll be back at the table with another program before this is over,” Minerd said in an interview.

With the $2 trillion that he recommends, he said, “you’re on your way to have something of a big enough scale to get things propped up.”

In a research note last week, Bank of America analysts said the aid package passed last week was the “bare minimum.” They estimated the government will need a total of $3 trillion in fiscal stimulus and more if the recession deepens.

The Fed declined to comment. The Treasury did not respond to a request for comment on Sunday.

The Fed has so far kept its pledge to lend to companies with investment-grade ratings, and to buy other high-quality assets such as Treasury securities.

The aim of the Fed’s support is to encourage banks and investors to lend to weaker, and therefore more risky, companies and local governments, where they can earn higher returns, giving them access to the funding they need to continue operating and paying staff.

In some of the Fed’s funding facilities, the Treasury put up $10 billion as loss-absorbing capital for every $100 billion of loans. Mnuchin’s comment that the Fed and Treasury can now lend $4 trillion suggests he expects the rate of losses on the new loans to be similar, less than 10%.

WEAKER CREDITS

Investors said losses would likely increase, however, if the government has to reach deeper into the economy. And they are betting the Fed will have to do so – junk bonds rallied last week, for example.

“‘We’re only going to lend money to really good credits’ is a good model if you’re a bank,” said Charles Lemonides, founder of New York-based investment firm ValueWorks LLC. “But if you’re trying to rescue businesses that are otherwise failing, it’s not a very good strategy.”

Fed officials have signaled they are not ruling anything out in their efforts.

In its support for the commercial paper market, for example, the Fed allows for companies that are downgraded after March 17 to return at least once more to the trough for funding.

In its facility to make loans to investment-grade companies through a special purpose vehicle, the Fed said, “The scope of eligible issuers may be expanded in the future.”

But officials know that reaching lower down the credit-quality spectrum entails greater risk and might require a larger contribution from Treasury to account for it.

In time, as they see how the programs for higher-quality borrowers play out, they may grow more comfortable with casting a wider net and explore ways to get cash to shakier corporate borrowers while limiting their risk.

Mohamed El-Erian, chief economic adviser to the German insurer Allianz SE (ALVG.DE), said backstopping non-investment grade credit would be a much harder decision for the Fed, given the degree of corporate credit and default risks involved.

“I suspect that any move in that direction would need to come with a massive fiscal backstop to protect the integrity of the Fed’s balance sheets,” El-Erian said.

LIMITING LOSSES

The Fed’s initial steps into the corporate bond market, limiting its scope to investment grade issuers, essentially avoids rewarding or bailing out badly run companies.

The Fed is justifying its move as help to companies that are caught in a situation not of their making, said Nellie Liang, former head of the Fed’s financial stability office and now at the Brookings Institution think-tank.

“It is a question of limiting losses,” Liang said in a webinar last week organized by Princeton University.

But the pressure on the Fed and Treasury to lend to riskier borrowers is only likely to increase if quarantines, stay-at-home orders and other economy-killing restrictions persist.

In the weeks ahead, the pool of high-grade borrowers currently allowed in the program will likely shrink.

The three major credit ratings agencies – Moody’s, S&P and Fitch – are certain to cut a number of companies now at the lowest tiers of investment grade into junk territory, as happened last week to Ford Motor Co .

That could become an issue, said Kathy Bostjancic, chief U.S. economist at forecasting and analysis firm Oxford Economics.

“You can argue there is a need and the Fed has a lot more insurance backing from the U.S. Treasury” to delve into the riskier part of the bond market, Bostjancic said.

“However, it could entail significant losses and so risky for the Fed and they might stay away from it,” she said.

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Calgary breaks all-time record in housing starts but increasing demand keeps inventory low – CBC.ca

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Soaring housing demands in Calgary led to an all-time record for new residential builds last year, but inventory levels of completed and unsold units remained low due to demand outpacing supply.

According to the latest report from Canada Mortgage and Housing Corporation (CMHC), total housing starts increased by 13 per cent in Calgary, reaching a total of 19,579 units with growth across all dwelling types in the city.

That compares to a decline of 0.5 per cent overall for housing starts in the six major Canadian cities surveyed by CMHC.

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Calgary also had the highest housing starts by population.

“Part of the reason why we think that might have happened is that developers are responding to low vacancies in the rental market,” said Adebola Omosola, a housing economics specialist with CMHC.

“The population of Calgary is still growing, a record number of people moved here last year, and we still expect that to remain at least in the short term.”

Earlier this year, the Calgary Real Estate Board also predicted that demand, especially for rental apartments, wouldn’t let up any time soon. 

Industry can cope with demand, expert says

According to numbers from the report, average construction times were higher in 2023 for all dwelling types except for apartments.

The agency’s report suggests the increase in the number of under-construction residential projects might mean builders are operating at or near full capacity.

However, there’s optimism the construction industry can match the increasing need.

Brian Hahn, CEO of BILD Calgary Region, said despite concerns around about construction costs, project timelines and labour shortages, the industry has kept up with the demand for new builds.

Demand is expected to remain robust, but the construction industry can keep up, according to BILD Calgary region CEO Brian Hahn.
Demand is expected to remain robust, but the construction industry can keep up, according to BILD Calgary Region chief executive officer Brian Hahn. (Shaun Best/Reuters)

“I’ve heard that kind of conversation at the end of 2022 and I heard it in 2023,” Hahn said.

“Yet here we are early in 2024, and January and February were record numbers again.”

Hahn added he believes the current pace of construction will continue for at least the next six months and that the industry is looking at initiatives to attract more people to the trades.

Increase in row house and apartment construction

Construction growth was largely driven by new apartment projects, making up almost half of the housing starts in Calgary in 2023.

The federal housing agency says 9,034 apartment units were started that year, an increase of 17 per cent from the previous year. Of those, about 54 per cent were purpose-built rentals.

Apartments made up around two-thirds of all units under construction, CMHC said, with the total number of units under construction reaching 23,473.

Growth, however, was seen across all dwelling types. Row homes increased by 34 per cent from the previous year while groundbreaking on single-detached homes grew by two per cent.

“Notwithstanding challenges, our members and the industry counterparts that support them managed to produce a record amount of starts and completions,” Hahn said.

“I have little doubt that the industry will do their very best to keep pace at those levels.”

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Ottawa real estate: House starts down, apartments up in 2023 – CTV News Ottawa

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Rental housing dominated construction in Ottawa last year, according to a new report from the Canada Mortgage and Housing Corporation (CMHC).

Residential construction declined significantly in 2023, with housing starts dropping to 9,245 units, a 19.5 per cent decline from the record high observed in 2022. But while single-detached and row housing starts fell compared to 2022, new construction for rental units and condominiums rose.

“There’s been a shift toward rental construction over the past two years. Rental housing starts made up nearly one third of total starts in 2023, close to double the average of the previous five years,” the report stated.

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Apartment starts reached their highest level since the 1970s.

“The trend toward rental and condominium apartment construction follows increased demand in these market segments due to population growth, households looking for affordable options, and some seniors downsizing to smaller units,” the CMHC said.

Demand from international migration and students, the high cost of home ownership, and people moving to Ottawa from other parts of Ontario were the main drivers for rental housing starts in 2023. The CMHC says rental and condominium apartment starts made up 63 per cent of total starts in 2023, compared to the average of 37 per cent for the period 2018-2022.

There was a modest increase in rental housing starts in 2023 over the record-high seen the year prior and a jump in new condominiums. The report shows 5,846 new apartments were built in Ottawa last year, up 2.1 per cent compared to 2022.

Housing starts in Ottawa by year. (CMHC)

Big demand for condos

The CMHC said condo starts reached a new high in 2023, increasing 3 per cent from 2022 numbers.

“As of the end of 2023, there were only 13 completed and unsold condominium units, highlighting continued demand for new units,” the CMHC said.

Condominum starts increased in areas such as Chinatown, Hintonburg, Vanier and Alta Vista, as well as some suburban areas like Kanata, Stittsville, and western Orléans. Condo apartment construction declined in denser parts of the city like downtown, Lowertown and Centretown, the report says.

Taller buildings are also becoming more common, as the cranes dotting the skyline can attest. The CMHC notes that buildings with more than 20 storeys accounted for nearly 10 per cent of apartment structure starts in 2022 and 2023, compared to an average of 2 per cent over the 2017-2021 period. The number of units per building also rose 7 per cent compared to 2022.

Apartment building heights in Ottawa by year. (CMHC)

Single-detached home construction down significantly

The number of new single-detached homes built in Ottawa last year was the lowest level seen in the city since the mid 1990s, CMHC said.

“The Ottawa area experienced a slowdown in residential construction in 2023, driven by a significant decline in single-detached and row housing starts,” the CMHC said.

Single-detached housing starts were down 45 per cent compared to 2022. Row house starts dropped by 38 per cent compared to 2022, marking a third year of declines in a row.

“Demand for single-detached and row houses also declined in 2023. Higher mortgage rates and home prices have led to a shift in demand toward more affordable rental and condominium units,” the report said.

There were 1,535 single-detached housing starts in Ottawa last year, 208 new semi-detached homes and 1,678 new row houses.

The majority of single-detached and row housing starts were built in suburban communities such as Barrhaven, Stittsville, Kanata, Orléans and rural parts of the city.

“Increased construction costs resulting from higher financing rates and inflation that occurred in 2022 and 2023 contributed to the decline in construction in the region,” the CMHC said. 

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Trump’s media company ticker leads to fleeting windfall for some investors

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A man looks at a screen that displays trading information about shares of Truth Social and Trump Media & Technology Group, outside the Nasdaq Market site in New York City, U.S., March 26.Brendan McDermid/Reuters

Possible confusion over the new stock symbol for former President Donald Trump’s Truth Social (DJT-Q) saw some investor brokerage balances briefly jump by hundreds of thousands of dollars on Tuesday, the first day Trump’s “DJT” ticker traded.

Several people complained on social media about briefly seeing the value of their DJT stock holdings on Charles Schwab platforms inflated to figures more in line with what they would be worth if the shares traded at the level of the Dow Jones Transportation Average.

Some users said they faced a similar issue in pre-market hours on Morgan Stanley’s E*Trade trading platform.

Shares of Trump Media & Technology Group opened Tuesday at $70.90, while the Dow Jones Transportation Average started the session at 15,937.73 points.

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For one trader, the Schwab brokerage balance jumped by more than $1 million due to the error, according to a screen grab shared on social media platform X. Reuters was unable to contact the trader or independently verify the brokerage balance.

“It sure was nice seeing millions in the account, even if it wasn’t real,” another person, going by the username @DanielBenjamin8, who faced the issue in his E*Trade account, posted on X.

Two X users and one on Reddit surmised that the inflated balances were due to the ticker symbol for the company being nearly identical to the index.

A spokeswoman for Charles Schwab said that certain users on some of Schwab’s trading platforms saw their brokerage balances briefly inflated due to a technical issue.

The issue has been resolved and investors are able to trade equities and options on Schwab platforms, she said. Schwab declined to describe the exact cause of the issue.

E*Trade did not immediately respond to a request for comment outside of regular business hours.

Trump Media & Technology Group and S&P Dow Jones Indices, which maintains the Dow Jones Transportation Average Index, did not immediately comment on the issue.

While social media users said the issue appeared to have been resolved, many rued not being able to cash out their supposed gains from the error.

“I better go tell my boss that I’m actually not retiring,” the trader whose account balance had briefly jump by more than $1 million, wrote on X.

Trump Media & Technology Group shares surged more than 36% on Tuesday in their debut on the Nasdaq that comes more than two years since its merger with a blank-check firm was announced.

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