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The Inevitable Has Finally Been Admitted In Europe: The Macro Experiment Has Ignited Inflation Without Commensurate Growth; Rates Will Spike
Last week I posted a comprehensive piece, The
Coming Interest Rate Volatility, Sovereign Contagion, Geo-political
Unrest & Double-Dip Recessions: Here’s The Answer To Valuing Global
Real Estate Through This Mess. The goal was to outline the literal mess that those who decided to drag us through this “Great Global Macro Experiment”have left us in. Since then, in merely one week’s time, we have bore witness to:
- The potentially imminent toppling of another multi-decade, long standing regime, the third in as many months. Gaddafi asserts control amid worldwide dissent – Libyan U.N. mission urges Gaddafi’s downfall – Gaddafi son denies civilians bombed – Analysis: Libya could face chaos in post-Gaddafi era. Leading up to the Libyan affair, Tunisia and Egypt fell
into the hands of virtually weaponless protesters (at least from a
conventional weapons perspective) armed with simply laptops and
cellphones (the new age computers
and apparently the weapon of choice for those in uprise) to post
messages on Twitter and Facebook, amassing solidarity with supporters to
converge in certain areas to join the mass protests. Identifying,
fearing, and failing to understand the true power of the Internet in
toppling a regime, Libya has repeated the faux pas of Egypt in
attempting cut the country off from cyberspace – attempting to halt the
charge of an African bull elephant with an Acme Walmart
(by way of China) fly swatter. It is apparent that Egypt’s efforts to
isolate its populace from the Internet, although failing to halt the
toppling of its regime, did succeed in hiding the futility of such an
effort from Quadafi, et. al. This not only forms another basis for
contagion, but one that was actually foreseeable nearly a year in
advance- see Egypt’s Social Unrest As A Pan-European Economic and Financial Contagion? It Can Happen!!! and First Tunisia, Then Egypt, Now Yemen: Will This Reach The Powder Keg That Is The EU & What Will Happen If It Does? Subscribers should reference
Potential Spillover Effects from the Middle East to the EU.
What we set out to do was to adjust the pathways of apparent pure financial contagion with several, real world factors.
- A second ratings agency threatens to take action in downgrading Japan’s debt rating among rampant, utterly failed QE efforts – Moody’s warns of Japan ratings cut if no reforms. I addressed this last month, Japanese Downgrade Illustrates Potential Paths To Contagion. Remain cognizant of the fact that most don’t realize Why Japan at 200%+ Debt to GDP Is In Much Better Shape Than Much Of Indebted Europe. Regardless of this fact, I still query If Japan Lost Two Decades From Its Bubble Popping, How Many Decades Should The US Expect To Lose?
How likely is it that we can have 20 more years of housing price declines?
- China attempts to put the breaks on inflation, yet again – China Orders Banks to Assign More Risk to Local-Government Loans.
We have long asserted that many of these loans were chocked for of
bogus collateral to begin with. The Cinderalla-ish China story is bound
to face reality, and if China truly isn’t the engine of growth to pull
the world into glorious economic nirvana, then what??? See “Will
China Hit That Inflation Deer In The Global Macroeconomic Headlights
Anyway, Despite The Fact They Are Slamming On The Brakes?” and realize that you can’t pack 25 years of growth into 3 years and not expect to pay the overheated piper!
If you think about it, that is a lot of activity for just one week. The ECB is thinking about it was well. From Bloomberg, Mersch Says ECB May Warn of Upside Inflation Risks Next Week
European Central Bank council member
Yves Mersch said officials may toughen their language on inflation next
week, indicating a readiness to raise interest rates in coming months.
“I would not be surprised at most colleagues concluding that we have upside risks to price stability,”
Mersch said in an interview in Luxembourg yesterday. With the economy
strengthening and inflation in breach of the ECB’s 2 percent limit,
policy makers will “inevitably” have to “rebalance our monetary policy
stance,” Mersch said, without giving a timeframe.
The ECB, which has kept its benchmark
interest rate at a record low of 1 percent for almost two years, is
growing more concerned that soaring energy and food prices will drive up
wages and entrench faster inflation. At the same time, raising
borrowing costs too soon could exacerbate Europe’s sovereign debt crisis
by increasing pressure on stressed banking systems in countries such as
Greece and Ireland.
The euro rose more than half a cent
$1.3643 after Mersch’s comments were published. Euribor futures extended
a decline, with the implied yield on the contract expiring in December
increasing seven basis points to 1.97 percent, as traders added to bets
on higher ECB rates. German two-year government notes fell, sending the
yield up six basis points to 1.44 percent.
In the subscriber document, Potential Spillover Effects from the Middle East to the EU we detailed the transmission mechanism that is the high correlations in the FICC markets.
With most of the developed nations choking on NPAs and excess supply
in their residential and commercial real estate markets, much of which
served as a reflexive impetus for recession, the last thing anybody
really needs is a spike in interest rates. Cap rate expansion,
anybody???
The US residential…
The US commercial…
Japanese residential
Japan All Urban Land index, in the face of improving GDP!
I explained where all this will most likely end up in New Amsterdam a couple of weeks ago…
I will go in depth in Amsterdam in a little more than a month, illustrating solutions for pricing and valuation…
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Your better off renting.. just a survival thing I have. To remain solvent while the rest go insovlent. Tough world we are in.
I learned valuable lessons from the last RE debacle.. many were too young or just forgot .. It was only 20 yrs ago. But it took 14 yrs to break even .. paid the bank and learned as much as I could about Mkts and Investing during that time..I rose to the top1%.
Put aside some cash each month.. and pay cash at the bottom.. see Reggie's charts, this RE decline is like nothing ever seen before, unfortunately.
so.. is it better to rent for 20 years til prices bottom out...
or buy now and pay it off over a 15 year mortgage and owe nothing before real estate bottoms?
I've been a homeowner for over 20 years but I'm starting to feel like a sucker. I've been on the winning side of equity but lost on it too, about break even and the bank is still making money off of me.
Let's say I pay off my house or have a lot of equity in it. I now have an "anchor asset" that ties me to the house and is a MAGNET for taxation, lawsuits, fees, repairs, etc., etc., etc.
They say paying rent is like flushing money down the toilet but you can always change toilets, you don't have to fix the toilet, and the lawyers can't sue the toilet out from under you because it wasn't yours to begin with.
It's a big paradigm shift but I'm thinking of selling now and going to rent basis.
Can I form an LLC, have it buy the house, and then rent my house from my LLC. Is that legal?
Ah Mises' "Human Action," the unpredictable consequences of humans making choices for themselves--the one trend that the bankers do not control.
"When will US real estate see the light" is the wrong question to be asking.
We just came out of a bubble, folks. Remember how you felt about rising housing prices in 2001, and more so in 2002, and even more so in 2003, and then, unvelievably, even more so in 2004, and then, beyond plausibility, even more so in 2005, and then, having lost any sense of what's plausible, even more so in 2006?
Unless you were one of those gaming the bubble, you were probably thinking: this is nuts, this can't go on.
And now, after house prices fall but remain slightly above the historical mean relative to household incomes, people are asking: when they will go back up again? As if, we'll know we're really out of this crisis when we can blow another wasteful, idiotic and asinine housing bubble?
A lot of people suffering from some severe post-bubble disorientation.
LOL. Excellent point. One by-product of central planning is the creation of an underlying bubble mentality -- intended to deceive. As the stock market climbs higher and higher with no visible means of support, investors climb on board just because it’s going up, hoping to save their former weak positions. Official government data is a pack of supportive lies touted by the MSM, while the central bankers make policy that only benefits themselves.
There is a deliberate corralling of the lemmings with the aim to fleece them. Bubbles make money for investment bankers in two ways—when they inflate and when they deflate. With the housing market in the cellar, look around and you’ll see these same bankers waiting in the wings.
Americans get no reliable facts on how to protect themselves in these manipulated markets or how to invest with impunity as their real worth plummets. When house prices were in steep incline, the trend itself brought people along, particularly those stung by the dot-com bust and now believing that hard assets were the only safe place to be. The Fed banksters were ready for them. Who would ever have thought the Fed and U.S. Treasury would actually target America’s homes?
The Fed Pied Piper can pull us all along on its band wagon when an honest market system no longer is in place. When we have to rely on shysters, in the end we are all toast.
Reggie, I have to ask myself why did Greenspan and Bernanke follow down the same road as Japan when they saw the destructive implosion at the end?
Frankly, I don’t think these people care or have a future plan; they appear to be operating moment by moment, stealing as much as they can quarter by quarter along the way.
Here’s a local case in point: Fifteen years ago in Oakland, California, the city had to deal with past fire and police pension funding and in 1997 took out a 15-year bond to satisfy union contract demands. This will involve 1125 retirees, only one who has so far retired. The original fund was created in 1951 and stipulated pension benefits be tied to future employee salaries, adjusted every year.
So even if a police captain retired in 1975, he would get up to 68% of the pay of a current captain in 2011
Now the 15 years are up but, alas, the bond failed to return expectations because of market downturns and did not accumulate the money needed to pay the benefits. Because of this the city will owe $46 million on July 1; this is in addition to a $40 million plus shortfall arriving in the General Fund Budget on July 1.
So what do you think the city staffers suggest on how to deal with this recipe for bankruptcy? They would like to issue another bond to buy an additional five years of pension holiday.
Why? It’s a game of kick the can. The problem goes away now for the present politicians and someone else can face the rusted can lying up against the wall down the road.
That’s what Greenspan and Bernanke and the current administrations are doing. The Clinton Administration kicks the can down to the Bush Administration, the Bush Administration kicks it down to the Obama Administration, the Obama Adminstration kicks the can..
And the investment bankers make money every roll of the tumbling can…
Excellent article and presentation, as usual, Reggie…
Reggie:
You've been invited to speak in Amsterdam. I don't know if you want to tell them about a potential spillover from North African tribal wars into the democratically established landscape of the EU.
You might sound like a crack pot if you did that and prove that you don't understand Europe, the EU and Europeans.
The problems in the muslim tribal world are homegrown and have been contained only by virtue of an agreement to support whatever tinpot dictator regime would emerge and give us access to their nation's oil. Much of the world, including myself don't give a rats ass about their stupid tribal issues marinated in a religious breakup between Sunni and Shia muslims. Most of Europe has absolutely no love for the Muzzies by and large and if they kill each other over some form of interpretation of their religious dogma, so be it. As long as we get access to the oil that we need to run our economies and keep our lifestyles of progression and sophistication. Those of them that can afford it are sending their kids to our school for a good reason.
Just a word of advise, tread lightly in Europe around the Muzzie issue. You have been ill informed by the American propaganda that all Europeans have a love fest with Islam.
The pot really has cracked with this one.
Reggie, you know best how to communicate your ideas to a myriad of different people. Speak your mind, and I am sure you will do well. Cheers!
all your oils are belong to us.
Oh what a wicked web we weave when first we practice to decieve.
The cigar will be a lot more cost effective...thx
I stopped talking to my wife about it a year ago. I just go on and live in the fantasy world when I'm around her. Funny thing happened - she started reading all this shit we've all been talking about for years and is starting to come around. Of course the PM's doing well have helped my orinial rantings.... but backing off and letting the world talk for me has worked really well. Good luck with the cigar. Damn, that's funny stuff.
I see a lot of people thinking that china has a strong hand but I think you understand the predicament they are in with the greatest malinvestment bubble in history.
I do believe europe in general fears inflation so much that they will err on the side of a relatively stronger.euro and slow or no growth. It doesnt necessarily hurt us and might actually help. But inflation is not the big risk in euroland.
Meh, Mao taught China how to liquidate bubbles by removing those who add to the pressure from the equation.
But inflation is not the big risk in euroland.
How so?,their just as screwed as we are.The UK couldn't buy sand off a free beach.
is the internet a "weapon" so to speak "for the people to expand." More musically "this is the age of the expanding man. that shape is my shade back where i used to stand. so useless to ask me why, throw a kiss and say goodbye. i'll make it this time. i'm ready to cross that fine(?) line."
"As the dust settles in Europe, European banks are realizing that there's no way Greece can stay solvent, according to Der Spiegel."
http://www.businessinsider.com/european-banks-greek-default-2011-2
Greece solvent? Other than dissolving wealth, what kind of solution is that?
They are just #1, the rest of the PIIGS are going out also.
And the Euro will be on steroids.
Just wait.
While I'm here... How can I get my wife to see the light? I do nothing but make her savings grow...quite nicely for 7yrs now and she still rolls her eyes when I talk money/commodoties/pinting press...its baffling how some people just get it, buyt others just don't even with ever mounting evidence.
So much for those smart, independent, empowered women. The only time their eyes don't glaze over is when they watch Jersey Shore.
Dan the MAN?
You sit her ass down, and tell her what your going to do.(remember you Da Man.)
Try to work a unified front,compromise.
If she refuses, take a portion of your assets, and diversify.
When the SHTF, she will be the first one in your face screaming they cannot do that!!.(Ooops, too late, honey we be screwed).
I know the type,she's a sheeple, she doesn't want to hear the TRUTH.
Therefore, her truth is the past,thinking it always will be the way it has been.Until it's not.
Have her watch the 700 Club.
Seriously... my wife leaves the TV on random channels while she exercises, and she came in the other day telling me that Pat Robertson was talking about rising food, gold and silver prices and the bad economy.
Of course I've been buying gold since $400 an ounce in 1998, so I'm looking like a genius in our house.
Try a lit cigar to the back of the neck. Or electroshock therapy. Or another wife.
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This was awesome.
Reggie: concise, to the point, deadly accurate.
Your analysis as usual is boat-rocking spot on; and completely at odds with what the Make Believe Media keeps trying to sell us.
Strategically, what should one do? Dependent on whether underwater or not, should one simply stop paying the mortgage, stay as long as possible before eviction, and then move to a rental all the while hoarding for a cash buy or just keep paying the mortgage? The issue here is not maintaining a credit rating (Who really needs one?) but capital preservation.
great stuff reg. thanks.
Reggie, didnt you hear? It´s all priced in. Buy the fucking dip.
No wonder The Ben Bernank's lip is quivering more than usual...
Massive fiat currency creation is a failed experiment... unless the experiment is to destroy the middle class and force the world to hit the reset button.
It is, isn't it?
DavidC
As long as the consumer is hurting and the middle class gets screwed over there will be no recovery. Of course, this assumes that a recovery is desired in the first place. I think this is nothing more than a land grab. The GSEs own 65% of the county's mortgage as it is. Commercial is coming soon. What land they don't own they will try to control through food bill legislation.
Kick Ice,'
this assumes that a recovery is desired in the first place.
ONLY by the people, the Gvt's are right on track, at least the one's bringing down the world economies.
CHAOS, was the goal, a course in Hegalian Dialectics, used on the Sheeple.
A.K.A. government creating its own demand for a "mandate."
"Do Something!" cry the sheeple.
"Ok, watch this!" replies the politico.
*Presto!*
*Change-o!*
FUBAR
If "they" are going to cement a hold on power, they damn well better finish it soon. We're rapidly approaching the day when any random guy in his parents' basement will be able to unleash a sizeable amount of whoopass.
They're thinking in terms of the ubiquitous surveillance state, coupled with various efforts to control and direct information. Case in point - the recently discovered .gov contracts (with our tax dollars) to buy software that allows them to creat and manage large numbers of fake people on social networking sites, for the purpose of spreading propaganda.
I think they're too late. It's not going to work.
Amazingly, the underpinnings of the New World Order are coming into focus; incrementally, to be sure, but there nonetheless.