Housing Bubble

The mere mention that tapering was even possible, combined with the Chairman's fairly sunny disposition (perhaps caused by the realization that the real mess will likely be his successor's problem to clean up) was enough to convince the market that the post-QE world was at hand. This conclusion is wrong. Although many haven't yet realized it, the financial markets are stuck in a "Waiting for Godot" era in which the change in policy that all are straining to see, will never in fact arrive. Most fail to grasp the degree to which the "recovery" will stall without the $85 billion per month that the Fed is currently pumping into the economy.  Of course, when the Fed is forced to make this concession, it should be obvious to a critical mass that the recovery is a sham.

Four words: financialization, debtocracy, diminishing returns. The entire global economy, developed and developing nations alike, is now dependent on cheap, abundant credit for everything: for "growth," for asset inflation, and ultimately for central state deficit spending, which props up all the cartels, rentier arrangements, fiefdoms and armies of toadies, lackeys, apparatchiks and embezzlers that suck off the Status Quo. The wheels fall off the entire financialized debtocracy wagon once yields rise.There's nothing mysterious about this.

We have warned a number of times that China is a ticking time-bomb (and the PBoC finds itself between a housing-bubble rock and reflationary liquidity injection hard place) but the collapse of trust in the interbank funding markets suggests things are coming to a head quickly. The problem the administration has is re-surging house prices and a clear bubble in credit (as BofAML notes that they suspect that May housing numbers might have under-reported the true momentum in the market since local governments are pressured to control local prices) that they would like to control (as opposed to exaggerate with stimulus). As we noted here, while the PBOC may prefer to be more selective with their liquidity injections (read bank 'saves' like ICBC last night) due to the preference to control the housing bubble, when they finally fold and enter the liquidity market wholesale, the wave of reflation will rapidly follow (and so will the prices of precious metals and commodities).

This piece is timely as markets spit up the punch from Bernanke's bowl

 The “biggest risk to global financial stability”

Why do the debt crisis in Cyprus and the subsequent "bail-in" confiscation of bank depositors' money matter? They matter for two reasons: 1. The banking/debt crisis in Cyprus shares many characteristics with other banking/debt crises. 2. The official Eurozone resolution of the crisis--the "bail-in" confiscation of 60% of bank depositors' cash in an involuntary exchange for shares in the bank (which are unlikely to have any future value)--may provide a template for future official resolutions of other banking/debt crises. In other words, since the banking/debt crisis in Cyprus is hardly unique, we can anticipate the resolution (confiscation of deposits) may be applied elsewhere.

With the meaningless focus on such distracting noise as daily POMOs, will/won't the Fed taper, how many shorts will the Fed's Markets desk squeeze today, and how massive will the second Fed housing bubble be, it is easy to lose sight of the big picture, namely just where is the debt juggernaut that is the US, heading? Conveniently, the US debt clock has a "time machine" function that extrapolates, at current rates of change, what the key metrics behind the US economic facade will look like.

Sometimes you see something that is from a credible source and you are so dumbfounded you don’t know what to think. Yesterday's raly-inducing WSJ' Jon Hiselnrath is one such example. If the Fed believes the market is worried about a rate hike, it would be downright terrifying how out of touch the Central Bank. Our explanation for the move in short rates is the loss of confidence in the Central Bank and its policy making process. The Fed’s balance sheet and Quantitative Easing program has become a Frankenstein monster over which the Central Bank is losing control. QE1 started during a crisis and was either incredibly successful or well-timed. It is often forgotten that the S&P 500 dropped another 22% in the first 3 months of QE1. QE1 had an Exit Strategy, a plan, a time frame and a reason. QE3 has no Exit Strategy, no plan, time frame, no expected level of job creation and no known end. As such, forecasting is nearly impossible in a policy by whim environment, especially when the key decision maker is likely to leave.

We first discussed the possibility of state and local governments using eminent domain to 'save us' from further housing issues a year ago but now the NY Fed has gone one step further with an academic-based justification for why this process is not a "zero-sum-game" and will render all stakeholders better off. We can hear echoes of "trust us" in this commentary as the authors explain how multiple valuation methods will be used to ascertain "fair-value" - which has always worked so well in the past -  and that we have "little to fear" from the  resultant long-term contraction in liquidity or credit as bubbles can only inflate during times of easy credit availability (and that will never happen!) Paying for all this? Don't worry - resources to fund purchases of loans/liens can be raised from public, private sources or a combination of the two. It seems to us that MBS holders will not be happy, consumers hurt as mortgage costs would rise (this 'risk' has to be priced in), and taxpayers unhappy as this is yet another transfer payment scheme to bailout underwater loans.

What assets will the core/Empire protect? Those of the core. What will be sacrificed? The periphery.

The 2011 actions of the FDIC ending the safe harbor for true sales locked in a solution to TBTF

For a long time we have been seeking a chart that captures the pure essence of America's transition into its "new normal" mutant clone, in which record high stock markets coexist with record high foodstamp usage; in which record public debt amounts coexist with record low interest rates; in which the Fed is responsible for 20% of the US GDP but which is forgiven if it means the second coming of a housing bubble giving people the false hope of another "flip that house" get rich scheme. We believe we have found it. On the chart below we show the number of US manufacturing workers over the past decade (currently at levels first seen in 1941) on one axis; and the number of bar and restaurant employees - currently at an all time high - on the other. For those asking, in the past year the US has added 366,700 "food service and drinking places" employees and a whopping... 41,000 manufacturing workers.

Following widespread discussion of the impact that Wall Street investors (gorging on the Fed's free-money extravaganza) have had on home prices, today's final straw for Blackstone appears to be the New York Times' editorial suggesting/blaming them (and others) for driving up the prices of single family homes and reducing the supply of affordable housing for first-time home owners. Blackstone decided to hit back with some of its own version of real estate truthiness via its' blog and why it is "proud of what it is doing in the housing market." So here are the six reasons that Blackstone believes laying the blame for housing bubble 2.0 at their (them being Wall Street) feet is wrong (and a few short responses to their perspective).

Chevron, we have a problem.

The problem is central banks have created a vast pool of credit-money that is far larger than the pool of sound investment opportunities.  Why are asset bubbles constantly popping up around the globe? The answer is actually quite simple. Asset bubbles are now so ubiquitous that we've habituated to extraordinary excesses as the New Normal; the stock market of the world's third largest economy (Japan) can rise by 60% in a matter of months and this is met with enthusiasm rather than horror: oh goody, another bubblicious rise to catch on the way up and  then dump before it pops. Have you seen the futures for 'roo bellies and bat guano? To the moon, Baby! The key feature of the New Normal bubbles is that they are finance-driven: the secular market demand for housing (new homes and rental housing) in post-bubble markets such as Phoenix has not skyrocketed; the huge leaps in housing valuations are driven by finance, i.e. huge pools of cheap credit seeking a yield somewhere, anywhere: