It feels like a good time to review what we can expect when our government and its agencies attempt to create wealth out of thin air. We can see the absurdity and hubris of our policymakers who believe they can circumvent economic laws in the following excerpt from the “The National Homeownership Strategy: Partners in the American Dream”. This little gem which we are suggesting is the document that led us to the economic devastation from which we are yet to crawl out. "For many potential homebuyers, the lack of cash available to accumulate the required downpayment and closing costs is the major impediment to purchasing a home. Other households do not have sufficient available income to to make the monthly payments on mortgages financed at market interest rates for standard loan terms. Financing strategies, fueled by the creativity and resources of the private and public sectors, should address both of these financial barriers to homeownership." So what lesson did we learn the hard way? Looking around today, absolutely nothing.
Greenspan was criticized by some for keeping the loose monetary policy far too long leading to the housing bubble. Chairwoman Yellen would be prudent to learn from history and not to repeat the similar missteps.
Let’s see. Between July 2007 and January 2009, the median US residential housing price plunged from $230k to $165k or by 30%. That must have been some kind of super “tax cut”.
The global oil price collapse now unfolding is not putting a single dime into the pockets of American households - the CNBC talking heads to the contrary notwithstanding. What is happening is the vast flood of mispriced debt and capital, which flowed into the energy sector owning to the Fed’s lunatic ZIRP and QE policies, is now rapidly deflating. That will reduce bubble spending and investment, not add to economic growth. It’s the housing bust all over again.
Pretend, for a minute, that you’re a money manager in today’s manipulated world...
The Federal Reserve conducted a study on Millennials and tried to ascertain why so many of them are living at home. Is it too much student debt? Lower incomes? Or is it that home prices are simply unaffordable? The study finds that all of these factors have a big impact on why many Millennials are living at home and why the first time home buyer market is performing so badly. (Hint: EB-5)
The story here is not Oil; it’s about a massive bubble in risk assets fueled by borrowed Dollars blowing up. The last time around it was a housing bubble. This time it’s an EVERYTHING bubble. And Oil is just the canary in the coalmine.
Oil is not just something that is refined into fuel--it is capital, collateral, debt and risk. In other words, it is intrinsically financial. Simply put, the sharp drop in oil revenues has knocked over a line of financial dominoes whose end is not yet in sight.
We are now far advanced into the third central bank generated bubble of the last two decades, but our monetary politburo has taken no notice whatsoever of its self-evident leading wave. Namely, the massive malinvestments and debt mania in the shale patch.
"We all are in a Ponzi world right now. Hoping to be bailed out by the next person. The problem is that demographics alone have to tell us, that there are fewer people entering the scheme then leaving. More people get out than in. Which means, by definition, that the scheme is at an end. The Minsky moment is the crash. Like all crashes it is easier to explain it afterwards than to time it before. But I think it is obvious that the endgame is near."
"Today central banks give money to institutions, which are not solvent, against doubtful collateral for zero interest. This is not capitalism."
While superficially the November Beige Book, which is chronically bad at spotting actual trends as was the case in the 2005-2007 period when it came to the housing bubble and the BB had absolutely no warnings about what only in retrospect would be a glaringly obvious bubble, was among the more optimistic ones seen in recent months (there were only 13 instances of "weather" in the document), here is what the Fed's assessment had to say about the only thing that matters currently for the US economy (in addition to the soaring US Dollar of course): oil. One example: 'Energy and mining activity was higher on net, though lower oil prices were a concern for the oil industry in the Atlanta and Dallas Districts."
"Almost 40% of appraisers surveyed from Sept. 15 through Nov. 7 reported experiencing pressure to inflate values,...If you thought what was happening before was an embarrassment, wait until the second time around." Is there any price in this economy that isn’t completely rigged?
Did you know that there exists a federal Immigrant Investor Program that grants “EB-5? immigration visas to foreigners who provide at least $500,000 to U.S. projects that create 10 or more American jobs? Apparently the good folks at the Pennsylvania Turnpike Commission are well aware of it, and are using it to raise $200 million. Here’s what we’d like to know. Who are these investors and who vets them? It is a known fact that corrupt Chinese officials and businessmen are scrambling to get themselves and their money out of their homeland as the government cracks down on corruption. How many of them are going to use this program to get into the U.S., and what will be the long-term impact to our society?
All the analysts chortling over the "equivalent of a tax break" for consumers are about to be buried by an avalanche of defaults and crushing losses as the chickens of financializing oil come home to roost.
"As was true at the 2000 and 2007 extremes, Wall Street is quite measurably out of its mind. There’s clear evidence that valuations have little short-term impact provided that risk-aversion is in retreat (which can be read out of market internals and credit spreads, which are now going the wrong way). There’s no evidence, however, that the historical relationship between valuations and longer-term returns has weakened at all. Yet somehow the awful completion of this cycle will be just as surprising as it was the last two times around – not to mention every other time in history that reliable valuation measures were similarly extreme. Honestly, you’ve all gone mad."
Central bank credibility is at all-time highs. As a consequence, we suggest, equities are near all-time highs too while gold is scraping multi-year lows. A change though may be in the offing with all three. Not today, nor tomorrow. But perhaps sooner than most think. Here’s how we see it...