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Betting the house with the Fed
It is hard to tell why the Federal Reserve moved so quickly into QE3 this past week. The move into QE3 was very specific in that it targets $40 billion a month of MBS purchases. It certainly caught markets off guard. Yet as some astute observers have pointed out, the nationwide housing market has been picking up and steady signs of inflation are now creeping in so why the sudden move in? Was this move necessary with mortgage rates already in negative territory? One camp believes that the fiscal cliff is very real and potentially will render a $500 billion gap in output next year. So $480 billion in MBS purchases nearly plugs that gap. Yet as we will highlight, the markets are probably missing the bigger picture just like they missed the timing on QE3. With the stock market reaching levels last seen in 2007, what has changed in this past half decade?
Measuring 2007 to 2012
I wanted to pull up some key data on overall measures of economic health from 2007 and 2012. The S&P 500 is now back to levels last seen in December of 2007 so let us take a look at some key points:
Let us go down the list item by item. The Case Shiller Index is 23 percent lower than it was in December of 2007. As previously noted, home prices have started moving up in 2012 but this is largely a function of low interest rates (probably another reason for QE3) and stifled inventory. The same issues of weak household income are popping up this time around. That is why FHA insured loans are so popular during this recent move up with housing values. Do not confuse this with a booming economy. This is merely a system that is allowing more leverage with stagnant household incomes.
Take a look at the U6 measure of underemployment between 2007 and 2012. In December of 2007 this was at 8.8 percent and today it is at 14.7 percent. Again, you need to try to examine where this recent stock run has come from. Take a look at government debt. From 2007 to 2012 the Federal Government went from $9.4 trillion in debt to over $16 trillion. A 70 percent increase in national debt resulted in GDP going up 9 percent over this half decade.
Take a look at the Fed balance sheet. This is up a stunning 220 percent over the last five years. So much for that being a temporary move. With QE3 on the horizon they are likely to push this above $3 trillion. This is why you are now seeing inflation stick in items like food, healthcare, education, and energy. However household incomes are not moving up.
New home sales are down 39 percent from where they were in December of 2007. Total household debt has deleveraged by 6.5 percent in this exact period. Does this justify the current move in stock values? Domestically it would appear this is not the case but remember many US companies now largely derive profits from abroad.
Fed targets employment via interest rates
The Fed has some lofty goals in pushing the unemployment rate lower:
Their longer run goals it to get unemployment down to 5.2 percent but that seems like a very difficult task to accomplish merely by buying up MBS and suddenly becoming the entire mortgage market combined with the GSEs and FHA. What will this really do? Well, first of all it will funnel more economic activity into housing but is that necessarily good? This was an issue in the early 2000s with the housing bubble. Many of our college graduates went into the FIRE side of economy because so much money is directed in this industry. Does the Fed with QE3 exacerbate this problem? It is also very likely that some of this higher unemployment is structural. For example, will all those lost FIRE jobs come back with the government basically running the housing market?
One thing is certain and that is housing has reacted in 2012:
California home sales in August reached levels last seen in 2006. Is this a sign that things have turned? In reality what has occurred is an unlocking of leverage via very low rates and dwindling inventory. Read any real estate forum and you can view the feeding frenzy again. Some of the comments seem to place blind faith in the Fed and ironically, these were the same comments that were hitting back during the housing bubble. It is true that people are laser focused on monthly payments and low down payments but when you are dishing out $500,000, $600,000, or even $700,000 you are still paying a hefty sticker price.
The Fed is betting on confidence picking up and capitulation to hit. Yet the irony is there is little prodding that needs to be done as demonstrated by the results in 2012. People will spend here even if it means going into massive debt to do it. If you doubt this look at the prices being paid for homes in SoCal or the prices still being paid for many colleges. This can only happen because of massive access to debt and not some hidden storage of money. Instead of the private sector being leveraged to the hilt it is now on the government side of the equation that leverage is running high. Ultimately, the financial sector and government sector are one in the same. The Fed has stepped deep into uncharted waters.
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Gotta have a pop before the election, to keep that margin from collapsing, and the registered suckers coming in. No Perot this time.
"It is hard to tell why the Federal Reserve moved so quickly into QE3 this past week. "
No it is very easy to tell. The big banks needed big money and fast.
Plus BB wants to keep his job and keep Barry in Casa Blanca
Lemme guess, end of fiscal year approaching?
70's are back! http://youtu.be/k80nW6AOhTs Inflation is our friend, spend spend spend!!!! Gold physical delivery only.
YES!!! jimmy carter inflation back inflation is our Friend
<< home prices have started moving up in 2012 but this is largely a function of low interest rates (probably another reason for QE3) and stifled inventory. >>
...and zero down mortgages still being handed out. House prices will drop as Shiller says---no job growth and what job growth does occur ....60% are low paying. Additionally, lenders don't care what quality the borrower is since they still merely pass the mortgages (aka losses) over to FHA (aka taxpayers)..
Loan fraud is the fuel of mass immigration, without it all the "false growth", (growth based on consumption rather than production) ends.
Most of CA's immigrant and alien population growth has been financed by subsidies from local govt, mostly from financed by bonds we're not even paying interest on http://www.bloomberg.com/news/2012-08-06/payments-on-105-million-school-bond-will-top-1-billion.html and deferred infrastructure maintainance "savings", the bond revenues were based on phony values which only exist in a fraudulent market.
Loan fraud funds local government, and local government funds consumption, without the subsidies mass immigration ends as millions fo poor beggar aliens on the street is politically incorrect, it can't exist without massive subsidies, we'd have tens of millions living on the streets without massive subsidies-mostly finanaced by loan fraud.
It doesn't matter if the loans go bad, if you can keep the home prices inflated to maintain the bond fraud everything is cool, and you don't have to inflate the home prices for the duration of the bonds, you only have to maintain the fraud while issuing the bonds (I call em alien invasion bonds).
Of course there's a problem with this Socialist economic strategy, you eventually run out of "sucker investors" willing to finance home loans for delusional immigrants that can't do math.
This is where the hyperpolitical douchbags at the fed come in accomodating mass criminal invasion by debasing the currency as the ultimate "sucker invester".
What we have to do is prosecute Socialism as treason and retire the responsible parties Mussolini style.
Except you alway need more loan fraud to maintain the ponzi.
The Prez has been a faithful servant of the Global Banksters/corporations/banksters agendas.
QE3 right before the election--DUHHHHHH?????
zrussell
You get the gold star. Obama was picked because he could feign sincerity in front of a teleprompter the same way Clinton could lie without blushing.
This is the dumbest most hopelessly naive post I have ever read!
duh, gee...I wonder why the Fed is buying up all the mortgages on planet earth, duh...
let me see....duh....gee....duh...
"it is hard to tell why the Federal Reserve moved so quickly into QE3 this past week. "
you have got to be kidding me!!! what planet do you live on son?
From PubCoCeo on Bill Gross Post:
"I dont think any body, present company excluded, undertsands the 40 billion per month is going to turn into 400 billion per month in derivatives at a minimum."
My response:
and then derivatives go boom!
say goodbye to your downpayment and all the payments you've made when you can no longer pay the mortgage due to currency deval
unbeknownst to you, your mortgage was sliced and diced into various tranches and sold off to a hedge fund
Mortgage meltdown 2.0
say hello to your new landlord Uncle Fed when you get foreclosed upon and Uncle rents your house back to you for the rest of your slave life here on Prison Planet Earth
Humanity, (and drhousingbubble) please wake the fu$k up!!!!!
The Fed buying these mortgages will have the effect of closing out $400 billion a month of derivatives. That is why they won't get the inflation they desire. The fed actions are actually reducing leverage in the system.
If they really wanted inflation they should buy these MBS and turn around and refinance every one of them with the actual homeowner. A few hundred dollars a month in the pockets of most Americans would go immediately back into the economy. Investor money would have nowhere to turn except investing in more productive endeavors.
The Fed could create wealth by increasing the interest rate; savers, retires, etc. would be wealthier. Instead, the Fed prefers the wealth effect, the illusion of wealth.
I read a ton of articles over the past 2 months saying that QE3 would be "economic suicide" so it would "never happen". I wonder what those "experts" are saying today...
So did I lots of them right here on ZH matter of fact but I think they were assuming the Fed was Sane and non-poltical thus wouldn't act in a political manner by showing their support for obama. Nor could people believe they would so openly display the Fed's bias for the rich by disregarding the middle/lower classes. Now they claim it is for jobs which we all know hasn't worked the first two times and reality is it won't work this time either.
Why the sudden move in? Hahaha that wasn't sudden it was planned. Crony's will make alot of money from this.
Sweet deal for investor's how they set that up .
Investors With Ties To Buffett, Soros, Obama Plan Mortgage Eminent Domain Grab
Foreclosure Fail: Study Pins Blame on Big BanksI'm not sure how this shows support for obama.
This money goes right to our tax obligation.
Giving that money right to taxpayers (trickle up theory) would have supported obama.
Booger it helps obama by helping the stock market and the rich if the market's are up history shows the incumbant is re-elected. Wall St. has picked presidents with an 88% success rate. That trickle theory is Marx's btw and it is really a trickle down
QE (quantitative easing) is essentially the printing of money and the addition of liquidity into the markets so that stock (and other asset) prices are given an artificial boost. Federal Reserve Chief Ben Bernanke believes that by pulling up stocks, the masses will feel richer and spend more on consumer goods, thus lifting up the economy. This is based on Karl Marx’s reflexivity theory (George Soros essentially paraphrased Marx) that states by turning the small wheel (stocks), you can turn the big wheel (economy), which in turn will come back and turn up the small wheel (stocks). Bernanke subscribes to such a theory, and he wants QE to lift up the small wheel (stocks), which he hopes will lift up the big wheel (the economy).
Intrade: Fed helped Obama's re-election odds
With the Fed guaranteeing currency devaluation, the strategy is to borrow money to buy physical assets that will increase in value and pay back the loan with devalued dollars in the future. It's what the government is doing to all their unpayable retirement promises. Borrow money to pay back social security and medicare and pay back in constantly deflating dollars. Surf the wave, my friends. Surf the freaking Fed wave.
um, sorry...no....
they have no intention of paying anything back....I'm sure Charles Ponzi was very concerned about making sure everyone got paid back too....
Yeah, except most of those retirement promises are indexed to inflation.
" Indexed to inflation."
Whay index? The CPI of 1.7% when Real inflation is running over 8%.
????Figures.
In first chart, a rise from 873 million to 2.8 TRILLION is 3200 TIMES, not the listed 220%.