Housing Bubble

It is amazing how big an effect a rambling, sleep-inducing speech by a chief central planner can have on financial markets in the short term. Nonetheless, the speech contained a few interesting passages which show us both how Bernanke thinks and that people to some extent often tend to hear whatever they want to hear. Bernanke noted that although he cannot prove it, econometricians employed by the Fed have constructed a plethora of models that show that 'LSAP's (large scale asset purchases, which is to say 'QE' or more colloquially, money printing) have helped the economy. In other words, although no-one actually knows what would have happened in the absence of the inflationary policy since we can't go back in time and try it out, the 'models' tell us it was the right thing to do. However, some indications would suggest that mal-investment is higher than ever - and accelerating - as the production structure ties up more consumer goods than it releases, an inherently unsustainable condition; additional expansion of money and credit will only serve to exacerbate the imbalance.

At the end of December 2010, Philipp Bagus (he of the must watch/read 'Tragedy of the Euro') provided a clarifying and succinct rebuttal or Bernanke's belief in the extreme monetary policy path he has embarked upon. Bernanke's latest diatribe, or perhaps legacy-defining, self-aggrandizing CYA comment, reminded us that perhaps we need such clarification once again. Critically, Bagus highlights the real exit-strategy dangers and inflationary impacts of Quantitative Easing (a term he finds repulsive in its' smoke-and-mirrors-laden optics) adding that:

Money printing cannot make society richer; it does not produce more real goods. It has a redistributive effect in favor of those who receive the new money first and to the detriment of those who receive it last. The money injection in a specific part of the economy distorts production. Thus, QE does not bring ease to the economy. To the contrary, QE makes the recession longer and harsher.

Or we might name it after the intentions behind it: "Currency Debasement I," "Bank Bailout I," "Government Bailout II," or simply "Consumer Impoverishment."

With a price hovering around $1,600 an ounce and the prospect of "additional monetary accommodation" hinted to in the latest meeting of the FOMC, gold is once again becoming a hot topic of discussion. Krugman, praising 'The Atlantic's recent blustering anti-Gold-standard riff, points to gold's volatility, its relationship with interest rates (and general levels of asset prices - which we discussed here), and the number of 'financial panics' that occurred during gold-standards. These criticisms, while containing empirical data, are grossly deceptive.  The information provided doesn’t support Krugman’s assertions whatsoever.  Instead of utilizing sound economic theory as an interpreter of the data, Krugman and his Keynesian colleagues use it to prove their claims.  Their methodological positivism has lead them to fallacious conclusions which just so happen to support their favored policies of state domination over money.  The reality is that not only has gold held its value over time, those panics which Krugman refers to occurred because of government intervention; not the gold standard. Keynes himself was contemptuous of the middle class throughout his professional career.  This is perhaps why he held such disdain for gold.

The punchline from today's Fed household debt and credit report is comparing student debt to one other favorite product of the housing bubble generation: HELOCs. We note home equity lines of equity because as of June 30, 2012, long after HELOCs were widely available to Americans locked in a rabid pursuit to extract as much equity as they could out of their homes, is when the 90+ day delinquent rate on this product hit an all time high of 4.92%, and is finally rising at a breakneck speed. What is fascinating is when one re-indexes the delinquency rate on HELOCs and student loans. While we admit that the "discharge" option on real estate-backed debt does have a material impact, the reality is that once the prevailing mode of thinking is one of just not paying one's student loans, it will be not the student loan chart which is already parabolic, but that which tracks delinquent student loans that will take its place in the exponential hall of fame.

Will Steve Keen be proven 'early' and correct? We suspect so; and the following infographic from DebtConsolidation.com.au provides some more compelling evidence of the growth of the Aussie housing bubble and its geographical diversity (and should you consider a trade on the back of this - Australian bank CDS are trading near 12-month tights).

We tried to bite our tongue; we ignored some of the sheer hypocrisy of Cleveland Fed's Sandra' oh Sandy' Pianalto (that QE2 was a definitive success in 2010 but now LSAPs require more analysis of costs and benefits); but when she started down the road of praising the US consumer for deleveraging we had enough. In the immortal words of John Travolta: "Sandy, can't you see, we're in misery" as while she notes consumers cutting back on credit card debt (due to forced bankruptcies we note), Consumer debt has only been higher on one month in history! Soaring auto loans and student debt should just be ignored? There is no deleveraging - Total US Consumer debt is 0.23% from its all-time high in mid-2008, and will with all likelihood break the record at the next data point. Meanwhile her speech, so full of careful-not-to-over-commits can be summed up by the world-cloud that shows the six words most prominent: 'Monetary Policy', 'Financial Conditions', and most importantly 'Credit Economy'. Here's the deal: Consumer Debt is Consumer Debt.

Another thesis regarding the housing market’s future path is that of a bounce and slog market. The theory focuses on the negative equity home owners and also the low inventory on the current market. This view point actually holds some solid ground. As of last count, there are over 11 million negative equity home owners in the US. This data is usually put out quarterly but with the stronger home price movement this summer, many will move out of the negative equity position. The theory proposes that many are not selling today simply because they cannot without bringing cash to the table. Out of the 11 million underwater home owners, how many would like to sell but simply do not because they would actually lose money on their sale? This is an interesting perspective on the underwater segment of the market. Yet the outcome is probably not as clean cut as one would expect.

In just four short years, our “enlightened” policy-makers have slowed money velocity to depths never seen in the Great Depression.  Hard to believe, but the guy who made a career out of Monday-morning quarterbacking the Great Depression has already proven himself a bigger idiot than all of his predecessors (and in less than half the time!!).  During the Great Depression, monetary base was expanded in response to slowing economic activity, in other words it was reactive  (here’s a graph) .  They waited until the forest was ablaze before breaking out the hoses, and for that they’ve been rightly criticized.  Our “proactive”  Fed elected to hose down a forest that wasn’t actually on fire, with gasoline, and the results speak for themselves.  With the IMF recently  lowering its 2012 US GDP growth forecast to 2%, while  the monetary base is expanding at about a 5% clip, know that velocity of money is grinding lower every time you breathe.

Now that the "alternative energy" industry is in shambles following one after another solar company bankruptcy, as the realization that at current prices, alternative energy business models are still just too unsustainable, no matter how much public equity is pumped into them, more "traditional" companies have resumed circling the drain. First, it was Patriot Coal, which finally succumbed to reality a month ago. Now it is the turn of ATP Oil and Gas, which filed Chapter 11 in Texas last night. And sure enough, in a world in which nobody is to blame, and everything is someone else's fault, the CEO promptly made a case that he is blameless and it is all Obama's fault. According to Forbes: "The founder and chairman of [ATP Paul Bulmahn] wants the world to know that the Obama Administration—and its illegal ban on deepwater drilling in the wake of the BP disaster—is to blame for the implosion of his company. Not him. “It is all directly attributable to what the government did to us,” he rails. “This Administration has gone out of its way to create problems for my company, the company that I formed from scratch.”

"It's defining a new category in real estate" is how the ultra-luxury apartment business is seen in New York. Goldman's Lloyd Blankfein and his buddies (including Sting) at 15 Central Park West are set to double their money as Bloomberg reports four condos in the Richie-Rich style extravaganza of a building have hit the market at asking prices at an average 192% over what owners paid in 2007 and 2008. The most expensive (a five-bedroom 35th floor pied-a-terre), topping Oaktree's Howard Mark's previous $52.5mm record purchase at 740 Park, is priced at a stunning $95mm. Testing the glass ceiling of a $100mm apartment is nothing though - as just like the rest of the nation's apparent house price recovery 'tight supply is supporting the current spate of eye-popping asking prices' which obviously will mean an influx of 'very expensive' inventory hitting the market in the coming years. For $95mm we wondered exactly what the apartment comes with? Perhaps $90mm of gold bars on the coffee-table? Perhaps Hugh Verrier and his wife Celia sum up the largesse perfectly: "we just thought of it as a living space". Indeed, Hugh, indeed.

Government Was Just Trying to "Foam the Runway" to Help Giant Banks

There's noting like a good rant with a fact or two thrown if for good measure. Damn, I luv this job:-)

Yes, There's A NEW Bubble It's Near Guaranteed To Pop Bringing Consumer Discretionary and Durable Sector Stocks Along With It!

I am sickened by the vast sums I see households squandering on hopelessly marginal "investments" in expensive higher education, healthcare and housing. I too am caught in the crony-capitalist/State cartel web of waste, skimming and fraud: we have paid tens of thousands of dollars on no-frills healthcare insurance (no eyewear, no dental, no meds, $50 co-pay) in the past decade, and received perhaps 3% of this sum in care. But to not have health insurance in America is to invite financial ruin should we suffer some serious illness. The same "must-have" argument supports the conventional wisdom about education: a young person "must have" a college degree if they hope to escape a lifetime of poverty. The issue isn't education per se, it's the ever-rising cost of an education that has arguably lost value in a global job market that faces a vast surplus of educated workers and a scarcity of secure, high-paying jobs. Simply put, minting 10,000 PhD chemists (for example) does not magically create 10,000 jobs for PhD chemists. Yes, education and healthcare are necessary, but cartels have leveraged this necessity into vast skimming operations that yield marginal returns even as their costs balloon without limit. Housing is also a necessity, but it does not follow that it is a high-yield investment. Rather, it has become a sinkhole for hard-earned, scarce cash.

With bank exec heads rolling, investigations hotting up globally, politicians fuming and investors exercising caution in bank shares, the LIBOR scandal is fueling massive speculation about the long-term ramifications for the industry. Indeed, after all that the banking industry has faced in the wake of the bursting of the housing bubble, an anonymously quoted bank CEO in a recent Economist story proclaimed "This is the banking industry’s tobacco moment." While there are more reasons not to draw parallels between the banking industry now and the tobacco industry of the mid-1990’s than there are similarities, we thought it would be interesting to review the impact on Tobacco during its "moment", and beyond.