Housing Prices

If a third of all US homes cannot trade due to being underwater or not sufficiently above water to clear closing costs, then the US economy is going to suffer

The Status Quo views real estate bubbles as a "good thing": as home prices rise, the homeowner's collateral (equity) rises, creating both a psychological "wealth effect" (now that we're richer, we can afford to borrow and blow more money) and a temporary (and thus phantom) increase in collateral that will support more household debt. What few seem to realize (or discuss) is how rising home prices push rents higher.This is an entirely pernicious effect, as renters aren't getting any more "home" for the higher rent--they're paying more money for the same shelter. Central Planning pushing housing prices higher is not win-win--it is lose-lose-lose.

As 11.3 million Americans spend more than half their income on rent, a record increase of 28% in four years, increasingly more are faced with the core "New normal recovery" choice: “We either eat, or we pay rent.”  Welcome to the Blackstone recovery...

Most are aware of Alan Greenspan’s 1966 essay - written when he was an acolyte of Ayn Rand - in which he sang the praises of the gold standard. Obviously, that early work would later prove awkward for Greenspan, as he held the reins of the fiat money engine known as the Federal Reserve. However, a reporter for Barron's unearthed a copy of Greenspan’s NYU doctoral dissertation, which he took great pains to bury, showing that when his professional ambition wasn’t involved, Greenspan could understand perfectly well  (a) the virtues of a commodity money and (b) the dangers of a housing bubble. If the Austrians are right in laying the blame for the housing bubble on Greenspan’s loose monetary policy following the dot-com crash, then Greenspan can’t plead ignorance: He knew what he was doing.

In 1970, when 11% of adult Americans had bachelor's degrees or more, degree holders were viewed as the nation's best and brightest. Today, with over 30% with degrees, as the WSJ notes, a significant portion of college graduates are similar to the average American - not demonstrably smarter or more disciplined. Furthermore, declining academic standards and grade inflation add to employers' perceptions that college degrees say little about job readiness. As we noted recently, change is coming as more and more realize college may not be worth it. Educational entrepreneurship offers hope that creative destruction is coming to higher education. The cleansing would be good for a higher education system still tied to its medieval origins - and for the students it's robbing.

Most economic observers are predicting that 2014 will be the year in which the United States finally shrugs off the persistent malaise of the Great Recession. In contrast, we believe that the episode has, for the moment, established supreme confidence in the powers of monetary policy to keep the economy afloat and to keep a floor under asset prices, even in the worst of circumstances. The shift in sentiment can only be explained by the growing acceptance of monetary policy as the magic elixir that Keynesians have always claimed it to be. This blind faith has prevented investors from seeing the obvious economic crises that may lay ahead. Based on nothing but pure optimism, the market believes that the Fed can somehow contract its $4 trillion balance sheet without pushing up rates to the point where asset prices are threatened, or where debt service costs become too big a burden for debtors to bear. The more likely truth is that this widespread mistake will allow us to drift into the next crisis.

At this point, the problem of hitting limits in a finite world has morphed into primarily a financial problem. Governments are particularly affected. They find that they need to borrow increasing amounts of money to provide promised services to their citizens. Debt is a huge problem, both for governments and for individual citizens. Interest rates need to stay very low, in order for the current system to “stick together.” Governments are either unaware of the true nature of their problems, or are doing everything they can to hide the true situation from their constituents. The public has been placated by all kinds of misleading stories about how oil from shale will be the solution. Quantitative Easing (used by governments to lower interest rates) has temporarily allowed stock markets to soar, and allowed interest rates to stay quite low. So superficially, everything looks great. The question is how long all of this will last?

The start of 2014 was less than exuberant as the markets turned in the steepest loss for the first trading day of a new year since 2008.  What does this mean for the rest of 2014?  Likely not much.  The old Wall Street axioms of "the first 5 trading days" and "so goes January, so goes the year" tend to be statistically more important.  However, it did get me thinking about the new year from a more macro perspective.  This weekend's "Things To Ponder" is a collection of ideas to get you to do the same.

As usual, in 2013, sticking to facts was a mistake in a world fueled by misinformation, propaganda, delusion and wishful thinking. Those in power have successfully held off the unavoidable collapse which will be brought about by their ravenous unbridled greed, and blatant disregard for the rule of law, the U.S. Constitution and rights and liberties of the American people.

"There is no disputing the facts. The economic situation is deteriorating for the average American, the mood of the country is darkening, and the world is awash in debt and turmoil. Every country is attempting to print their way to renewed prosperity. No one wins a race to the bottom. The oligarchs have chosen a path of currency debasement, propping up insolvent banks, propaganda and impoverishing the masses as their preferred course. They attempt to keep the masses distracted with political theater, gun control vitriol, reality TV and iGadgets. What can be said about a society where 10% of the population follows Justin Bieber and Lady Gaga on Twitter and where 50% think the National Debt is a monument in Washington D.C. The country is controlled by evil sycophants, intellectually dishonest toadies and blood sucking leeches. Their lies and deception have held sway for the last four years, but they have only delayed the final collapse of a boom brought about by credit expansion. They will not reverse course and believe their intellectual superiority will allow them to retain their control after the collapse.”

For the New Year, it seems that SOH, that last true refuge for pensive brooding bears, has been overrun with pompous bulls peddling & pumping a new 21st century high tech plateau of permanent prosperity, that would make even Irving Fisher's rose twittering cheeks blush.  I wonder if old Irving would have Linked himself In or posted his rip roaring 20s rosy market views on a pretty pink Facebook page?

It is time to crank up the Looney Tunes theme song because Wall Street has officially entered crazytown territory.  Stocks just keep going higher and higher, and at this point what is happening in the stock market does not bear any resemblance to what is going on in the overall economy whatsoever.  So how long can this irrational state of affairs possibly continue?  Stocks seem to go up no matter what happens.  If there is good news, stocks go up.  If there is bad news, stocks go up.  If there is no news, stocks go up.  On Thursday, the day after Christmas, the Dow was up another 122 points to another new all-time record high.  In fact, the Dow has had an astonishing 50 record high closes this year.  This reminds me of the kind of euphoria that we witnessed during the peak of the housing bubble.  At the time, housing prices just kept going higher and higher and everyone rushed to buy before they were "priced out of the market".  But we all know how that ended, and this stock market bubble is headed for a similar ending.

From the first headline to the last, the following brief month-by-month summary of the year shows just how far markets and global happenings have come...

Although the probability of any one of the predictions coming true is low, they are deduced strategically by Saxo Bank analysts based on a feasible - if unlikely - series of market and political events. As Saxo's chief economist notes, "This isn't meant to be a pessimistic outlook. This is about critical events that could lead to change - hopefully for the better. After all, looking back through history, all changes, good or bad, are made after moments of crisis after a comprehensive failure of the old way of doing things. As things are now, global wealth and income distribution remain hugely lopsided which also has to mean that significant change is more likely than ever due to unsustainable imbalances. 2014 could and should be the year in which a mandate for change not only becomes necessary, but is also implemented."

The financial crisis is surely a touchy subject at the Fed, where the biggest PR challenge is “bubble blowing” criticism from those of us who aren’t on the payroll (directly or indirectly). But Foote, Gerardi and Willen are, of course, on the payroll. They tell us there’s little else that can be said about the origins of the crisis, because any “honest economist” will admit to not understanding bubbles... " Unfortunately, the study of bubbles is too young to provide much guidance on this point. For now, we have no choice but to plead ignorance, and we believe that all honest economists should do the same." This smells to us like a strategy of gently acknowledging criticism (of the Fed’s interest rate policies), while at the same time attempting to neutralize it.

While the BLS may be searching far and wide for evidence of hedonically-adjusted "core" inflation, and not finding it anywhere (expect in assets, housing prices, food and energy, but apparently all America buys every day are LCD TVs and iPads), one place where not even the BLS can hide what is clear and present "inflation" is college grade point averages, and especially grades for humanities courses, where as the saying goes pretty much everyone is "above average." And, as JPM adds, "Soon, colleges will have to “turn the dial up to 11” or else everyone will have the maximum GPA." Well, in a society where the push is to make everyone equal, it would only be fair for everyone to get the exact same perfect grades...