March 17, 2013

We Think Bubble Activities Are Normal

A reader asks some questions. “Is U.S. dollar inflation about to take flight? Should we take comfort in expert assurances to not worry about a potential stock market crash? Are you adequately hedged against a bond bubble collapse? It seems like we haven’t run out of bear food just yet. In fact, I’m quite concerned about weight gain potential at this point.”

One said, “So let me understand this correctly. Stocks are poised for a fall. The bond bubble is poised to painfully pop. The Precious isn’t moving much. Cash is being eaten up by the price hikes in ‘needs.’ Treasuries are at the whim of Congress and/or the Chinese. Real estate is a risky proprosition at best. WTF is the retail investor supposed to do?”

A reply, “Start a business that provides something useful instead of expecting free money simply because you have money?”

One said, “What are you talking about? Our whole system is based on free money because you have money.”

From Bloomberg. “Federal Reserve Chairman Ben S. Bernanke minimized concerns that the central bank’s easy monetary policy has spawned economically-risky asset bubbles in comments at a meeting with dealers and investors this month, according to three people with knowledge of the discussions. The Fed chairman brushed off the risks of asset bubbles in response to a presentation on the subject from the group, one person said. Among the concerns raised, according to this person, were rising farmland prices and the growth of mortgage real estate investment trusts. Falling yields on speculative- grade bonds also were mentioned as a potential concern, two people said.”

“‘There’s a lot of disagreement about what role monetary policy plays in creating asset bubbles,’ Bernanke said on Jan. 14 at the University of Michigan’s Gerald R. Ford School of Public Policy in Ann Arbor. ‘It is not a settled issue. Our attitude is that we need to be open-minded about it and to pay close attention to what’s happening,’ he added. ‘And to the extent that we can identify problems, you know we need to address that.’”

“The ‘first line of defense’ if bubbles emerge ‘needs to be regulatory and supervisory’ actions rather than changes in monetary policy, according to Bernanke.”

From CNBC. “Struggling companies that otherwise might not be able to stay afloat have found a friend in the Federal Reserve. The central bank’s cheap-money policies have allowed borderline companies to get low-cost financing thanks to investors who are thirsting for yield and buying risky bonds as the Fed keeps its target funds rate near zero.”

“Globally, high-yield bond issuance stands at a historic mark of $108.5 billion, buoyed by central banks around the world mimicking Fed policy and cutting rates at breakneck pace. Spreads between junk bond yields and their benchmark measuring sticks are at the lowest since 2007. ‘Everyone is running out there to raise debt,’ said Peter Cardillo, chief market economist at Rockwell Global Capital. ‘Of course the more speculative situations are rising.’”

“‘We’re keeping companies afloat artificially by the Federal Reserve’s cheap money,’ said economic strategist Michael Pento, head of Pento Portfolio Strategies. ‘The market isn’t being supported by real viable fundamentals.’”

“Stock market bulls use corporate earnings to bolster their case that equities are cheap, but those profits are likely inflated by the influx of debt used to keep companies going. ‘People are saying the economy’s doing great,’ Pento said. ‘They’re ignoring the fact that the ‘E’ in P/E (price to earnings) ratio is artificial. What would the earnings be if the real estate market wasn’t being supported by the Fed, if they didn’t have access to cheap capital, if the government wasn’t able to float this consumption bubble by sending transfer payments out? All of that is engineered by the Federal Reserve and government deficit spending.’”

From Bullion Vault. “According to Ben Bernanke, the Chairman of the Federal Reserve, the pulling back on aggressive policy measures too soon would pose a real risk of damaging a still-fragile recovery, writes Dr Frank Shostak for the Cobden Centre. The Fed Chief is of the view that for the purposes of financial stability a continuation of the central bank’s aggressive stimulus conducted through purchases of Treasury and mortgage securities remains the optimal approach.”

“But is it true that a loose monetary stance provides support to economic activity? Furthermore, if this is the case then why after such an aggressive lowering of interest rates and massive expansion of the Fed’s balance sheet does the economic recovery remain fragile? Surely if loose monetary policy could revive economic activity then a very loose policy should produce very strong so called economic growth – so why hasn’t it happen this way?”

“Contrary to popular thinking, loose monetary policy, which leads to a misallocation of resources, weakens the economy’s ability to generate final goods and services, i.e. real wealth. This means that loose monetary policy not only cannot provide support to the economy but on the contrary undermines the foundations for economic growth.”

“The so-called recovery that Bernanke and most commentators are referring to is nothing more than the revival of various non-productive or bubble activities, which in a true free market environment wouldn’t emerge in the first place. These bubble activities are funded by means of loose monetary policies, which divert real wealth from wealth generating activities thereby weakening the process of wealth generation.”

The Manteca Bulletin. “The approach of spring is bringing with it a sound not heard for seven years - large earth moving equipment prepping land for new Manteca neighborhoods. New home building has started off 2013 strong in Manteca. The city issued permits to build 33 new single family homes in January. At that rate, Manteca could be pushing 400 new houses by year’s end.”

“At the start of July, the city had approved projects in one form or another that would add 18,477 housing units to the city or 80.3 percent more homes than currently exist. If all of the housing units are built based on current yields per household Manteca’s population would go from 70,000 today to almost 132,000.”

From Nevada Business. “With increasing sales and home values, Nevada’s housing market shows signs of recovery and strength not seen in recent years. However, against this growth backdrop, experts said the market is plagued by a significant problem—insufficient inventory. Sales throughout The Silver State reflect the great demand for homes. This is due to ‘reasonable’ prices and ‘drop dead low’ interest rates,’ said Dave Tina, president of the Greater Las Vegas Association of Realtors. ‘What’s the downside? There really isn’t any,’ Tina added.”

“Behind the sales are first-home buyers and investors. In Southern Nevada, for instance, about 50 percent of the resale activity is investors, said Dennis Smith, president of Home Builders Research Inc. What is helping inventory, Tina said, are investors flipping their houses and new construction coming online. ‘If the builders weren’t building, we’d be in worse trouble,’ he added.”

“In Southern Nevada, 5,900 new home permits were issued for 2012, a 58 percent increase over 2011, Smith said. Builders have purchased every subdivided lot in Las Vegas, which means if the land has been plotted, they can start construction immediately. New homes, for instance, are going up in Summerlin, Green Valley and Lake Las Vegas. ‘Everyone is building throughout the valley now,’ Tina said. ‘All the builders are building everything they can.’”

The Daily Ticker. “Economist Steve Keen tells The Daily Ticker the U.S. stock market is a giant bubble. But the key factor inflating it may not be what you think, according to the economist (i.e. he’s not pointing fingers at the Fed…at least not directly). Keen has his eye on margin debt. This is the money people borrow from their stockbrokers to expand their holdings of shares. Keen says the ratio is now 70%, meaning with $300,000 you can borrow $1 million worth of shares.”

“He sees what he believes is a stock market bubble bursting in the U.S. the way Japan’s did in the 1990s. The bubble popped in late 1989, and the Nikkei fell 63% in less than three years, but didn’t hit bottom until 2003. ‘I think we’re in a long slow bleed, much longer and slower than the Japanese stock market crash, but there’s similar dynamics,’ he predicts.”

“‘In 500 years time people will look back and see this as the biggest debt-financed bubble in human history and ask, ‘why didn’t we realize it,’ Keen says. ‘But we think it’s normal.’”

Bits Bucket for March 17, 2013

Post off-topic ideas, links, and Craigslist finds here.