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.’”
From the Bloomberg article: ‘In his Feb. 7 speech, Stein also discussed mortgage real estate investment trusts, which he said had “grown rapidly” by using low-cost, short-term financing to fund purchases of longer-term debt. Mortgage REITs’ holdings of government-backed home-loan securities rose to about $350 billion last year, from about $90 billion in 2008, according to Nomura Securities International estimates last month.’
Short term financing to buy long term mortgage debt. So these guys are betting rates won’t rise for 20-30 years? These are the sort of things people look back on and say, ‘how could they possibly have done this?’
It’s one thing for the central banks to provide loose money in an economic plunge. It’s another to do so when people are speculating at all time highs. Why do they do it? It’s always the same song: ‘According to Ben Bernanke, the pulling back on aggressive policy measures too soon would pose a real risk of damaging a still-fragile recovery’
According to me, if Bernanke pulls back on his loose money policies, the 2nd Great Depression will be unmasked.
‘if Bernanke pulls back on his loose money policies, the 2nd Great Depression will be unmasked’
Papering over economic problems isn’t a long term solution. Eventually, something will blow up. I know, posters here will say, ‘but the central banks can do this forever!’ Oh really? That’s to say the time value of money no longer exists. We already have people paying money to hand the federal government trillions of dollars via treasury bonds. Is that really logical?
I think this is the more likely case: ‘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.’
IMO, these dozen or more central banks around the world are making the depression deeper.
“That’s to say the time value of money no longer exists.”
But that’s precisely the illusion they’re attempting to create. They want everyone to believe that money is worthless. And you see this lie getting pimped here and everywhere as the inflation boogeyman. You, I, we know this is a suspension of reality. Ok… reality can be suspended from a certain place in time to another certain place in time but reality will resume.
Eventually, something will blow up. I know, posters here will say, ‘but the central banks can do this forever!’ Oh really?
Something will blow up but we don’t know exactly what will happen.
Brazil’s currency collapsed three times from 1986 to 2000 and they regrouped, and now have even less poverty than before the collapses.
The USA can regroup if we do the right thing after or before a collapse.
“even less poverty”
Brazil has gotten spoiled by the global credit expansion into thinking that it can be very irresponsible and there aren’t going to be any serious consequences. When the Brazil bubble pops, “less poverty” will go away also.
Or (woo-woo time here,) perhaps the IMF has decided to transition to a non-debt-based global economy? Certainly there will have to be significant forbearance of sovereign debt in the near future if some players (Africa, USA?) are to stay in the game.
Some countries’ interest payments approach their entire GPA, and Sharia law, for example, forbids charging interest on loans, so it’s not an unknown economic structure. Perhaps we’re looking at energy units as a standard of value, or intrinsic worth, or creative commons or….
Sorry, GDP.
I kinda liked that slip, actually.
Be concerned when a country’s interest rate moves to match the collective IQ.
“…perhaps the IMF has decided to transition to a non-debt-based global economy?”
Methinks not.
“Oh really? That’s to say the time value of money no longer exists.”
Last night at a church function, I explained to a friend how the laws of economics have been temporarily repealed.
The multi-trillion dollar question is that of for how long such a suspension of economic fundamentals can and will be sustained.
That is like asking how long a drinking binge may continue. There is no rule actually on how long a binge may continue. There is a rule though, that postponed sobriety is a more painful sobriety. The more postponed, the more painful.
“We already have people paying money to hand the federal government trillions of dollars via treasury bonds. Is that really logical?”
Buying Treasurys that yield close to 0 percent could be logical in a deflationary environment. For example, with 0 percent interest and 3 percent annual deflation, the Fisher equation* suggests the real return would be 3 percent.
The possibly illogical part regards why investors believe the Fed would ever allow deflation to happen, given their stated intention to not allow it.
* i = r + pi, where i = nominal interest rate, r = real interest rate and pi = inflation rate. A slight rearrangement of this equation shows
r = i - pi. In my example, i = 0% and pi = -3%, so r = 0% - (-3%) = 3%.
Fisher’s nickname was Captain Obvious.
That equation is a little more subtle than it appears. It is an approximation to
r = (1+i)/(1+pi) - 1
= [(1+i) - (1+pi)]/(1+pi)
= (i-pi)/(1+pi)
≈ i - pi, provided that pi is close to 0.
God forbid the Fed from hinting that they may one day have to exit their extraordinary balance sheet positions.
March 17, 2013, 8:02 a.m. EDT
Stocks risk harder drop if Fed hints at tapering
How Fed meeting could move stocks, bank shares, gold, Treasurys
By Carla Mozee, MarketWatch
LOS ANGELES (MarketWatch) — The Federal Reserve will meet this week, and with the consensus that it will keep its ultra-loose monetary policy in place at least through year’s end, a hint that stimulus measures will be tapered sooner than later could trigger a downshift in U.S. stocks.
Analysts say the central bank is wary of creating turmoil for markets, and expect the Fed to largely stick to its script this week, which would result in bond yields remaining in ranges and gold clinging to a recent downtrend.
“The Fed understands this is a touchy subject…and at some point, they have to put their foot off the gas. The key will be how they do it, how they signal it,” said Matthew Tuttle, chief investment officer at Tuttle Wealth Management LLC.
Talk that the Fed will possibly slow the pace of bond purchases has been steady since policy makers are set this week to debate the asset purchase program, and as investors have received a slate of improving economic data.
The rate-setting Federal Open Market Committee will gather for a two-day meeting that ends Wednesday. It is expected to keep interest rates near zero, where they’ve been since December 2008. It’s also expected to continue its quantitative easing program of buying $85 billion a month in Treasury and mortgage debt, “especially with sequester layoffs a reasonable consensus forecast,” analysts at Credit Suisse told clients late last week.
…
Is it just me, or does this comment seem patently crazy to others as well?
“These are the sort of things people look back on and say, ‘how could they have possibly done this?’”
It helps the decision making process to consider just whose money is it that is involved. If it is one’s own money that’s involved then one will make one type of decision, if it is other people’s money then a quite different decision just might be made.
Collect a pile of OPM and collect a bunch of fees for managing this pile of OPM and you will be set.
If it goes wrong? So what? Walk away from this pile of OPM and search out another pile.
P.T. Barnum had it right.
I got into a REIT a little while after the Fed initiated its $40 bn a month in QE3-funded MBS purchases, on the assumption that anything tied to real estate would go up for a while. So far it’s up around 17% over less than a year.
“Short term financing to buy long term mortgage debt. So these guys are betting rates won’t rise for 20-30 years? These are the sort of things people look back on and say, ‘how could they possibly have done this?’”
I doubt many are looking out that far ahead. Rather I would guess they are assuming they will have the opportunity to exit positions ahead of whenever the Fed gets around to unwinding it’s balance sheet in 2015 or later. The strategy is to unload your positions before everyone else does.
Doesn’t that smell like the S&L problem a couple decades or so ago?
“In Southern Nevada, for instance, about 50 percent of the resale activity is investors.”
Uh oh. What happens to Southern Nevada when these investors rotate out of RE and into something else, when they become net sellers instead of landlords?
What happens to the states of CA, FL, AZ, ID when investors(loosely invoked term) bail on what they already know are the melting ice cubes(rapidly depreciating houses) in the palm of their hand?
The last people I met who were buying AZ real estate were Canadian equity locusts, if I am using that term properly. They borrowed against their fake profits on the Canadian house to speculate in Phoenix real estate.
That group will be forced to bail 3 to 5 (or less) years after the Canada Bubble pops. Hardly anybody up there has a loan with a longer term than that, and there is no walking away with all your assets intact. It’s just one group, but I think maybe not insignificant.
when these investors rotate out of RE ??
I know several people who have purchased 2nd homes in Nevada that only go there a few weeks per year…The primary reason for the purchase is for future retirement taking along with them their California pension…
So they’ll be rotating out in 15-20 years.
So they’ll be rotating out in 15-20 years ??
Whats that suppose to mean….You could say that about every retiree in the country…We all have a termination date…
The question was “when investors bail”….My point is not all of what appears to be investors are in fact investors…They have another purpose…
The damn question relates to 30 million excess empty houses.
Investors or not, those houses are going back on the market when their owners head for the pearly gates.
You better believe it. 35 MILLION of them.
Funny about the loaded question by an HBBer presuming ALL asset classes will fall in tandem when interest rates rise. Someone please point to an example where more than three years all asset classes were losers. This includes treasuries, equities, investment real estate, and precious metals.
“Someone please point to an example where more than three years all asset classes were losers.”
One fact remains clear: There is NEVER a time when all asset classes are losers, as any asset price change is measured relative to some explicit or implied numeraire.
Japanese stocks and real estate were losers from roughly 1990 to the present. Of course, if you were lucky enough to be long in yen, or better yet, long-term Japanese bonds, it was a great run!
1987 was a year when U.S. long-term bonds crashed, followed by a 20% Black Monday stock market drop in October. I don’t know about gold at that time.
“There is NEVER a time when all asset classes are losers,…”
As soon as I typed that, I realized my error. If real production in the economy severely declines or societal organization disintegrates to a level where few have the means to acquire the goods and services which constitute real wealth, then the real value of all assets can go down the toilet in tandem.
Good examples of this are the aftermath of the French Revolution* or the present-day North Korean economy.
* Reading Les Miserables is a good source of insight.
Closely related comment from above:
In the Fed’s economic fantasy land, declines in real wealth due to malinvestment fostered by command-and-control central banking practices will never occur.
In reality, we have a hair-of-the-dog stimulated housing construction boom to add to the extant glut of white elephant McMansions and crowd out more productive uses of economic resources. But it’s all good, as the REIC is making money again…
‘an example where more than three years all asset classes were losers’
IMO the question regarding these things is, has there ever been a period when so many central banks pursued a zero rate (or near zero) policy for so many years? Have not these assets enjoyed a pretty good run?
I don’t know how this is going to play out. But the junk bond market alone ought to slap the Fed into taking action. They call it junk for a reason.
It would make T-bills a winning asset class if the Fed goes into action assuming by that you mean raise rates. Series I and EE savings bonds would look good. The last time Series I bonds had a fixed rate above 1% seemed way long ago. I wonder if we will ever see a fixed rate in them above 3% before the USSA defaults? I haven’t bought much savings bonds in the last four years, but bought like crazy from 2001 to 2006.
Read about a guy and his wife who put $240,000 into series I bonds up to 2002. If they are still sitting on them, I would not criticize them if they invested regularly into stocks and gold ever since.
It would make T-bills a winning asset class if the Fed goes into action assuming by that you mean raise rates
Rising interest rates might make T-bills more attractive to purchase, but it would not be good for those T-bills you already hold, which I believe was the original point.
True, but T-bills are still a good idea to ladder with for emergency cash. How you turn 52-week t-bill into a four week t-bill (sort of) but with higher yield…buy 52 week bills every four weeks. Keep buying the next 52 weeks when the previous ones matured.
“…Rising interest rates might make T-bills more attractive to purchase, but it would not be good for those T-bills you already hold, which I believe was the original point.”
Agreed. How better to address a rising trade imbalance with PRC (back around 2000, when it first became a public issue) than pursue a policy of debt devaluation via an “ownership society”?
The more the Fed pushes the QE3 pedal to the metal, the more junk bonds will get issued to lure in yield chasers.
But the junk bond market alone ought to slap the Fed into taking action. They call it junk for a reason.
Unless, of course, the Fed has at long last achieved the alchemists’ dream: that of turning junk into gold.
“slap the Fed into taking action…”
Has there ever been a time when there was such overcapacity in the production of everything around the entire globe? There aren’t any seriously sustainable investments in growth to make in a world so overextended. What’s not a junk bond at this time? It doesn’t even look smart to invest in government growth.
“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?”
My 83-year-old dad asked me again today for what to do with cash he has coming available from maturing investments. My advice was something along the lines of the above: Would you rather gamble in stocks and potentially lose a lot of money, or play it safe in CDs that return nothing, or gamble in long-term Treasurys to get a low return in the near term and a large capital loss when the Fed unwinds its balance sheet?
Of course the answer is some of each asset class, and rebalance. If I was 100% in equities after 2001 I would probably be a nervous wreck by now, with the roller coaster rides. Yet my net worth would be higher. With gold my net worth now would be highest.
A morning swimmer I know has his mom in assisted care in Los Angeles. Her care costs $100,000 per year. Her assets from selling the house are $1,000,000. My friend tells me he cannot keep it in cash. Suppose she lives longer than ten years? I would guess a Vanguard global index fund would be the thing to put 90% of the money in. A gold ETF for ten percent. I would prefer 60% of the stock fund and 30% of laddered TIPs.
I haven’t been able to get comfortable with TIPs…I don’t trust how they actually do the math.
I think I’d be more interested in the floating rate bond issuances that they are considering making for the first time.
That question was a frustrated response to several separate articles and posts on HBB predicting separate craaaaters in all of those investment classes. Everybody has a favorite asset of doooom, nobody has an asset of optimism.
On Friday I did some rebalancing of my own, doing some profit-taking, I guess. Thank the PPT for forestalling the craaater long enough to transact.
I did something fairly counter to my own intuition last week, which was to reallocate some money into an asset class I have steadfastly avoided and told others to avoid in recent years: long-term bonds.
At this point, the bandwagon move into stocks seems way too extreme to be sustainable. I’m planning to dollar-cost average into long-term bonds over the next few months, then sell my “dips buying” allocation after the next inevitable 10%+ correction in stock prices.
I will let y’all know how this strategy works out; I realize there is a risk of losing money if the Fed loses control of its long-term interest rate suppression policy, but I frankly have quite a bit of confidence this will not happen, based on recent experience.
I intend to eventually move from 52 week T-bills to two year notes. It appears two year notes are issued monthly, while T-bills are issued every four weeks. I think in another eighteen months or so I will be moving into those durations. It would be nice to move into five year notes in time. About 32 percent of my assets are in cash or government securities. Having securities maturing every few weeks is a nice thing. I like the idea of having contrarian assets relative to my physical precious metals. My precious metals are basically my “cash under the mattress” the government does not know about.
Nice to reminisce about 5%-yielding five year notes though! I have a 5% ten year note bought several years ago.
Unlike other anarcho capitalists and voluntaryists, I do not consider politics in regard to my personal finance planning. I see a case for being into my state’s municipal bonds, for buying U.S. treasuries as well. Only fools invest politically. I am not economically powerful enough to counter the trends caused by central planning. So playing their game is what will help my assets grow.
“I am not economically powerful enough to counter the trends caused by central planning. So playing their game is what will help my assets grow.”
Totally agreed. Don’t fight the Fed!
“Of course the answer is some of each asset class, and rebalance.”
That’s basically what I gave him, after I finished painting the bleak picture of the current investing landscape.
CRATERRRRRRRRRRRRRR!!!!!!
“We Think Bubble Activities Are Normal”
Was at the gym yesterday for a short workout, when the braggadocious conversation of a couple of nearby loud mouths caught my attention. First they were bragging about their big game hunting exploits; one of the guys claimed he shot a moose and had to carry it for some distance to get it back to his vehicle.
Next the subject switched over the current state of the SD real estate market. Mr Moose Hunter recently put an offer on a house somewhere north of $500K and was outbid by $100K. He was clearly excited over how crazy the market is. I couldn’t resist butting into their conversation to question whether they thought bankers holding inventory off the market might have something to do with the perceived inventory shortage and crazy prices. Mr Moose Hunter gave thoughtful consideration to my suggestion, and acknowledged that shadow inventory was somewhat of an unknown. Then he added something to the effect of, “If this turns out to be a dead cat bounce, lots of people are going to get burned.”
I left the conversation wondering about that “dead cat bounce” comment. I have frequently heard that term over the past several decades in the context of stock market corrections; an epic example is the day after Black Monday, October 19, 1987, when Alan Greenspan “supplied liquidity” to the market, which made lots of money for those who were sufficiently prescient to go long in the wake of the 22.6% one-day price crash. The dead cat bounces created by the Greenspan-Bernanke put have created positive wealth effects over the years for lots of Wall Street gamblers who would otherwise have lost their shirts due to loosing bets.
Until recently, I never heard “dead cat bounce” applied to residential real estate. In fact, I thought perhaps I had introduced the term here on the HBB, as I have long maintained that the current price rebound in the U.S. market is a slow-motion dead-cat bounce. I expect this to eventually give way to a long-term cratering in U.S. residential real estate in the wake of the 2007 U.S. housing bubble collapse as denial gives way to reconciliation with dismal long-term economic fundamentals the U.S. economy faces over the next few decades.
I can’t overstate my surprise on overhearing the term “dead cat bounce” uttered in casual conversation by a moose-hunting San Diego real estate mania investor.
‘claimed he shot a moose and had to carry it for some distance’
Only if it was a baby moose:
http://www.alaskanmoosemovie.com/yahoo_site_admin/assets/images/dad_with_moose.121163231_std.jpg
“Only if it was a baby moose:”
He was a big guy, but the comment nonetheless struck me as pure BS — a great warmup for the ensuing real estate discussion.
If he was a real hunter he may have meant that he quartered it and carried it in quarters.
Wasn’t the “dead cat bounce” in RE real estate in 2010?
Liar,
That is what you want to believe but the truth is something entirely different.
“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.
I don’t understand this statement, but believe that if it is true, this could be the engine that unwinds the economy into D2.
Loose money is feeding stocks, bonds, housing, gov debt (bubbles), and large company profits with billions of debt.
Their interest savings are most of their current profits.
Large corporate trading profits are being severly masked with this laddered almost free and rising balance sheet debt. (We may even be approaching the same quantum of interest because of the volume of new debt being taken on.)
They are keeping their cash reserves, paying huge capital taxes thereon, for the day when acquisitions can be made.
Instead I think that cash will be used for survival purposes unless they quickly realize their phantom profits can evaporate overnight with only a decision from Bernanke.
We have to get back to the basics and free money isn’t helping. It is facilitating poor management practises just like we are getting from the government (Canada included).
‘I don’t understand this statement’
Here’s an example from above:
‘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.’
And this:
‘In the case of housing, misallocation of resources arises from people’s perception of wealth from strong home price gains. Home owners perceive the gains as real wealth and do not adjust for inflationary effects. They spend these gains on real goods at a faster rate than their real wealth gains, thereby increasing debt and lowering savings. The effect may not be apparent on a case-by-case basis, but when viewing statistics on a national scale, we see that savings as a percentage of income has gone to zero and that we have a debt bubble that is far more ominous than the asset bubbles we have recently experienced.’
‘the path our government will take is predictable with a high degree of certainty. As a nation of debtors, any deflationary cycle will be unpalatable. Deflation will cause our debts to grow in real terms, causing great distress to us debtors, and therefore our government has fought deflation tooth & nail each time it has been a threat. Those battles have put us in a vicious circle: each deflation-fighting bout has only spurred greater misallocations, which in turn have only made deflation a greater threat.’
‘In a healthy economy… that is one in which production, not consumption, is glorified and in which savings, not debt, is prominent… deflation is a healthy and natural part of the economic cycle. Deflation cleans the less efficient participants out of the economy (they are usually the ones burdened by debt), and increases the value of savings. The combination of these two effects, frees capital to be used for new production, which spurs economic expansion and wealth creation’
http://www.safehaven.com/article/4187/misallocation-of-resources-and-real-money
‘The effect may not be apparent on a case-by-case basis, but when viewing statistics on a national scale, we see that savings as a percentage of income has gone to zero and that we have a debt bubble that is far more ominous than the asset bubbles we have recently experienced.’
The Fed’s ongoing War on Savers does not help the situation one iota.
“I don’t understand this statement,…”
By lifting all asset prices in tandem with a tsunami tide of liquidity, loose money swamps out the underlying fundamental signal that differentiates between investments which are likely to generate real wealth versus likely loosers. The strategy shifts from picking investments which represent real value to picking up nickels in front of steam rollers and hoping to cash out before the steamroller flattens you.
Worst of all:
‘each deflation-fighting bout has only spurred greater misallocations’
Economics
Why Japan should not fight deflation
By Dr Frank Shostak, on 29 January 13
On January 22, 2013 policy makers of the Bank of Japan (BOJ) voted for a 2% inflation target, to be achieved “at the earliest possible time”, with a planned 13 trillion yen a month ($145 billion) in extra securities buying. The action came after months of intense pressure on the BOJ from the country’s new Prime Minister, Shinzo Abe, to take more aggressive action to boost the economy.
Mr. Abe maintains that deflation will undermine any efforts to grow the economy and the government and the central bank must act together to get prices rising again.
The yearly rate of growth of the consumer price index (CPI) stood at minus 0.1% in December against minus 0.2% in the previous month. This was the 7th consecutive monthly decline.
Furthermore, the yearly rate of growth of industrial production fell to minus 5.5% in November from minus 4.5% in the previous month.
Most economists are in agreement with Prime Minister Abe that falling prices, labeled as deflation, are a major threat to Japanese economy. They are in agreement with Prime Minister Abe that the way out of the economic slump is for the central Bank of Japan (BOJ) to aggressively increase the money supply. This, it is held, will raise inflationary expectations and lift people’s willingness to spend, which in turn will set an economic recovery in motion. In short, the key to economic recovery is lifting the demand for goods and services by arresting the fall in prices.
However, many experts were disappointed by the BOJ’s latest plans because the planned expanded asset purchases will not begin until 2014.
Also, many of the securities the Bank of Japan will be purchasing are in the form of short-term debt that will quickly mature hence experts hold that the yearly additional purchase of assets will equal less than $150 billion per year. By contrast, experts argue, the Fed’s balance sheet is expected to expand by a trillion dollars in 2013.
Is a fall in prices bad news?
Contrary to conventional wisdom, there is nothing wrong with declining prices. In fact, it is the essential characteristic of a free-market economy to select as money those commodities the purchasing power of which is growing over time. What signifies an industrial market economy under commodity money such as gold is that the prices of goods follow a declining trend. According to Salerno,
In a free market, the rising purchasing power of money, i.e., declining prices, is the mechanism that makes the great variety of goods produced accessible to many people.
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Ben
I agree with your points, but I was looking for that micro that hasn’t been exploited yet - and I don’t know what it is.
Is it poor corporate management not obeying the basics ?
Most of these shares being bought back are indirectly using Fed cheese. Most dividends too. Sure helps stock prices for the biggies, but another form of borrowing against the future. Also helps their personal reward.
Is it poor marketing?
North America produces excellent long term products. Others short term but at less cost - but more over time. Why can’t we communicate this effectively - we should be able to repower our factories on this information.
Is it because gravy, like cream, is rising to the top ?
Gravy is being used to power the big corps while the smaller ones are seeing their share values plummet even in a rising bubble - and if taken on their own are approaching depression status. If we soon don’t repower these small engines many more will go under. Their capacity utilization rates are almost okay but their profitability sucks which makes capital replacement impossible.
Bankers, politicians, fed - and senior corporate management - are at fault for this mess. They made decisions for the moment that encouraged waste which lacked long term thinking but enhanced their status and pockets.
They are addicts that don’t know how to throw off their bad habit.
Check out the bubble price and sale action on this Poway home. In short, it sold on 9/25/2008 for $2,260,000, or $690,000 less than it initially listed for on 4/15/2007. It came back on the market last August at $2,495,000, where it sits and sits and sits to date with no sale. With the sequester hammering government contract funding which supports high-end Poway housing, good luck to these sellers at getting out for more than they paid in 2008!
13411 Summit Cir, Poway, CA 92064
For Sale: $2,495,000
Est. Mortgage:
$8,999/mo
Bedrooms: 6 beds
Bathrooms: 5.5 baths
Single Family: 9,126 sq ft
Lot: 172,497 sq ft
Year Built: 1999
Last Sold: Sep 2008 for $2,260,000
Heating Type: Contact for details
Description
Private estate at the top of Green Valley Summit with sweeping panoramic views. Dramatic entry foyer with soaring ceilings and double staircase. Hardwood floors, decorator paint, beautiful fixtures and finishes thru-out. Gourmet kitchen with custom cabinets, granite counters, large island with sink…More
Zestimates
Value Range 30-day change $/sqft Last updated
Zestimate What’s this? $2,212,178 $1.33M – $2.43M -$2,178 $242 03/14/2013
Rent Zestimate What’s this? $9,426/mo $6.7K – $17K/mo -$40 $1.03 03/11/2013
Owner Estimate
Market Guide
Zillow predicts 92064 home values will increase 5.6% next year, compared to a 8.7% rise for Poway as a whole.
Price History
Date Description Price Change $/sqft Source
02/01/2013 Listed for sale $2,495,000 – $273 Coldwell Banker Residential Brokerage - Rancho Bernardo
12/05/2012 Listing removed $2,495,000 – $273 Coldwell Banker Residential Brokerage - Rancho Bernardo
08/09/2012 Listed for sale $2,495,000 10.4% $273 Coldwell Banker Residential Brokerage - Rancho Bernardo
09/25/2008 Sold $2,260,000 -7.8% $247 Public Record
08/22/2008 Listing removed $2,449,900 – $268 NRT California
08/06/2008 Price change $2,449,900 -18.2% $268 NRT California
06/19/2008 Listed for sale $2,995,000 – $328 NRT California
02/28/2008 Listing removed $2,995,000 – $328 RealBird
02/28/2008 Price change $2,995,000 1.5% $328 RealBird
04/15/2007 Listed for sale $2,950,000 – $323 RealBird
The home was built in 1999, but the used home sales people are hiding the original sale price because they don’t want you to know how much money the original greater fool lost by purchasing this falling knife.
It all depends on your point of view. What’s happening here is ridiculous. This came back on the market after three months with a $60K increase added to the previous $60K increase. These are old homes in a sketchy neighborhood.
http://www.ziprealty.com/property/1876-ROCKLEDGE-DR-LAS-VEGAS-NV-89119/42770430/detail
Price history:
Sept. 2012: $130K
Dec. 2012: $190K
Mar. 2013: $250K (list)
http://www.zillow.com/homedetails/1876-Rockledge-Dr-Las-Vegas-NV-89119/7097399_zpid/
And another flipper may buy it. Some would say, ‘wow, up 120k in less than a year!’ It’ll end in tears.
As my 92 year old father says, “there won’t be anything left but the cryin’.”
Would you overpay the Zestimate™ by $100K for the privilege of joining the San Diego County Ownership Society?
16031 Big Springs Way, San Diego, CA 92127
For Sale: $550,000
Zestimate®: $445,581
Est. Mortgage:
$1,982/mo
See current rates on Zillow
Bedrooms:4 beds
Bathrooms:3 baths
Multi Family:1,835 sq ft
Lot:4,826 sq ft
Year Built:1980
Last Sold: Feb 1988 for $151,000
Heating Type: Forced air
Zestimates
Value Range 30-day change $/sqft Last updated
Zestimate What’s this? $445,581 $352K – $495K +$10,427 $242 03/14/2013
Rent Zestimate What’s this? $2,283/mo $1.6K – $3K/mo -$37 $1.24 03/11/2013
Price History
Date Description Price Change $/sqft Source
03/08/2013 Listed for sale $550,000 264% $299 Keller Williams Realty, San Diego North Inland
02/23/1988 Sold $151,000 – $82 Public Record
Check out this one:
- Sold for $244K in 1999
- Resold for $460K in 2003
- Listed for $500K in 2011, eventually sold for $433K in 2012
- Now relisted and marketed as a “short sale” but Zilldo™ says it is worth $457K, $24K above last year’s sale price
MY HEAD IS SPINNING!
16030 Big Springs Way, San Diego, CA 92127
Sold on 1/27/12: $433,000
Zestimate®: $457,101
Est. Mortgage:
$1,560/mo
Bedrooms: 3 beds
Bathrooms: 3 baths
Single Family: 1,775 sq ft
Lot: 3,920 sq ft
Year Built: 1981
Last Sold: Jan 2012 for $433,000
Heating Type: Contact for details
Price reduced! Now a short sale. Don’t miss the opportunity to buy this highly upgraded home. This pristine & inviting High Country West twin home features 3BD, 2.5BA & all the privacy of a detached home. Plus gorgeous sunset views from the private, tropical and expertly manicured backyard.
Zestimates
Value Range 30-day change $/sqft Last updated
Zestimate What’s this? $457,101 $361K – $517K +$6,946 $257 03/14/2013
Rent Zestimate What’s this? $2,421/mo $2K – $2.7K/mo -$22 $1.36 03/11/2013
Price History
Date Description Price Change $/sqft Source
01/27/2012 Sold $433,000 -3.8% $243 Public Record
01/15/2012 Listing removed $449,888 – $253 RE/MAX Ranch & Beach
10/10/2011 Price change $449,888 -10.0% $253 RE/MAX RANCH & BEACH
08/23/2011 Listed for sale $499,888 – $281 RE/MAX RANCH & BEACH
08/18/2011 Listed for sale $499,888 8.7% $281 REMAX Ranch & Beach
12/11/2003 Sold $460,000 55.9% $259 Public Record
08/01/2001 Sold $295,000 20.9% $166 Public Record
08/26/1999 Sold $244,000 – $137 Public Record
“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.’”
A supply shortage appears to pose no problem in the LV market. But what about demand? Who is going to take the inflated-price homes off the hands of the latest wave of investors?
I just don’t think you made it past that statement “What are you talking about? Our whole system is based on free money because you have money.”
That is the problem to me - a huge problem. Our capitalist landlord system is all about making money because you’ve already got it (and the labor class suffers for it, of course). So we say “Go create something useful” when really you’re 99% screwed unless you are a wealthy capitalist landlord