December 1, 2013

Having Your Cake And Eating It Too

Readers suggested a topic on denial. “Has anyone else noticed the bubble in ‘No Bubble Here’ stories in the MSM financial press ever since Yellen’s confirmation hearing? Which incipient national housing bubble collapse is destined to wreak the most economic havoc on the home country and global economies? Norway’s? China’s? Canada’s? Other?”

A reply, “I think it’s easy to not see a bubble in stocks because frankly stocks should have already reached this valuation or higher. But that would be based on real growth, having taken our medicine long ago. Since those things didn’t happen but should have, I think it’s easier to convince people that stocks should really be valued where they are. Since they have no understanding of what is the cart and what is the horse anyway…”

From Macleans. “Bank of England Governor Mark Carney is concerned about the ‘prospective evolution of the housing market.’ That’s the rhetorical flourish central bankers use to say that they think they’re sitting on something that’s starting to resemble a bubble. The governor, then, is back to his old task of trying to let the air out of the bubble gradually, without triggering a pop and without raising interest rates.”

“But this isn’t only Mark Carney’s curse. Central bankers and finance ministers in Norway, Israel, Switzerland and New Zealand, to cite a few, are trying to pull off the same trick. Their efforts are testing one of the big lessons the West thought it had learned from the financial crisis: That you can use regulations alone to tame bubbles.”

“That lesson came from Asia. Well before the financial crisis, Hong Kong, South Korea and others had started regulating and supervising the financial system as a whole, rather than focusing on single banks and financial institutions. After the collapse of Lehman Brothers, cold-sweating Western eggheads started to pay attention. Low interest rates had helped fuel the disastrous U.S. housing bubble, but the midst of the worst recession in half a century was no time to raise them. How to keep monetary policy loose without fuelling new bubbles and borrowing binges? By using regulations to toughen financial conditions in certain trouble areas even as low interest rates kept propping up the rest of the economy.”

“With growth still sluggish, though, no one is eager to hike up interest rates, which would raise borrowing costs for everyone, not just homebuyers, and hurt exporters by tilting up the exchange rate. So we’re all trying the alternate approach. So far, though, this seems to have simply slowed the pace of housing prices and household debt growth. Both are still rising. Around the world, similar maneuvers have produced similarly iffy results.”

“For now, the jury on whether tighter rules are really a substitute for tighter monetary policy is still out. Managing a prolonged period of low interest rates without creating dangerous asset bubbles would be the equivalent of the proverbial having your cake and eating it too. As we all know, it doesn’t work in the world of physics. Whether it will in the world of finance remains to be seen.”

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Comment by Whac-A-Bubble™
2013-11-30 09:41:15

“Managing a prolonged period of low interest rates without creating dangerous asset bubbles would be the equivalent of the proverbial having your cake and eating it too.”

History has not dealt kindly with the aftermath of protracted periods of low risk premiums.

– Alan Greenspan

Comment by Mr. Banker
2013-11-30 10:19:54

How about zero risk premiums? I’m into zero risk premiums. Not saying risks don’t exist, just saying I don’t want to be the one taking them.

That’s what OPM is for. That’s what the taxpayer is for.

Let’s share both the risks and the rewards, let’s split them right down the middle. You take one, I’ll take the other.

Comment by Housing Analyst
2013-11-30 10:38:56

Identifying which event that starts the spiral is anyones guess. It’s not a matter of if but when.

Comment by Whac-A-Bubble™
2013-11-30 11:46:20

Here is my candidate:

The Norwegian Bubble

Thoughts on the Norwegian economy. Is too much of a good thing always a bad thing, or is this time different? How will Norway manage its overheated economy? Focus will be on what seems to be a Norwegian housing bubble waiting to burst. Oslo and Stavanger among other top cities are leading the pack.
Sunday, November 3, 2013

An Answer To Christian Vammervold Dreyer
Christian V. Dreyer, the leader of an association for Norwegian real estate brokers (EFF), writes in his latest blog post about the falling house prices. He himself has worked as a real estate broker/agent in the past. Now, is there any sense in arguing with a real estate broker about a housing bubble? After all, Dreyer and EFF are not hiding their agenda, which is to work for the benefit of real estate brokers. Real estate brokers usually lose jobs if house prices drop in any significant way. House prices can drop in a significant way if the majority of people expect them to do so. Dreyer and EFF thus have all the reason to tell people that house prices will not drop in any significant way and so it’s safe to buy.

I write this post for two reasons. One is that Christian Dreyer is presented as an expert even by the financial media in Norway, and so gets his message through to people. The other reason is that many other experts, or “experts”, are using arguments similar to Dreyer. It’s like the whole country is full of real estate brokers? Perhaps that’s what you get when over 80 % own the house they live in and are lured by the “wealth effect” of ever rising prices.

An Answer To Christian V. Dreyer

In his post Dreyer first goes through some reasons for the current price decline:

1) Strong and sustained house price increases which have lead to high household indebtness.
2) Higher bank capital requirements set by the authorities.
3) Increased inventory of dwellings for sale, due to slower demand and a glut of finished new home projects where speculators/”flippers” (!) want to sell and people moving in sell their old homes.
4) First-time buyers having difficulties with entering the market (due to high prices and increased equity requirement, I assume).

I mostly agree with these, so I won’t go through them in more detail. It’s nice that we can agree on something. But then comes the conclusion. Dreyer argues that the above-mentioned factors have led to the media taking a negative view on the housing market, and this media coverage and the effect it has on sentiment are the real culprit behind the price decline. Sure, psychology is an important driver of the market, like I have mentioned on many occasions. But I don’t understand why Dreyer goes through all these more fundamental reasons for the decline only to say that in the end it comes to sentiment (psychology), while at the same time he admits that this change in sentiment is a result of the more fundamental factors he just presented?

Or perhaps I understand. After having put all the blame on sentiment, he goes on to argue that the strong fundamentals of Norwegian economy will in the end win over the negative sentiment. There has never been more people at work in Norway, never have we had more purchasing power. Low interest rates, low investment in new housing and low unemployment, he argues, will make sure that the prices will soon rise again.

So, no matter how high the prices have got, they are safe from a significant decline because of strong economic fundamentals? The problem is that bubbles are never formed when the economic fundamentals are weak. Currently strong fundamentals can never be an argument against a bubble that can burst in the near future. Quite the opposite, you get a bubble when the absolute majority of people think like Dreyer thinks - that this can’t be a bubble. And that happens when the fundamentals are at their strongest and the future at its rosiest, just when the Dreyers of this country think that nothing can go wrong.

What Dreyer also forgets here is that sentiment affects fundamentals, just as well as fundamentals affect sentiment. A positive feedback loop between sentiment and fundamentals has taken us to where we are in Norway today. But you can’t have the cake and eat it too. So when the sentiment turns more and more negative as it has done now (and this is not just true about house prices but also about the economy), it will start to affect the fundamentals as well. Anyone with a basic understanding of bubbles should know this.

My conclusion is that Dreyer has no valid arguments when it comes to the question of if this is a bubble that has started to burst or not. At best, he manages to present many facts that actually speak for a bubble.

Comment by Whac-A-Bubble™
2013-11-30 11:50:52

Interview | SATURDAY, NOVEMBER 30, 2013
Shiller and Gundlach Size Up the World
Jeffrey Gundlach and Robert Shiller see opportunities in stocks and bonds—and massive housing inflation in Norway.

At first glance, Robert Shiller and Jeffrey Gundlach make an odd pair. Shiller, recently awarded the Nobel Prize in economics for his “empirical analysis of asset prices,” is soft-spoken and has the professorial demeanor befitting a Yale academic. Indexes bearing his name for stock valuations and home prices have become part of the nation’s financial lexicon. Gundlach is a brash, sometimes bombastic bond titan. He is CEO of DoubleLine Capital, a Los Angeles asset manager with $53 billion in assets, mostly in fixed income. But the two have plenty in common. Gundlach, for instance, did doctoral work in mathematics at Yale and, like Shiller, has a good eye for bubbles; he spotted trouble in the housing market before it collapsed in 2008. Now, Gundlach and Shiller have launched the DoubleLine Shiller Enhanced CAPE fund (ticker: DSEEX), which Gundlach will manage. The fund is tied to a Shiller innovation—the CAPE, or cyclically adjusted price-earnings ratio. That’s stock prices divided by their average earnings over the past 10 years, adjusted for inflation; the fund gravitates to low-CAPE sectors. We recently sat down with the pair to discuss stocks, bonds, and a monstrous housing bubble—this time in Norway.

Comment by Strawberrypicker
2013-11-30 18:06:47

So now he’s selling something. Gundlach is a prize.

Comment by Whac-A-Bubble™
2013-11-30 21:40:20

It’s all good, as Prof. Shiller will have all that much more to contribute to the PayPal link on the HBB.

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Comment by Blue Skye
2013-11-30 16:24:47

The Chinese leveraging up about $27 trillion quacks like the mother of triggers.

Comment by Whac-A-Bubble™
2013-11-30 11:15:03

Definition of asset bubble

When the prices of securities or other assets rise so sharply and at such a sustained rate that they exceed valuations justified by fundamentals, making a sudden collapse likely - at which point the bubble “bursts”. [1]

The housing market booms, in Spain and Ireland, were fuelled by low borrowing costs. Their bursting has strained banking systems. [2]

Comment by Prime_Is_Contained
2013-11-30 11:37:30

Does anyone know of a good data source for total income earned? I’d like to know where we are at currently relative to the pre-bust peak…

Comment by Prime_Is_Contained
2013-11-30 12:36:04

According to this data:

2009 was apparently our only “down” year, and by 2011 we were back over the previous peak in 2008; this was the nationwide aggregate, although they also provide a per-state breakdown.

US nationwide data, reformatted for easier reading:

2012 $13,401,868,693
2011 $12,949,905,000
2010 $12,308,496,000
2009 $11,852,715,000
2008 $12,451,660,000
2007 $11,900,562,000
2006 $11,256,516,000

Source: U.S. Department of Commerce, Bureau of Economic Analysis. Data released March 2013.
Table Prepared by: Bureau of Business and Economic Research, University of New Mexico.

Comment by Whac-A-Bubble™
2013-11-30 13:32:09

The 2008 bailouts paved the way for the 0.1% to take a much larger share. While Main Street America was on its back, Wall Street gunslingers were made whole by QE1, QE2 then QE3, providing free gambling chips to snap up devalued assets at fire sale prices. While aggregate income quickly recovered, Main Street’s income stayed in the crapper while asset owners made out like bandits.

Comment by Prime_Is_Contained
2013-11-30 19:27:29

Wall Street gunslingers were made whole by QE1, QE2 then QE3, providing free gambling chips to snap up devalued assets at fire sale prices. While aggregate income quickly recovered, Main Street’s income stayed in the crapper while asset owners made out like bandits.

While I completely concur that the Fed’s actions enabled the rich to get richer (and who couldn’t get rich if they could get zero-percent loans and leverage up to buy assets that the Fed was bound and determined to guarantee would go up?), there is one tiny detail that prevents me from completely buying this as an intentional outcome:

The rich would have gotten far richer, if the Fed had let asset prices crash far lower before they started flooding all asset classes with free money.

If that was possible, why didn’t they do that?

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Comment by Patrick
2013-12-01 18:41:12


I am not a subscriber to the theory that the rich got richer because of the recession - but because they were able to lever, and lever way beyond the abilities of J6P.

They have gambled their way to greater riches by borrowing - not by contributing.

Some obscene uses of counterfeit Fed dollars:
1. Repurchase corporate shares at high values
2. To stabilize bank leverage without control
3. Purchasing garbage - err - securitized mortgages
4. Big brokers borrowing cheap money for the 1% to gamble with
5. Lending money to cover Gov deficits at zero rates
6. Spending some of them on advertising that they are creating jobs - do they think that low of our intelligence?

Yes, the 1% would have been richer because their margins would have been greater.

But lets wait a little while.

Comment by Whac-A-Bubble™
2013-11-30 14:26:06

In many states, the recovery is making the income gap worse

By Niraj Chokshi
November 18 at 6:00 am
A sign showing a foreclosure home in Texas for sale in August 2006. (Credit: David J. Phillip/Associated Press.)

The income gap in America has been widening for decades and the modest three-year recovery did little to change that, according to new Census data.

The new data suggest that despite modest recoveries in many states, the middle class has been shrinking while households have been added in the lowest and highest income brackets. In many states and nationally, the highest income brackets saw more growth than the lowest, but households in the middle brackets continued to decline. The state-by-state data compare incomes from a pair of three-year periods: 2007 through 2009, a span that included the Great Recession, and 2010 through 2012, a period that included the ongoing and modest recovery.

For years, the wealthiest 1 percent have amassed income more quickly than the rest. From 1979 through 2007, for example, the top 1 percent of households saw income grow by 275 percent, according to a nonpartisan Congressional Budget Office study. Compare that to the bottom fifth of households, which saw income gains of only 18 percent over that time. Recent Nobel Prize winner for economics Robert Shiller, who is known for creating a closely tracked home-price index, last month called income inequality “the most important problem that we are facing now today.” And just last week, President Obama’s nominee to lead the Federal Reserve, Janet Yellen, called income inequality “an extremely difficult and to my mind very worrisome problem.”

Comment by Whac-A-Bubble™
2013-11-30 15:44:50

It’s not a bubble unless an MSM-annointed expert sez it iz.

Markets More: Nouriel Roubini Housing Bubble Bubbles
Nouriel Roubini Just Identified A Ton Of Housing Markets That Look Like Bubbles To Him
Sam Ro
Nov. 29, 2013, 8:49 AM
Nouriel Roubini, Chairman and Co-Founder, Roubini Global Economics, takes part in a panel discussion titled “Global Overview” at the Milken Institute Global Conference in Beverly Hills, California on April 29, 2013.

Economist Nouriel Roubini is sounding a big warning about global housing bubbles.

In a new piece for Project Syndicate, he identifies at least 17:

Now, five years later, signs of frothiness, if not outright bubbles, are reappearing in housing markets in Switzerland, Sweden, Norway, Finland, France, Germany, Canada, Australia, New Zealand, and, back for an encore, the UK (well, London). In emerging markets, bubbles are appearing in Hong Kong, Singapore, China, and Israel, and in major urban centers in Turkey, India, Indonesia, and Brazil.

Signs that home prices are entering bubble territory in these economies include fast-rising home prices, high and rising price-to-income ratios, and high levels of mortgage debt as a share of household debt. In most advanced economies, bubbles are being inflated by very low short- and long-term interest rates. Given anemic GDP growth, high unemployment, and low inflation, the wall of liquidity generated by conventional and unconventional monetary easing is driving up asset prices, starting with home prices.

Roubini notes that some countries are trying to contain these bubbles through policies like “lower loan-to-value ratios, stricter mortgage-underwriting standards, limits on second-home financing, higher counter-cyclical capital buffers for mortgage lending, higher permanent capital charges for mortgages, and restrictions on the use of pension funds for down payments on home purchases.”

However, politics is preventing regulators from being effective.

For now, Roubini doesn’t see the bubble(s) bursting any time soon.


Comment by Ben Jones
2013-11-30 17:27:52

I’ve recently been getting offers for a month of free new letters from this guy. Let’s see if I can help him out some more:

Mexico, Columbia, Costa Rica, Panama, Dubai, Saudi Arabia, Kenya, South Africa, Nigeria, Kurdistan, Iran, Kabul, Mogadishu, Malaysia, Thailand, Vietnam, Nepal, Macau, Philippines, Moscow, Latvia, Slovenia, and probably some more I can’t think of right now.

Comment by Whac-A-Bubble™
2013-11-30 21:42:30

LOL! How can you expect an economics professor who lives in NYC to not try to hawk his newsletter wherever he might be able to find subscribers…

Comment by Ben Jones
2013-11-30 17:08:21

‘(Reuters) - Iceland said on Saturday it would launch a mortgage debt relief programme worth about 150 billion krona ($1.26 billion), in a move that could hurt its credit ratings and which critics say could scare off foreign investors.’

‘Mortgage holders will also be given tax breaks to encourage them to use pension savings to pay down their borrowing, a measure worth about 70 billion krona.’

‘A centre-right coalition of the Progressive Party and the Independence Party won an election earlier this year on a promise to reduce the financial burden on households after years of austerity.’

‘The government said it would finance the measure through tax hikes on financial institutions and a haircut on around $4 billion in debts owed to overseas investors in Iceland’s failed banks, which collapsed in late 2008.’

‘Those debts are now mainly held by hedge funds, which bought them at a deep discount.’

“The net impact on the Treasury is expected to be insignificant each year during the period 2014-2017,” the government said.’

Comment by Whac-A-Bubble™
2013-11-30 21:46:14

It seems like there are soon-to-be collapsed bubbles all over the globe, with Humpty-Dumptys in high office everywhere preparing to do all they can to reflate them.

Got popcorn?-

Comment by azdude02
2013-12-01 05:41:07

we need high home prices so people can extract some well deserved equity.

Comment by Taxpayers
2013-12-01 09:25:48

since they already stiffed all the other countries ,where do they get the cash for this “program”

Comment by Whac-A-Bubble™
2013-12-01 09:14:37

Stocks bubbling over?
U-T EconoMeter panelists look at Wall Street prospects
By Roger Showley
6 a.m. Dec. 1, 2013
photo FILE - In this Tuesday, Nov. 19, 2013, file photo, traders Peter Tuchman, left, and Eugene Mauro confer on the floor of the New York Stock Exchange. The Dow’s first close above 16,000 pushed most world stocks higher Friday Nov. 22, 2013 but gains were kept in check by worries the Federal Reserve will cut its monetary stimulus soon. (AP Photo/Richard Drew, File) The Associated Press

Question: With stock indexes hitting all-time highs, are we facing a correction in the next few weeks?

Panel’s answers: Yes 3, No 9, Not participating 4
Marney Cox, San Diego Association of Governments

Typically sustainable stock market gains are based on company earnings expectations becoming true. However, most earnings companies have experienced during the current rally come from cutting costs or actions by the Federal Reserve to lower interest rates making the stock market more attractive as an investment vehicle than the bond market. Neither of these two drivers of stock market gains is sustainable, so a correction is expected. When the correction will take place is a more complicated question. Stock market gains to date, for example, are above annual levels expected by most Wall Street strategists, so most of these cheerleaders have revised their expectations…up.

Comment by Housing Analyst
2013-12-01 12:19:58

If you take on mortgage debt at current massively inflated housing prices, you’ll enslave yourself for the rest of your life.

“Debt is bondage.”~Suze Orman, May 11, 2013

In other words, don’t buy housing at these massively inflated prices. Don’t Be A Debt Donkey®

Comment by Ben Jones
2013-12-01 12:37:51

‘Australia’s biggest banks, whose lending standards helped the nation avoid a property crash during the global credit crisis, are raising concern with home loans helping to fuel record house prices.’

‘The proportion of mortgages that represented more than 80 percent of a home’s value — the loan-to-value ratio — rose in the third quarter to the highest since the second quarter of 2009, data from the banking regulator show. Mortgages in which borrowers pay only interest also increased to the highest in at least five years, according to the figures.’

‘On top of a decline in the average variable interest rate on standard housing loans to a four-year low of 5.95, banks are offering discounts to some customers.’

“Australian house prices already looked in the ‘bubble region’ even before this 2013 spring surge so why are they reaching new highs?” Brian Johnson, a Sydney-based bank analyst at CLSA Ltd., said in an October report. Aside from low interest rates, “Australian banks are aggressively offering ‘package discounts’ to headline standard variable rates, rebating cash to borrowers, lowering credit underwriting standards.”

Comment by Blue Skye
2013-12-01 18:04:59

They are going to get blown away when the Chinese Miracle Music stops.

Comment by Housing Analyst
2013-12-01 16:37:14

“Housing as a rental investment is a huge gamble considering it’s negative cash flow at current inflated asking prices of resale housing.



Comment by Cantankerous Intellectual Bomb Thrower™
2013-12-02 00:44:05

Speaking of having your cake and eating it too, what do you think about the idea of gold-backed Bitcoin?

Comment by Cantankerous Intellectual Bomb Thrower™
2013-12-02 00:46:13

Tim Worstall, Contributor
I write about business and technology.
Tech | 12/01/2013 @ 10:46AM |10,319 views
Today’s Strange Bitcoin Idea, The Gold Backed Bitcoin

This particular idea rather has me scratching me head as I can see a small publicity value to this idea and no other practical one at all. The idea being to produce physical bitcoins that are partially gold. That sounds like a reasonable way of getting a bit of publicity but not much else. And I cannot for the life of me fathom what the use of them would be beyond that. It’s the island of Alderney that is suggesting this:

The tiny Channel Island of Alderney is launching an audacious bid to become the first jurisdiction to mint physical Bitcoins, amid a global race to capitalise on the booming virtual currency.

The three-mile long British crown dependency has been working on plans to issue physical Bitcoins in partnership with the UK’s Royal Mint since the summer, according to documents seen by the Financial Times.

It wants to launch itself as the first international centre for Bitcoin transactions by setting up a cluster of services that are compliant with anti-money laundering rules, including exchanges, payment services and a Bitcoin storage vault.

The special Bitcoin would be part of the Royal Mint’s commemorative collection, which includes limited edition coins and stamps that are normally bought by collectors. It would have a gold content – a figure of £500-worth has been proposed – so that holders could conceivably melt and sell the metal if the exchange value of the currency were to collapse.

Now in one sense even just the idea has worked. For the FT has run a whole page on the point and here I am at Forbes talking about it again. So, the word should be getting out and about that Alderney wants to set itself up as a hub for the legal and controlled trading in bitcoin. So in that one sense the job is done already, that gold bitcoin has done what I presume it was intended to do.

Comment by Prime_Is_Contained
2013-12-02 00:52:45

The idea doesn’t really make any sense.

Either bitcoin is mined—e.g. created by demonstrating “proof of work” by computing a computationally-intensive crytographic hash—or it is not. If it is gold-backed, then presumably there is no benefit to mining (as gold can’t be created out of thin air), so who would have any incentive to sign the transaction logs? Or are the miners going to be given real gold, and if so, who is it that pays them?

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