July 6, 2014

Mid-Year Predictions

What are your housing bubble predictions at mid-year? Six months ago, “Dow tops out at around 17,000 (+.- 500)…we’re already there. Could go down to 12,000-14,000 by the end of 2014. Recession begins in Q3-Q4 of 2014, and will be announced in 2015. Housing prices continue their very slow, gradual decent. Prices don’t start seriously declining until ~2017.”

One said, “More and more people will wake up to the fact that a high flying stock market is doing nothing for them, and grumblings from the serfs get louder as they realize the PTB are screwing them six days to Sunday, and there are no jobs or extended UE bennies. Something wicked this way comes, something ‘nobody saw coming.’”

One had this, “YoY declines in real estate this year. There was value to be found in certain markets late 2012 and early 2013, but as witnessed by recent reports, the smart investors are out. It was amazing how much of the market this year was all cash purchases and investors. And yes, mortgage rates are going up. Poof.”

One year ago. “I think the most fundamental question is whether the Fed can run out of money for QE. I say it can’t…but opinions differ and I’m no expert on the Fed. If you say ‘they can’t print money, they can only loan money against collateral,’ what stops them from valuing Beanie Babies at 1T each for the purposes of collateral? If they can run out of money and do, or shut it off for any reason, we get the depression that we started into in 2008. If they can’t run out of money and choose to keep the spigot open then they slowly wring every bit of real value from the dollar to maintain the charade and then at that future time we have to restart our money system from scratch.”

And this, “My prediction is FASB rule 134 stays suspended. No Mark-to-Market means trillion of dollars of MBS and CDO are still rated the same as US Treasuries. Makes sense since the FED balance sheet is stuffed with them. It has been widely reported Ben Bernanke will exit soon. Selecting a new FED chairman is like getting a new Pope for Wall St.. I hope it’s a woman this time.”

And finally, “Inventory is going to the moon! And beyond! Meanwhile, home sales will slow down significantly. Because of things like job growth and income growth. Neither of which have been breaking records of late.”

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Comment by Housing Analyst
2014-07-04 04:36:15

Comment by Housing Analyst
2013-07-02 08:18:08

6-18 Monther

Evil Men (Fed Res) will continue to buy down the yields yet some exogenous global event will interrupt this irrational policy and yields will spiral up rapidly prompting another round of “if we don’t do this, the end of the world will come” fixes.

Housing demand will continue to slip lower as it has been doing since 2007 and the paid PR hacks will continue to deny it. Great effort and money will be thrown at detracting from losses associated with paying inflated prices for houses from 1998-current.
Housing demand lower CHECK

Collapsing demand denied CHECK

HARP/HAMP and re-securitization of junk CHECK

Financial market implosion- 10 steps closer.

Comment by Combotechie
2014-07-04 05:28:02

My predictions are the same as ever which is: Cash will remain king and so will cash-flow remain king.

The returns on cash investments, such as bank CDs, will remain dismal (probably for years to come) and thus cash-flow generating thingys such as a good paying job will retain its widely-unappreciated high value - I say widely-unappreciated because so may people are willingly walking away from good-paying, cushy jobs so as to retire and live off social security and the dismal returns of cashed-out pensions and dismal returns of other types of stored wealth. (Something I like to think of as The Alpo Retirement Plan.)

Comment by Michael Viking
2014-07-04 08:23:46

Cash will remain king

Ah, Combotechie…you’ve been repeating this tired canard for half a decade. I don’t think “cash is king” means what you think it means. Here’s one definition: “The belief that money (cash) is more valuable than any other form of investment tool. ”

I find it odd that you say that “cash is king” and then point out that cash is a dismal investment:
The returns on cash investments, such as bank CDs, will remain dismal

Is cash king or isn’t it? If you own stocks, that’s not cash. If you “own” real estate, that’s not cash. If you own bonds, that’s not cash. If you’re using any other investment tool then it’s not cash. If you have cash in your mattress or in your bank account - *that* is cash. And as you point out, that’s dismal. Staying in cash has been the absolute worst investment for quite some time.

Maybe you just mean “Being wealthy is much better than being poor”? That’s not news.

Comment by Combotechie
2014-07-04 09:41:26

In the Good Ol’ Days of plentiful good-paying jobs cash was easy to get and it was easy to hold onto, and during that same time returns on savings were also good which also meant cash was easy to get and easy to hold onto, and if you added in the ability to turn assets into cash (i.e. cash out one’s home equity) then everywhere you cared to look cash was easy to get and easy to hold onto. And something that is easy to get and is easy to hold onto does not rule.

But those days are gone and they have been replaced by days where good paying jobs are hard to get, good returns on savings are hard to get, and the ability to turn assets into assets is hard to do - hard to do if you want the cash and still want to hang onto the asset. And all this adds up to cash being able to rule as a king rules (those who have the cash get to call the shots) and it also means that cash-flow assets (such as a good-paying job) also rules.

Comment by Combotechie
2014-07-04 09:51:22

“turn assets into assets” = “turn assets into cash”

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Comment by Combotechie
2014-07-04 10:19:04

Not all that long ago, five or six years ago maybe, posters here on this message board were laughing to themselves about how stupid the Chinese were to accept our “worthless, unbacked fiat pieces of paper” in return for sending to us tons of their junk. This was the time when the term “cash is trash” ways bandied about.

And then … something happened.

And as a result of something happening the Chinese are now moving these worthless fiats over here and are buying up property. And cities and states (who are desperate for cash) are making deals with Chinese (the ones with cash) to come over and settle in. And payday loan stores have popped up everywhere along with TV ads directed to those who are desperate for cash and (willingly or not) will pay some hefty prices to get some of the stuff.

Oh, and bankruptcies? Are there not a few pending bankruptcies in many of our towns, cities, counties and states? Just “a few”, perhaps? And these “few” could be saved if they only had access to … access to what? To cash, maybe?

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Comment by Doom
2014-07-05 07:51:44

Low paying jobs, little or no interest rates on savings, if anybody thinks capitalism will surive on such spectulation then none of you know how capitalist work?

They never keep the folks on the reservation down and out to never see hope, or feel it. These crisis you see happen every time in capitalism is capitalism, everybody gets their turn for a 7 to 10 year period, you miss it, the next wave gets their turn.

This last wave was for the era of the 1%, next wave for the other 99%, don’t miss it folks, after 2015 look for a revival in American worker and smart investors, the 1% got their shot, be prepaired, Wash can’t afford for the 99% to keep raging on them, not good for world democracy?

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Comment by Whac-A-Bubble™
2014-07-04 10:55:13

How are your real estate sales results looking so far this year? Everyone of my three immediate family members who told me last February they were planning to sell homes last spring didn’t, but maybe your clients are having better luck than they are with a slowing market.

Comment by Doom
2014-07-05 07:59:39

No question the spring market was a disaster, except for the folks who gave property away and took their losses overall it was a standoff, and sellers took it hard on the chin.

Reducing of prices still produce little sales, buyers are now seeing lot of houses pulled from the market as sellers say, we will wait till fall to realist or gauge the temp again.

Many grossly underwater got out, the folks who can afford to stay and many can now, well it will be intersting, somebody always needs a house and if interest rates move towards 5% look for a flurry of activity in the near future?

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Comment by Whac-A-Bubble™
2014-07-05 09:29:19

“Reducing of prices still produce little sales…”

That’s just silly. Any dump will sell quickly if priced right, though negative pricing may be needed to move some properties around Detroit.

Comment by Housing Analyst
2014-07-05 11:52:05

I have a wager with someone on just how long this charade is going to continue.

Comment by Doom
2014-07-05 13:47:38

I don’t deal in dumps, Unless you think 4 4 baths 4300 ft houses are dumps, or have you ever seen or owned such a house?

Comment by Guillotine Renovator
2014-07-05 14:06:41

“I don’t deal in dumps, Unless you think 4 4 baths 4300 ft houses are dumps, or have you ever seen or owned such a house?”

Houses like that have never made sense as rentals in the history of single family residences. Assuming your name can even be found on some paperwork as the loanowner of such monstrous energy hogs (I have my doubts about somebody with such poor grammatical skills), you are nothing but a two-bit speculator riding a once in a blue moon fantasy which is almost certain to end in a nightmare.

Comment by Housing Analyst
2014-07-05 16:15:17

They’re all dumps my friend. Smelly depreciating shacks….. Including yours.

Comment by Housing Analyst
2014-07-04 11:04:37

“Staying in cash has been the absolute worst investment for quite some time.”

Not really, not at all. Had you traded that cash on a single family residence, you’d have lost money any time since 2008. Alot of money.

“Cash”- cash and cash equivelents. Not depreciating assets like houses, cars, retail junk, etc.

Comment by Doom
2014-07-05 14:00:23

Cash as one person told me isn’t realitive in the world of fiancé leverage is.

I ask him if you went into the grocery store and bread ,milk, and eggs were $10 and you had $7.00 dollars on you, do you think you could leverage the clerk to give those three items for $7.00 or would he say fine $7.00 uh, there is the bread and milk come back when you got the $3.00 bucks for eggs?

Cash is king for as long as the dollar stays the worlds currency which it will.

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Comment by Whac-A-Bubble™
2014-07-05 18:14:39

“…in the world of fiancé leverage is.”

How did we get off topic on to how to financially convince women to get married?

Comment by Furlow
2014-07-07 17:14:04

As always with you, too many absolutes. I bought my townhouse in 2012 for $270,000 and just sold it for $370,000. How did I lose?

That said, I do believe market has peaked and it won’t “cool off” or “flatten for a while” like people are hoping it will. CA is boom and bust and I see another big bust coming.

Luckily my conscience is clear as I sold the townhouse to a rich Chinese couple who paid cash. Seriously who has that much money laying around?

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Comment by Housing Analyst
2014-07-08 06:41:15

That and a dollar will get you a cup of coffee here.

Comment by Bill, just South of Irvine, CA
2014-07-04 08:58:43

Cash was king since 2008. But the stock portion of my portfolio mocked that saying for the last 64 months. Holy flying spaghetti monster!

Comment by Whac-A-Bubble™
2014-07-04 13:05:26

Do you think the Fed’s decision to use QE3 to deliberately pump up the stock market starting in March 2009 could have had something to do with your stellar returns? If so, do you expect stellar returns to continue unabated after the Fed finishes taking away the QE3 punch bowl?

These questions are somewhat rhetorical, in that I don’t really claim to know the answers, but they should be of concern to all investors.

Comment by Bill, just South of Irvine, CA
2014-07-04 14:56:42

I know that the Fed had A LOT to do with my stock gains. But they are gains. Of course I moved some of them into short maturity treasuries, medium maturing municipal bonds and cash, and used some of the gains to pay bills and stay zero debt. But that’s the winning strategy.

The “looser” strategy was to stay in cash only, or short maturities such as T Bills. Let’s say you have $50,000 per year to invest since 2009: Well you put in $275,000. Your amount saved is better than zero, congrats! But your principle plus gain is still under $300,000 when you could have $550,000 now.

How smart is cash only?

Vanguard S&P 500 Admiral fund started on November 13, 2000. If you moved 100% of your investments into that fund that day your average annual gain would be only 4.77% since then. I would not pull out a penny of that fund until its average annual gain returned to 10% like the investor shares fund has since 1976. As Jerry Siegel wrote, the longer you keep money in the stocks, the lower the risk of your principle.

I know that you already know this W-A-B.

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Comment by Whac-A-Bubble™
2014-07-04 19:34:34

I’ve parked quite a bit of dough in stocks myself over the last several years, as you have to keep getting up to dance so long as the DJs over at the Fed keep on playing the music.

I’m wondering when it the best time to pull it out before the next crash, and where to park it until the onset of QE4. Any thoughts?

Comment by Bill, just South of Irvine
2014-07-05 08:48:37

W-AB, I do rebalance out of stock funds in my 401k. Last fall I moved 10% into a conservative income fund of bonds. Early this year I upped it to 12%. If I am right and my 401k balance goes up another 5% or so by late October I will boost it to 15%. And keep it there until the next 30% or more descent from the peak after that day.

Comment by Guillotine Renovator
2014-07-05 11:22:24

“…do you expect stellar returns to continue unabated after the Fed finishes taking away the QE3 punch bowl?”

In the event of a major economic/stock market meltdown a la 2008/2009, do you expect the Federal Reserve to do the very same thing which didn’t work the first time?

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Comment by Prime_Is_Contained
2014-07-05 13:48:04

do you expect the Federal Reserve to do the very same thing which didn’t work the first time?

Not quite–I’d expect them to double down, trying the very same thing on a much larger scale.


Comment by Bill, just South of Irvine, CA
2014-07-05 14:35:59

By “double down” you mean not only to return to buying $85 billion per month of junk MBS, but double that?

If so gold and silver prices will stay down with super ZIRP. Though cost of production is climbing, it’s probably around $1300 to mine an ounce of gold these days.

I’d welcome such double down for making my stocks continue to go up. Note stocks have by far outperformed RE since 2009.

I’ll end up selling one out of my 4000 shares of staffing company stocks to buy Amy the Hoaxster’s shack.

Comment by Whac-A-Bubble™
2014-07-05 18:16:52

“In the event of a major economic/stock market meltdown a la 2008/2009, do you expect the Federal Reserve to do the very same thing which didn’t work the first time?”


Repeatedly employing the same failed policies while politically dressing them up as successes is their stock-in-trade.

Comment by scdave
2014-07-04 09:03:28

(Something I like to think of as The Alpo Retirement Plan.) ??

When you are playing on hole #14 in the “Golf-Course-Of-Life” there maybe more important things to consider other than making money…

Comment by Bill, just South of Irvine, CA
2014-07-04 09:02:09

Okay midyear prediction. I was wrong last December. But I keep trying. Anyway:

Stocks will do well through early November. The S&P 500 will finish 2014 positive. Could be in the double digit percentage gain at least by election day in November.

If the percentage gain is above 20% by then, watch for a correction taking the S&P down, but overall finishing in the single digit percentage gain on the closing bell the last trading day of the year compared to opening bell on the first trading day of 2014.

Comment by Bill, just South of Irvine, CA
2014-07-04 09:04:42

, “More and more people will wake up to the fact that a high flying stock market is doing nothing for them, and grumblings from the serfs get louder as they realize the PTB are screwing them six days to Sunday, and there are no jobs or extended UE bennies. Something wicked this way comes, something ‘nobody saw coming.’”

Holy jeebuz. As if not even a young person earning $40,000 per year since 2009 can put even $100 into stocks. There is no excuse for not having invested in this boom.

The ones who say things like that quote are sour pusses who hate it when others who risk their own principle make the gains and then they lash out because they did not make the gains themselves.

Comment by Jingle Male
2014-07-06 05:02:34

Yes Bill, very similar to all those who lament people making gains by investing in real estate….

Comment by Housing Analyst
2014-07-06 06:19:23


Remember…..<bHouses are depreciating assets that always result in loss.

Comment by Furlow
2014-07-07 17:17:41

Again. Bought in 2012 for $270K, sold in 2014 for $370k.

ALWAYS is a long time.

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Comment by Housing Analyst
2014-07-08 06:43:32

Again. That and a dollar will get you a cup of coffee here.

Hint: Nice try.

Comment by Whac-A-Bubble™
2014-07-04 10:52:48

The stock market will always go up from now on.


Comment by Guillotine Renovator
2014-07-04 15:09:59

In that case you should sink everything you own into it, and your relatives, too, if you can talk them into it. I mean, go for it, Whac, bet the house. :)

Comment by Doom
2014-07-05 13:52:06

Anybody who deals in words of always and never, should be taken with a grain of salt.

Comment by Housing Analyst
2014-07-05 19:24:29

Housing always depreciates and is never an investment.

Anyone who denies this should be taken with a grain of salt…. Like you.

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Comment by Jingle Male
2014-07-06 06:03:51

Always…..I mean never…oops…

Comment by Housing Analyst
2014-07-06 06:16:24

We know precisely what you mean J._Fraud.

Comment by rms
2014-07-04 17:48:17

“The stock market will always go up from now on.”

+1 Amen. It will climb like a home-sick angel.

Comment by Whac-A-Bubble™
2014-07-04 19:40:03

To the Fed’s credit, at least they no longer seem convinced that asset price bubbles don’t exist.

ft.com > Comment >
July 3, 2014 6:14 pm
Janet Yellen’s asset price boom
Caution on rates is wise but Fed could do more on bubbles

They say the US Federal Reserve is for ever blowing bubbles. Janet Yellen did little to counter that view this week with her reiteration that tighter interest rates are almost always the wrong tool to curb asset price inflation.

She was right, however, to hold the line. Central banks have a poor record of anticipating asset bubbles, let alone preventing them. There is no reason to suppose that their foresight has improved. In contrast, it is within the Fed’s power to bolster the economy’s resilience to bursting bubbles via tougher macroprudential controls. Bubbles will always be with us, she argued. The goal should be to make them less explosive.

Ms Yellen is in good company. On Thursday, Sweden’s central bank reversed its stance of tightening interest rates to head off asset price bubbles by slashing them to just 0.25 per cent.

Far from rebuilding confidence, the Riksbank’s strategy of “leaning into the wind” had brought Sweden to the brink of outright deflation. In place of the blunt monetary instrument, the Riksbank will look at further toughening banks’ capital requirements.

At the Bank of England, Mark Carney has taken macroprudential policy a step further by promising to vary the loan-to-value ratio on mortgages with the housing boom cycle. Central banks everywhere are starting to vary their bank stress tests to take the asset price cycle into account.

The debate is far from settled. This week the Bank for International Settlements threw a contrarian straw into the wind by insisting that central banks should tighten early and clearly to stave off another cycle of bubbles. Ms Yellen is wise to ignore their advice. Without easy monetary policy, the US, the UK and other leading economies would have grown by far less in recent years. Premature tightening would have reduced growth, risked deflation and increased the value of the debt burden that the BIS so fears.

The BIS was right to warn of the dangers of “balance sheet depression”, which can persist for years. Alas, its remedy would worsen the disease. Without growth, the balance sheet can only deteriorate further.

That said, there are grounds to worry that the Fed is not doing enough to limit the impact of future asset price shocks. Unlike the BoE, which seems serious about counteracting the UK’s chronic housing boom-bust cycle, the Fed’s macroprudential tool kit is limited.

Ms Yellen has made it clear the Fed will increase capital cushions as conditions demand. But almost all the onus is on the formal banking sector. Much of the risk, however, has shifted into shadow banking. There are real concerns the Fed is behind the curve. Regulators are almost never as nimble as the markets they regulate. Ms Yellen must do more to demonstrate that the Fed, and its sister agencies, will follow the search for yield into whichever asset classes it goes, and via whichever entities.

Comment by Ben Jones
2014-07-05 09:13:17

‘Bubbles will always be with us, she argued.’

Predicting the future, IMO, is less important than understanding what is happening right now. Something remarkable happened this past week. Openly challenged by the IMF and BIS on bubble risks, the Fed chair came right back and more or less said they don’t care. The economists quoted in the desk clearing post said, the central banks are intentionally creating bubbles to “clean-up” as they say, from the last round of monetary recklessness. So the mask is off. There’s a few problems though. Bubbles haven’t always been with us. This is a wildly dangerous viewpoint for central bankers to hold. For instance, note the efforts of so many Asian and European central banks to tamp down bubbles. Why do they think bubbles are undesirable but Yellen doesn’t?

The economists in the post yesterday suggested all this bubble merriment was really a by-product of these elites systematically stuffing free money in their pockets, while pretending to be “managing” the economy. Thus the ever increasing inequality. Hmmm, that couldn’t possibly back-fire on a bunch of limousine riding pasty a-holes who’ve never had a real job in their life.

No life’s a bowl of cherries when printing money and handing it out to your wall street buddies is you’re day job:

“The fundamental flaw in Yellen’s attempted assurances that the Fed could contain financial turbulence by regulatory means was quickly apparent in the question and answer session with Lagarde. “You’ve beautifully demonstrated the efforts that have been undertaken from a macro prudential point of view in terms of the universe that you have under your jurisdiction,” Lagarde told Yellen. “But this universe, being restricted and well supervised at it is, has generated the creation of parallel universes.”

‘The response of the financial markets to regulation had been to create a shadow banking system, “outside the realm of central bankers,” Lagarde said. “What can be done about them in order to make sure that there is no creation of significant risk threats out there which are not covered by macro prudential tools?” she asked.’

‘Yellen’s reply was highly revealing. “I think you’re pointing to something that is an enormous challenge,” she told Lagarde. “And we simply have to expect that when we draw regulatory boundaries and supervise intensely within them, that there is a prospect that activities will move outside those boundaries and we won’t be able to detect them.”

Well that’s all neat and tidy and parallel universe-y then! Ta-ta, I’m off to lunch, let me know when my car has arrived.

Comment by Whac-A-Bubble™
2014-07-05 09:35:34

Political Diary
A Warning for the Fed
By Mary Anastasia O’Grady
June 30, 2014 1:07 p.m. ET

All hail Claudio Borio, head of the monetary and economic department at the International Bank for Settlements based in Basel, Switzerland. On Sunday the BIS released its annual report with a stern warning to central bankers around the world that they risk inflating dangerous asset bubbles with loose monetary policy. “Financial markets are euphoric, in the grip of an aggressive search for yield . . . and yet investment in the real economy remains weak while the macroeconomic and geopolitical outlook is still highly uncertain,” Mr. Borio said.

That view from Mr. Borio is not new. But getting it into the BIS annual report at this time is a great public service.

Among other things, the BIS is worried about government debt levels. As The Wall Street Journal said on Monday, “the BIS report cited data that showed 2014 debt exceeding 100% of gross domestic product in most major economies, including Italy, Spain, France, the U.S. and the U.K.” Low interest rates, the bank pointed out, increase the appetite for borrowing and diminish incentives to deleverage. But at some point rates go back up, and too much leverage never ends well.

One good reason to listen to Mr. Borio is that he predicted the last financial crisis. In April he told the German newspaper Der Spiegel that he sees the same thing shaping up again, as central banks keep interest rates exceedingly low because of lagging growth in the real economy, even though financial asset prices are spiking.

The trouble, Mr. Borio told the newspaper, is that the financial sector—for which he uses growth in loans and real estate prices—is increasingly delinked from the real economy. This has been happening since the 1980s when deregulation and globalization started to take off, he said. Since then, the “financial cycle” as he calls it has looked very different from the real economy. The story can be told simply with a chart provided by Mr. Borio, showing changes in the “financial sector” laid on top of a chart of changes in U.S. gross domestic product. There appears to be very little correlation in the past thirty years and far more volatility in the financial sector.

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Comment by Ben Jones
2014-07-05 10:04:01

‘they risk inflating dangerous asset bubbles with loose monetary policy. “Financial markets are euphoric, in the grip of an aggressive search for yield”

They have been for years, so I’m not sure what the timing of the BIS and IMF “warning” means. Yellen says a lot about guarding the “system”. But who holds all these junk bonds issued at 6 or 5%? Sure, it won’t be the banks that get taken down by US house loans going bad, but the individuals who are underwater may be going to Applebee’s a bit less.

Yellen’s tone-deafness extends far and wide. Also yesterday, I posted a comment from a Singaporean netizen who could connect the Asian housing bubbles with Fed-led global QE. The person also called BS on the developers begging the government to protect them from a 1.5% decline after a 60% run-up.

And there was the Chinese tale of a developer insisting that houses aren’t built to live in. (Of course! Such perversity can only arise when people have lost their minds. When people can openly say completely insane things or do insane things, confident they will get rich doing so, is more telling than charts and statistics.)

OK, so what does Yellen’s little foot-stamping act this week mean for you or me? Is it a response to CYA stuff from the IMF and BIS? I don’t know. But what was revealed is only a situation that already existed. No policy was changed, only made more clear. I do think we can conclude that the Federal Reserve is either crooked to the core, or packed with reckless fools, blindly doing what has failed over and over. Either way, it’s not good.

Comment by Blue Skye
2014-07-05 20:15:33

Either way, it is not good to be in debt to these people.

Comment by iftheshoefits
2014-07-06 08:59:59

It’s not good to be parking your cash with them, either.

Not many real choices these days, are there?

Comment by Whac-A-Bubble™
2014-07-05 09:39:20

Markets & Finance
Wall Street’s Worst-Case Scenario: A Run on Bonds
By Nick Summers and Lisa Abramowicz
July 03, 2014

All it takes is a few mouse clicks to buy shares in the Scout Unconstrained Bond Fund (SUBFX), an exchange-traded fund that tracks a concoction of debt tied to the government, financial firms, mortgage pools, and other entities.

And all it takes is a few mouse clicks to sell—something that has begun to worry Wall Street. Since the financial crisis, $900 billion has flowed into bond mutual funds and ETFs such as Scout Unconstrained, bringing the industry’s total holdings to $3 trillion. Fund investors who sell shares get their money back almost immediately, as if they were making a withdrawal from a money-market fund. The bonds that the funds own are far less liquid, often trading in telephone conversations or e-mails between brokers, away from exchanges. If too many people decide to get out of bond funds at the same time, the wave of selling could lead buyers to sit on their hands, bringing the system to a halt.

In the aftermath of the financial crisis, the Federal Reserve has kept short-term interest rates near zero to spur borrowing and boost economic activity. The unemployment rate has fallen to 6.3 percent, below the Fed’s target of 6.5 percent, and the central bank is curtailing its easy-money policies, reducing the amount of bonds it buys each month and getting closer to raising its benchmark interest rate. Economists surveyed by Bloomberg say rates could rise as soon as the end of this year.

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Comment by Housing Analyst
2014-07-05 09:40:47

“The economists in the post yesterday suggested all this bubble merriment was really a by-product of these elites systematically stuffing free money in their pockets, ”

Or another way to look at it, it’s a skim no different than mobsters running the house. The greater the losses, the greater the skim.

The public needs to pull their had out of there ass.

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Comment by Whac-A-Bubble™
2014-07-05 09:42:21

Fed Shelters Investors From Full Cost of Bonds Selloff, BIS Says
By Anchalee Worrachate
June 29, 2014

The Federal Reserve has taken some of the sting out of selloffs in Treasuries through its accumulation of government bonds, according to the Bank for International Settlements.

Last year’s rout in the securities between May and July generated total losses of $425 billion, equal to about 2.5 percent of U.S. gross domestic product, the BIS estimated in a report published today. With the Fed’s holdings softening the blow, private investors incurred only about $280 billion of the costs, or 1.7 percent of GDP.

“The valuation losses for public holders of U.S. Treasury securities in 2013 were relatively contained,” the Basel, Switzerland-based BIS said in its annual report.

Treasuries fell last year for the first time since 2009 as the Fed moved closer to scaling back its bond-buying program, designed to boost the economy by lowering borrowing costs. While they rose in the first half of this year, analysts are predicting declines for the next four quarters, according to yield forecasts compiled by Bloomberg, exposing investors and the Fed to another potential round of losses.

To assess the impact on public bondholders of the declines last year, the BIS drew a comparison with other bond selloffs in 1994 and 2003. It found the total losses in the 2013 rout were greater than in the previous two episodes because the market size is bigger and bonds are more sensitive to changes in interest rates.

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Comment by Guillotine Renovator
2014-07-05 11:28:34

“The economists in the post yesterday suggested all this bubble merriment was really a by-product of these elites systematically stuffing free money in their pockets, while pretending to be “managing” the economy. Thus the ever increasing inequality.”

This is it in a nutshell. It’s the biggest ripoff of the American public in history, and it’s right in plain sight. Yet, nobody seems to care enough to call these people on the carpet. There are a few articles here and there, but nothing gains traction. Bernanke and Yellen are fawned over by the media like they’re some sort of heroes, but they are economic terrorists.

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Comment by cactus
2014-07-05 13:00:05

The economists in the post yesterday suggested all this bubble merriment was really a by-product of these elites systematically stuffing free money in their pockets, while pretending to be “managing” the economy. Thus the ever increasing inequality. Hmmm, that couldn’t possibly back-fire on a bunch of limousine riding pasty a-holes who’ve never had a real job in their life.”

They nailed it

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Comment by ClubberLang
2014-07-05 00:17:54


Comment by Doom
2014-07-05 07:34:07

Interest rates will go up, 5% to 5.5% on mortages which will start a house buying panic in the near future.

Bank interest on jumbo CD’s to 4%, folks will rejoice and spend that money when it stats accumulating ( sounds like inflation anybody listening).

Stocks will retreat to about 3,000 point drop. Target number will be about 13,500 to 14,000 and stay flat very long time when these numbers are reached.

Jobs pick- up and hourly wage raises to near $30.00 to try to keep with inflation and keep some of the Indians on the reservation happy.

Super rich 1% start to worry as wealth shrinks, fed doesn’t care about them anymore they had their fun for 10 years.

Houses continue to see a low inventory because many who got burned stay put longer and remodel their property. Slim pickings in resale mean more new houses are built and lines start to form again for them.

All in all Wash DC know their approval ratings are in the tank, both parties realize a revolt is not in the best interest for democracies. They throw the 1% out to the wind and start to pay attention to the other 99%, they have to.

Look for better times, higher inflation, better jobs, stable but tough housing for buyers market as Resales shrink and new homes surge.

A kinder gentler Gov’t means less intrusion on our life’s, the fed reserve takes a more neutral stance and involment, IRS and tax code revise so the very rich get more hits and working class and students loans ease up.

All of this by 2017 will happen I believe, in the past I have a good track record, in trying to gauge capitalism.

Comment by Housing Analyst
2014-07-05 09:36:21

Housing demand has been drifting lower every year since 2005 irrespective of direction of rates.

Get honest.

Comment by Jingle Male
2014-07-06 06:08:51

…and will keep drifting lower forever. You know, because it is different this time….prices will never go up again…..HA!

Comment by Housing Analyst
2014-07-06 09:28:31

Indeed it will for as long as asking prices of resale housing remain inflated 300% over long term trend.

See? You’re really are capable of learning J._Fraud.

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Comment by Whac-A-Bubble™
2014-07-05 09:45:20

“…which will start a house buying panic in the near future.”

There is a huge conceptual flaw in this thinking, which is that people who can’t afford to buy now will be even less able to afford buying after rates go up.

More likely scenario: House selling panic when owners realize that prices are reverting to normalcy, and aren’t destined to ever again go back to currently stratospheric levels relative to incomes and rents.

Comment by plasmacutter
2014-07-07 10:06:36

I hate to be a pedant, but it’s “normality”.

“normalcy” was a word pushed into the public consciousness by candidate Warren G harding. It’s up there with bush’s use of “nucular”.

Comment by taxpayers
2014-07-05 10:32:27

invest in countries w/o unemp ins and other goodies
ewm- ews
ro gold and cash w low unemp
swz- norw

Comment by Jingle Male
2014-07-06 06:11:26

What are you saying? Can you write in English, Spanish or German…..something we can interpret?

Comment by Whac-A-Bubble™
2014-07-05 10:57:35

“Recession begins in Q3-Q4 of 2014…”

Will this be a weather-related development?

How Can So Many Smart People Really Blame a 3% GDP Drop on the Weather?
June 26, 2014

And it just continues. Every day you take a look at what’s happening in the news, you just don’t believe it. You don’t believe what’s happening. You don’t believe what people are saying about it. Some of you, I’m sure, are starting to question your own sanity. I, of course, never do that, but some of you no doubt are. And none of it makes any sense out there.

The number of people who actually say that the weather is why we had a 3% contraction — 3% is historic! It’s not coincidental, accidental. It’s not a blip. It’s historic. A 3% contraction in the economy: “Nothing to see here. It was just the cold weather.” I mean, there’s some otherwise smart people, or people we’re told are smart, saying that.

Comment by Jingle Male
2014-07-06 06:17:28

3% is an ANNUAL rate. The contraction was over a 3 month period during J,F, & M. It was cold. Pretty logical conclusion. The numbers for the 2nd Qtr are much better. So clearly the weather played a part, the recovery trend is continuing….. And the histeria dies down.

Comment by Whac-A-Bubble™
2014-07-06 08:07:20

“It was cold. Pretty logical conclusion.”

It is cold every winter. If the weather logically explains economic activity, then why isn’t there an economic contraction every winter?

Comment by Rental Watch
2014-07-07 03:47:10

There IS an economic contraction every winter…it’s why data are “seasonally adjusted”.

The St. Louis Fed doesn’t even publish a quarterly GDP data that isn’t seasonally adjusted…they don’t want people to panic. The BEA’s standard press release only shows seasonally adjusted data.

In many parts of the US, this particular winter happened to be among the coldest on record, and thus typical seasonal adjustment wasn’t enough.

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Comment by Housing Analyst
2014-07-07 06:23:47

And cratered even with the seasonal adjustment.

Comment by Housing Analyst
2014-07-06 08:27:50

Remember J._Fraud…… The definition of a housing recovery is falling prices to dramatically lower and more affordable levels spuring demand.

Comment by Whac-A-Bubble™
2014-07-06 08:32:57

Isn’t it clear by now that the Fed will prevent this from ever occurring?

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Comment by Housing Analyst
2014-07-06 09:00:55

How’d that work out for the Fed in 2007?

Comment by Prime_Is_Contained
2014-07-06 10:02:25

How’d that work out for the Fed in 2007?

Pretty well in terms of housing prices; I did not expect them to be successful at causing them to levitate, but they did succeed, at least for a while.

Comment by Housing Analyst
2014-07-06 10:12:13

You’re ducking and weaving

Comment by Ben Jones
2014-07-06 10:25:22

This isn’t happening in a vacuum.

‘MANILA, Philippines - Monetary authorities are likely to raise rates further as inflationary pressures are still high and June’s deceleration is primarily led by the slowdown of housing prices, a leading bank economist said. In its latest global research, HSBC economist Trinh Nguyen said at the July 31 meeting, the Bangko Sentral ng Pilipinas (BSP) will likely increase the main policy rate (reverse repurchase agreement) by 25 basis points, taking the rate to 3.75 percent.’

‘Nguyen noted that headline inflation decelerated slightly on lower housing costs. But food prices remained elevated, reflecting supply-side constraints. “Excess liquidity is another concern; credit growth accelerated in May. The government will import more rice to mitigate supply shocks but food prices will remain high,” she said.’

“The central bank raised the special deposit account (SDA) by 25bps and the RRR by two percentage points to temper inflationary pressures. The respite from lower housing costs, however, is temporary and inflationary pressures will likely remain high,” she added.’


The Bank of England has been forced to slow down the housing market, and is now telling investors to watch out. New Zealand is clamping down in several ways. Same with Hong Kong, Malaysia, Singapore, Norway and even Canada to a lesser degree.

The Indian central bank chief said publicly that what the Federal Reserve does can’t be considered in just a US viewpoint. All this money washing around drove up food prices in India and they had to raise rates to defend their currency. Those higher rates hurt part of their economy, including real estate.

I’m glad this discussion has come to a head. I wonder if millions of 401k holders will stand outside Yellens office demanding she “cleanup” their evaporated retirement accounts?

Comment by Whac-A-Bubble™
2014-07-06 13:04:36

“How’d that work out for the Fed in 2007?”

Spectacular fail.

Best and worst predictions of the past 25 years

Jeff Cox | @JeffCoxCNBCcom
Tuesday, 1 Jul 2014 | 7:05 AM ET

Helicopter Ben’s “contained” crisis. Most accounts of financial-crisis history no doubt will paint then-Federal Reserve Chairman Ben Bernanke as one of the central figures on the Committee to Save the World, as it was nicknamed. But it was also Bernanke’s seeming obliviousness to the dangers of subprime mortgages that helped stoke the debacle in the first place. In a speech given March 28, 2007, before the Joint Economic Committee, the central bank chief showed just how deep the denial ran over the coming crisis: “Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear,” he said. “At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency.

The statement would soon prove to be tragically shortsighted, though the Fed ultimately would join with the Treasury Department to devise trillions of dollars’ worth of alphabet-soup programs that bailed out the financial, insurance and auto industries, paving the way for a recovery—albeit grudgingly slow—that continues today.

Comment by Ella58
2014-07-05 11:42:32

Prediction (though I hope I’m wrong): the clogged pipeline of foreclosures will be cleared away by magic (and somehow consequence-free for banks) debt forgiveness and restructuring, which of course will fly under the radar.

Comment from someone on another blog: “Yesterday [July 3rd], one of my neighbors told me that the bank had forgiven $300,000 of her mortgage and refinanced the balance so she could stay in her home. She was dumbfounded.”

After all, with so many people who have been in foreclosure for 5+ years and are still in their houses, who will know or object if their debt is suddenly a few hundred thousand lower?

If the Mortgage Forgiveness Debt Relief Act is not extended, then at first the IRS will pursue these debtors for taxes on their loan forgiveness “gift,” but will reverse course immediately after legislators threaten to intervene again, and this particular provision of the tax code will simply no longer be enforced.

Forgiveness and restructuring will also apply to home equity loan resets as they continue to snowball, and most will be rolled over to another 10 year interest-only period.

Also, all this forgiveness, restructuring, extension and tax relief will continue to unfold in an ad-hoc, arbitrary manner; many will benefit from tax-free debt forgiveness, but a few will still get thrown out of their homes or investment properties or get hit with a huge tax bill. The media will focus exclusively on this latter group.

Comment by Housing Analyst
2014-07-06 13:47:21

End result: An increasingly moribund housing market as a result of collapsing demand.

Comment by Housing Analyst
2014-07-05 12:47:57

“Local Realtor Accused Of Setting Own Property On Fire”


Realtors truly are corrupt bottom of the barrel types.

Comment by Housing Analyst
Comment by cactus
2014-07-05 13:09:07

Gasoline goes up

Health care cost go up

taxes go up

Education cost go down

Housing goes up in price were the 1% live down everywhere else

Comment by rms
2014-07-05 18:22:43

“Education cost go down”

Huh? Not so for the top-ten ABET-STEM Universities.

Comment by Whac-A-Bubble™
2014-07-05 22:31:08

Higher education
The attack of the MOOCs
An army of new online courses is scaring the wits out of traditional universities. But can they find a viable business model?
Jul 20th 2013 | NEW YORK | From the print edition

DOTCOM mania was slow in coming to higher education, but now it has the venerable industry firmly in its grip. Since the launch early last year of Udacity and Coursera, two Silicon Valley start-ups offering free education through MOOCs, massive open online courses, the ivory towers of academia have been shaken to their foundations. University brands built in some cases over centuries have been forced to contemplate the possibility that information technology will rapidly make their existing business model obsolete. Meanwhile, the MOOCs have multiplied in number, resources and student recruitment—without yet having figured out a business model of their own.

Besides providing online courses to their own (generally fee-paying) students, universities have felt obliged to join the MOOC revolution to avoid being guillotined by it. Coursera has formed partnerships with 83 universities and colleges around the world, including many of America’s top-tier institutions.

EdX, a non-profit MOOC provider founded in May 2012 by Harvard University and the Massachusetts Institute of Technology and backed with $60m of their money, is now a consortium of 28 institutions, the most recent joiner being the Indian Institute of Technology in Mumbai. Led by the Open University, which pioneered distance-learning in the 1970s, FutureLearn, a consortium of 21 British, one Irish and one Australian university, plus other educational bodies, will start offering MOOCs later this year. But Oxford and Cambridge remain aloof, refusing to join what a senior Oxford figure fears may be a “lemming-like rush” into MOOCs.

On July 10th Coursera said it had raised another $43m in venture capital, on top of the $22m it banked last year. Although its enrollments have soared, and now exceed 4m students, this is a huge leap of faith by investors that the firm can develop a viable business model. The new money should allow Coursera to build on any advantage it has from being a first mover among a rapidly growing number of MOOC providers. “It is somewhat entertaining to watch the number of people jumping on board,” says Daphne Koller, a Stanford professor and co-founder of Coursera. She expects it to become one of a “very small number of dominant players”.

The industry has similar network economics to Amazon, eBay and Google, says Ms Koller, in that “content producers go to where most consumers are, and consumers go to where the most content is.” Simon Nelson, the chief executive of FutureLearn, disagrees. “Anyone who thinks the rules of engagement have already been written by the existing players is massively underestimating the potential of the technology,” he says.

Comment by scdave
2014-07-06 07:45:57

“Anyone who thinks the rules of engagement have already been written by the existing players is massively underestimating the potential of the technology,” he says ??

Yep…Top flight Academia knowledge is coming to the masses of the world on the cheap…That teenage genius, from some poor family or area now has access to the same information the brightest at MIT have…

Eric Schmidt (Google) offered up this thought on the Charlie Rose show…He said, information technology is available to even the most remote parts of the world and will unleash idea’s and products that will dwarf what we have today…

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Comment by Whac-A-Bubble™
2014-07-06 08:19:45

The logical way forward will be for higher education to further divide into the have-alots, who can afford on-site education at an Ivy League college, including the benefits of face-to-face instruction plus socialization into the future movers-and-shakers club, and the have-littles, who will be able to access the best lectures online through MOOCs, but will not enjoy the social experiences or face time with big name professors that the have-alots will get.

The winners will be adult learners who have the self discipline and motivation to work through MOOC coursework but whose schedule demands and financial means would not enable them to pursue a traditional college program. The losers will be traditional colleges on the competitive fringe which can’t compete with more affordable MOOC course programs from big-name schools.

Comment by scdave
2014-07-06 08:33:17

Well, I agree with much of what you said but, although that child in say a remote outback of New Zealand will get the same information although without the face time with professors and others…However, they could get face-time through Skype even if it may be others taking the same course…

I think that was Eric’s point…That the “prisoner-of-place” model of needing to be physically located at the University has changed…He suggested that the idea’s and products that come from this unleashing of Knowledge is going to be massive…

Comment by shendi
2014-07-06 08:52:23

So does this mean a drop in tuition and cost of getting a degree in a marketable field? Will the future parents have the courage to tell their average kids to get the degree from a MOOC (massive open online course) while staying at home?

It has potential for all those students adult or new that have the discipline to learn. However the job opportunities have plateaued. In fact they are decreasing all the time for those average and below average students.

Comment by scdave
2014-07-06 09:21:11

So does this mean a drop in tuition and cost of getting a degree in a marketable field ??

Well sure it does…

Will the future parents have the courage to tell their average kids to get the degree from a MOOC (massive open online course) while staying at home ??

When it becomes mainstream acceptable yes…Furthermore, the big picture is quality vs. cost…Very poor people will be able to get an education in disciplines that would cost thousands of dollars maybe more like 10’s of thousands mostly available to the very rich or very bright…

Comment by rms
2014-07-06 09:37:12

FWIW, the easy kitty, projectile vomiting, spring travel, etc., are also part of the college experience. But I could see the MOOC as the ideal model for continuing education particularly for those outside of the metro RE bubbles.

Comment by scdave
2014-07-06 09:45:56

FWIW, the easy kitty, projectile vomiting, spring travel, etc ?

I don’t think they need to be on campus to get all those benefits now do they… : >)

Comment by Whac-A-Bubble™
2014-07-06 10:48:50

“However, they could get face-time through Skype even if it may be others taking the same course…”

How are they going to pay for that?

Which reminds me of a potential opportunity for folks with tutoring skills (myself included) — that of providing access to real time Q&A sessions that are standard in traditional college education but may be lacking in the MOOC realm until enterprising educators figure out how to fill the void.

Comment by Whac-A-Bubble™
2014-07-06 11:01:55

“So does this mean a drop in tuition and cost of getting a degree in a marketable field?”

Yes, provided a few hurdles in MOOC education can be overcome:

1) How do you control cheating, including identity fraud, in online education (also a problem in traditional college education, but potentially much worse for MOOCs)?

2) Can the MOOC educational experience provide a comparable level of benefit to students as a traditional college education?

3) What can be done to increase the success rate for MOOC courses, given that completion rates so far have tended to lie below 10%?

4) Will the traditional college educational establishment be willing to give up market share to online degree programs?

Meanwhile, for bright, self-motivated people, there are many great online courses already available for the taking, provided your objective is to gain the knowledge from taking the courses, rather than a degree.

Comment by Prime_Is_Contained
2014-07-06 11:13:10

1) How do you control cheating, including identity fraud, in online education

How do they control it in standardized tests like the SAT?

It will be controlled the same way in online education, IMO: after mastering the curriculum (at your own pace, online), show up in person, with state-issued ID in hand, to take the test.

At the end of the day, if employers are going to make assumptions about what you know, it is reasonable for them to ask to see verifiable, comparable results.

I think there is a huge potential market here for organizations like the College Board, ETS, etc.

Comment by Whac-A-Bubble™
2014-07-06 11:33:42

PiC — agreed. I don’t think the identity fraud issue is insurmountable by any means; just one of the hurdles that will need to be overcome to operationalize MOOC-based degree programs.

Comment by shendi
2014-07-06 17:06:40

I sure hope that grade inflation will go away. It could then mean an easier path for students to find jobs in their own field/ subject of study. As these days even with GPA above 3.5 the quality of students is really bad.

Comment by Prime_Is_Contained
2014-07-06 18:37:36

I sure hope that grade inflation will go away.

That’s one of the benefits of having the testing done by the College Board or ETS! No one complains that the GRE has been grade-inflated…

Comment by azdude
2014-07-05 14:17:57

these bubbles are created to enrich the elite.

Comment by Professorlocknload
2014-07-05 15:02:23

I’ll throw a prognostication in to the hopper;

Bottom line here is, the Fed has no choice but to monetize this Wurlitzer in order to prevent asset price drops, pumping nominal house prices up to generate increased property tax revenues, thereby bailing out municipalities, and upping prices of things in general, to increase sales tax revenue.

In the process, amnesty that the Home Builders and Realtors are lobbying for, will be granted. This adds 15-35 million new household formers to the picture. Once legitimacy is established for these millions, Fanny, Freddy, FHA, etc will solicit these new customers to join the ‘Murikan dream, absorbing 14 million vacancies, plus what ever in addition need to be built to accommodate these new “citizens,” and the millions who flood in behind them in anticipation of the next amnesty. (With risk of losing a home by being deported gone, multiple family living arrangements will give in to single family household formation.)

Lagging incomes will begin rising as this tsunami of new money, and velocity of same, exponentially increases. The Fed will see to it the money gates remain wide open until inflation is running double digit, and interest rates are up to around 100 basis points behind it.

In other words, it’s QE until the old 20’s tune ‘”We’re in the Money” takes a position on the Top 40 again. As Hendry suggested, one trillion didn’t do it. Four trillion didn’t do it. But some trillion, some day, will. As A kicker, Bass stated, when asked about the end game, and I paraphrase, “They are going to kill the dollar.”

Rising asset prices this time around are most likely in response to the devaluation of the Buck, now getting underway. If the Fed sees another negative GDP print coming, best spend some of that depreciating cash on a crash helmet, ’cause the Three Wire bales of C-Notes will be falling from the heavens. It’s all the Keynesian fools know.

No, house prices aren’t going back to 1963’s $5 k, the Dow isn’t going back to 750 and a cup of Joe 5 cents. I don’t expect gas at 27 cents, either. Three steps forward, one step back is the norm. This time around it took two steps back. The next Great Leap Forward is going to catch a lot of folks off guard, but it just isn’t different this time, it’s just a bit more extreme.

My take, anyway. And you might guess, I chewed the sweet out of the bonds these last 5 or 6 years, and am shopping Northern California*, Oregon Coastal positive ROI property again. Add a doubloon or two of $1.2 k AU and anything else I can trade for Janet’s funny money.

Better to be early in these inevitable trend swings than late. And this Deflation meme is getting very long in the tooth, as the price of everything from rent to food to fuel has risen, and I need those things. ( I don’t eat IPads, so deflation has done nothing for me in that regard.) And at this juncture there sure isn’t a shortage of “Believers” who will take the bonds off my hands. Might as well sell ‘em what they want.

Add the fact Janet’s “Blue Team” needs frenzied dancing in the streets, to maintain control of the levers in 2016. So will the “Red Team” con- gress, for that matter.

* Northern Cal, Not SF !

Comment by Housing Analyst
2014-07-05 17:03:02

Once again, you’re ignoring demand.

Comment by Patrick
2014-07-06 15:58:01

Bingo. We have a winner.

Demand will not rebound to it’s former heights because of miniaturization, improved efficiencies, automation, and massive attitudinal changes, eg vegan vs meat.

Corporate profitability drives have permanently lowered cost of sales goals.

We have to design a new economy that will Sop up surplus labour.

Rah rah statements will not rebound demand. A 3% hit should be analysed not painted over.

Sanctioned counterfeiting is a straw house in a wind storm. Worthless even in the short term.

We should all buy a Gandhi-like thread making machine.

Comment by Guillotine Renovator
2014-07-06 00:29:37

Sounds like you’re trying to justify buying a house, almost like a junkie who cannot quit the dope and keeps coming up with reasons why using is ok. You will get taken out at the knees.

Comment by scdave
2014-07-06 07:57:47

and am shopping Northern California*, Oregon Coastal positive ROI property again ??

I am quite familiar with both area’s Professorlocknload….

Comment by Guillotine Renovator
2014-07-06 10:29:15

Maybe you two should get together and ’snap up some sweet dealz.’

Comment by plasmacutter
2014-07-07 10:26:02

“Rising asset prices this time around are most likely in response to the devaluation of the Buck, now getting underway. If the Fed sees another negative GDP print coming, best spend some of that depreciating cash on a crash helmet, ’cause the Three Wire bales of C-Notes will be falling from the heavens. It’s all the Keynesian fools know. ”

I’m getting tired of people referring to an obvious supply-side policy of giving trillions of dollars to huge banks and hoping it will ‘trickle down’ as Keynesianism.

Keynesian “pump priming” is a shot-term policy of cushioning the blow of a large firm or economic sector dying off by assuring the peons who lost their jobs through no personal fault can still buy things from the remaining producers on the field. So long as the economic problem is not structural, this policy works by allowing enough time for the “next in line” firms to fill the gap. If the problem is structural, no amount of priming the pump will work because the hose is busted.

There is not one iota of “Keynes” in the fed and federal policies of bailing out businesses who are failing due to incompetence/complacency, then handing them trillions of dollars. Keynes if alive today would be on the major media utterly fuming. I suspect he’s spinning so quickly in his grave at this point we could build a turbine around him and provide the entire world with free, perpetual energy.

Comment by Whac-A-Bubble™
2014-07-05 18:02:11

Global financial stability will prove unattainable until this situation is resolved.

The global monetary system
Not floating, but flailing
After 150 years of monetary experimentation, the world remains unsure how to organise global finance
Jul 5th 2014 | From the print edition

SEVENTY years ago this month, 730 delegates gathered in Bretton Woods, New Hampshire to reopen an old debate. Global commerce has long faced a fundamental tension: the more certainty countries create around exchange rates, the less room they have to manage domestic economic affairs. Thirty years before Bretton Woods a war wrecked the world’s first stab at the problem—the gold standard—and the attempt to rebuild it in the 1920s led to depression and another war. The exchange-rate system agreed at Bretton Woods lasted only a generation. After 150 years of experimentation the world has yet to solve its monetary problem.

Most monetary systems have been the product of accident rather than design. The classical gold standard developed in industrialising Britain. Its economic success encouraged others to transact on its terms. Germany’s adoption of gold in 1871 put Europe’s two leading economies on one standard; others quickly followed suit.

The gold standard’s priority was the lubrication of global trade. Exchange rates were fixed across economies and capital flowed without any regulatory hindrance. Though the free flow of capital left currencies vulnerable, the system survived for decades thanks to governments’ iron commitment to gold. That, in turn, was built on the relatively feeble political influence of working people and the relative strength of creditors. Central banks refrained from destabilising actions and lent to each other in times of crisis.

The first world war changed all this. Belligerent countries instituted capital controls and printed money to pay for the war. Europe tried to patch up the system after the war but it no longer worked well. Gold reserves grew increasingly unbalanced; France and America built growing hoards, while Britain and Germany ran short. Central bank solidarity was also in short supply. America, which at times controlled 46% of the world’s gold, could have rebalanced the system by expanding its money supply and allowing prices to rise. Yet it refused to do so thanks to domestic worries, chiefly a desire to limit a Wall Street boom.

The revived system broke under the strain of depression.

Comment by Whac-A-Bubble™
2014-07-05 18:03:11

China’s housing bubble denouement will continue to unfold at a snail’s pace.

Comment by Whac-A-Bubble™
2014-07-05 18:05:37

Investing 7/01/2014 @ 9:21AM
China Housing Bubble Won’t Impact Global Financial Markets, Says Treasury Secretary Lew

He didn’t exactly call it a bubble, but whatever you call it, China’s red hot real estate isn’t going to impact global financial markets the same way the U.S. mortgage crisis did, Treasury Secretary Jacob Lew said Tuesday.

“China needs market determined interest rates and market determined capital,” he said during a media conference run by the U.S. China Business Council. ”Some of the pressures in the economy, like real estate, come from the artificial way in which capital has been allocated.”

Lew said there was a possibility of a bubble and that China had an “awful amount of tools” to stop it.

The Treasury Secretary said the housing market was not connected to the rest of the world, and was generally not over leveraged like it was in the U.S. and Europe. ”I think that for the next few years China can handle that, but if we go five years down the road and no reforms have been made, maybe they will have more difficulties,” he said.

Comment by Whac-A-Bubble™
2014-07-06 08:22:47

One can’t help but wonder whether the China housing bubble is fully contained, the way the U.S. subprime lending situation was circa August 2007?

Comment by Whac-A-Bubble™
2014-07-05 18:10:17

Monday, 16 June 2014 10:46
Chinese Economist at IMF Warns of Global Housing Bubble
Written by Bob Adelmann

The false assumption that regulators can be safely counted upon to steer economies — local, national, or global — to full employment with minimal inflation while avoiding booms and busts was exposed in the latest yelp from the deputy managing director of the International Monetary Fund (IMF), Zhu Min. In Chinese, his name means “people rule” or “democracy,” but his ideology is firmly rooted in the Keynesian fallacy that economies can be successfully managed by experts without assistance or input from the common folk.

In announcing that the IMF has launched a new website, Global Housing Watch, Zhu delights in thinking that the world’s economy can be driven by looking through the rear view mirror. He said,

Housing prices are inching up….

In fact, our research indicates that boom-bust patterns preceded more than two-thirds of the recent 50 systemic banking crises [experienced around the world]….

We need to guard against another unsustainable boom.

Through a series of charts and graphs — one the tools of hubris-infected Keynesians — Zhu concludes that another bubble is brewing: “33 out of 52 countries in our Global House Price Index showed increases in house prices,” some of them unnerving. For example, Zhu’s own China has seen housing prices gain nearly 10 percent in just the last year, placing it fourth behind New Zealand, Hong Kong, and the Philippines. The United States, Israel, Australia, Switzerland, and Germany aren’t far behind, either, registering gains in the high single digits.

And when other ratios are calculated, such as affordability compared to rents and incomes, the numbers are equally concerning. In explaining why he’s nervous, he sounds sensible:

Theory asserts that house prices, rents and incomes should move in tandem over the long run. If house prices and rents get way out of line, people would switch between buying and renting, eventually bringing the two in adjustment. Similarly, in the long run, the price of houses cannot stray too far from people’s ability to afford them.

In a free, unfettered, unregulated housing market, of course, Zhu is exactly right. But as Ronald Reagan famously said, “Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”

Zhu is a graduate of that school. Born and raised in China, Zhu attended Fudan University, where he obtained his BA in economics in 1982. That university, founded in 1905, was subverted into a Keynesian transmission belt when the People’s Republic of China took over the country in 1952, modelling itself after the Soviet educational system.

After graduating from Fudan, Zhu gained a master’s degree in public administration from Princeton and a Ph.D. in economics from Johns Hopkins University. Prior to his work at the IMF, Zhu held various positions at the Bank of China, serving, as his own bio boasts, in “internal control [and] compliance.” No free market training there.

And his analysis of the international housing bubble that appears ready to burst shows it. What’s needed is more regulation and interference in the operation of the market than already exists, says Zhu, who suggested putting limits on loan-to-value ratios that banks and mortgage companies can offer, along with higher debt-to-income ratios required by borrowers. Additional capital requirements on the lenders themselves were also recommended. And then, of course, there’s monetary policy “which involves the central bank [of each country] raising interest rates … to cool off the housing sector.”

Comment by Whac-A-Bubble™
2014-07-05 18:12:29

Housing markets
Double bubble trouble
China’s property prices appear to be falling again
Mar 22nd 2014 | HONG KONG | From the print edition

CAN bubbles ever pop twice? In late 2009 the world began to worry about a Chinese property bubble, symbolised by Ordos, a newly built city, bereft of citizens, in Inner Mongolia. In the spring of 2010 China’s government broadened its curbs on multiple home purchases and mortgage borrowing. The following spring, prices in nine big cities fell at last, according to one widely watched index. “The Great Property Bubble Of China May Be Popping” declared the Wall Street Journal in June of that year.

This week the same newspaper cited “compelling signs the Chinese property boom is over,” noting that “Cassandras” have been predicting a crash for years. (The Cassandra of Greek myth could tell the future but was never believed. For China’s property Cassandras, things are the other way round: their direst predictions are often believed, but have yet to come true.)

Bubbles often go on longer than expected. This newspaper warned about America’s internet and housing bubbles years before they burst. What is unusual about China’s bubble is not its persistence but its prevarication. It seems to be bursting for a second time. Property prices did peak in 2011, as the Journal noted. But the following year, they started to rise again.

Prices are still rising in 69 of the 70 cities tracked by the official statistics (Wenzhou in Zhejiang province is the exception). But residential sales fell by 5% in the first two months of the year, compared with a year earlier. And other statistics paint a darker picture, points out Nomura, a bank, which believes that property now poses a systemic risk to China’s economy.

Nomura (among others) calculates an alternative property-price index by dividing the official figures for the value of housing sold nationwide (599 billion yuan, or $96 billion, in the first two months of 2014) by the floorspace sold (94m square metres). That suggests the price per square metre was about 6,400 yuan. By this (volatile) measure, prices fell by 3.8% compared with a year earlier (see chart). That has not happened since February 2012.

Falling prices would be a natural outcome of China’s frenetic pace of homebuilding. China now has almost as much floorspace per person as Italy enjoyed in 2009, Nomura calculates. GK Dragonomics, a consultancy, thinks China needs to build roughly 10m homes a year to keep up with the growing size and aspirations of the urban population (see article). Until 2011, China’s annual homebuilding was below that figure. In 2012, it surpassed it.

In most countries, that would be reported as good news. A rapid expansion of the housing stock means fewer people living in the boondocks or in urban discomfort. In China, however, this building frenzy is seen as an economic threat, not a triumph. One fear is that China’s developers are building houses for the wrong people (speculators) in the wrong places (backwaters). Instead of accommodating China’s overcrowded urban masses, too many houses stand empty, serving as stores of value for people dissatisfied with bank deposits and distrustful of the stockmarket. Another fear is that if homebuilding falls sharply, China may struggle to shift labour and capital quickly enough to avoid an abrupt slowdown in the overall economy.

Comment by Whac-A-Bubble™
2014-07-06 08:26:21

China’s lending bubble could threaten U.S. and global economies if not defused
Christopher S. Rugaber, Associated Press | April 29, 2014
Last Updated: Apr 29 8:13 AM ET

WASHINGTON — Just as the global economy has all but recovered from debt-fueled crises in the United States and Europe, economists have a new worry: China. They see a lending bubble there that threatens global growth unless Beijing defuses it.

That’s the view that emerges from an Associated Press survey this month of 30 economists. Still, the economists remain optimistic that Beijing’s high-stakes drive to reform its economy — the world’s second-largest — will bolster Chinese banks, ease the lending bubble and benefit U.S. exporters in the long run.

“They’ve really got to change the way they do business,” said William Cheney, chief economist at John Hancock Asset Management. “But they have a good track record of doing just that. I’m an optimist about their ability to make this transition.”

The source of concern is a surge in lending by Chinese banks. The lending was initially encouraged by the government during the 2008 global financial crisis to fuel growth. Big state-owned banks financed construction of homes, railroads and office towers. But much of the lending was directed by local officials for pet projects rather than to meet business needs.

On Monday, the International Monetary Fund issued a warning about China’s private debt. It released a report citing “rising vulnerabilities” in China’s financial system, including lending outside traditional banks. Lending by that “shadow” banking system now equals one-quarter of China’s economy, the report said.

The IMF also pointed to recent defaults in credit card and other debt sold to investors by banks and heavy debts owed by local governments.

If it continues, “this could spark adverse financial market reaction both in China and globally,” the IMF said.

The bubble has caused land prices in China to double in five years, according to an estimate by Nomura, a Japanese bank. Outstanding credit surged from 130% of the economy in 2008 to 200% in 2013, according to Capital Economics, a forecasting firm.

When debt has built up that fast in the past — as in the United States during the housing bubble — financial crises have typically followed.

“That should be setting alarm bells off,” said Mark Williams, chief Asia economist at Capital Economics.

When debt finances excessive building, eventually too few people or companies are willing to buy all the houses, apartments and offices. That can send prices sinking and trigger loan defaults by developers and property owners. Banks typically then curtail lending, thereby slowing growth.

Comment by Whac-A-Bubble™
2014-07-06 16:08:48

Has China’s property bubble burst?
Counting the Cost explores the problems facing the Chinese housing market and its impact on the economy.
Counting the Cost
Last updated: 02 Jul 2014 11:33

Property in China is not something we would usually delve into that much - maybe only because it does not grab headlines like property bubbles and subprime mortgages do elsewhere. But there are now widespread fears that China’s property market could be heading for a bust.

The last two downturns the Chinese government provided a financial boost to reignite the economy. But this time the government is not willing to play backstop as it tries to manage a wider economic slowdown.

So has China’s property bubble burst? And will it take down the economy? Kamahl Santamaria talks to Frank Chen, the executive director of CBRE in Shanghai. Wayne Hay reports from Brisbane, Australia and Adrian Brown from Yingkou, China.

Comment by Whac-A-Bubble™
2014-07-06 16:50:46

Opinion, Thinking About China
The Secret of China’s Housing Bubble Revealed
By Chinese Netizen | July 2, 2014
Last Updated: July 1, 2014 8:19 pm
A Chinese homebuyer makes inquiries about a new apartment project on display at a real estate fair in Yichang, in central China’s Hubei Province on May 18, 2012. (AFP/AFP/Getty Images)

Editor’s note: Since 2008, experts have predicted that a massive housing bubble in China was on the verge of bursting, yet the day of reckoning keeps getting postponed. The following dialogue has circulated widely on China’s Internet, posted by an anonymous netizen. It helps explain the psychology that keeps China’s housing bubble afloat.

At a karaoke bar, a middle-aged man sat with his nephew in a private compartment. “Uncle,” the nephew said, “No one is buying the houses we build. You must think of a solution fast.”

The middle-aged man glanced briefly at his nephew and turned to the table, where he grabbed a bottle of wine worth tens of thousands of yuan (10,000 yuan equals US$1,600). After pouring himself a full glass and downing it, he said to his nephew: “You don’t need to worry. All you need to do is construct the houses.”

The nephew, still not understanding, asked, “But why construct the houses if no one is buying them?”

“Don’t know much, do you, child? I’m not building houses to sell. Most people couldn’t afford them, anyhow. The construction is just a vanity project.”

Surprised, the nephew asked, “Where will the money come from if you do not sell the houses?”

“We will get a loan from the bank,” the uncle replied.

“Wouldn’t we need to pay it back?” the nephew asked.

The uncle explained: “Say I borrow 500 million from the bank and use only 200 million for investment and development. 300 million will be mine to keep. So it doesn’t matter whether I sell the houses or not.”

“After the houses are built, we will engage in speculation until the houses are worth a billion yuan each. We will gift some of the best houses to public servants.

“Once these public servants have many houses on their hands, they will do all they can to keep the value of the houses from dropping because if the value drops, it means the money they’ve got is disappearing. That’s how they will begin providing services for us,” the uncle said.

“But why wouldn’t we need to pay the bank back?” the nephew asked.

“Pay what?” scoffed the uncle. “We’ll use this billion-yuan house as collateral, and take out a loan for a new housing development. Just watch me get rich.”

“What if the bank runs out of money?” the nephew asked.

“No worries. The government will print more,” the uncle replied.

“Suppose it doesn’t?” the nephew asked.

“We’ll just announce bankruptcy and leave the houses for the government to deal with,” the uncle replied. “All my money is in foreign banks, anyhow.”

The nephew suddenly felt that he had learned something very important: Houses are not built for living in.

Comment by Housing Analyst
2014-07-05 19:31:00

Escondido, CA Housing Prices Dives 8% YoY; Inventory Doubles As Sellers Seek Buyers


Comment by Whac-A-Bubble™
2014-07-06 08:28:07

Prediction: Disagreement among top bankers about the best way to support global economic prosperity will continue to increase over the near-term future.

Comment by Whac-A-Bubble™
2014-07-06 08:31:57

Bloomberg News
Central Bankers Fire Back at Their Own Club Over Bubbles

By Simon Kennedy
July 04, 2014
Janet Yellen, chair of the U.S. Federal Reserve, speaks during a Joint Economic Committee hearing in Washington. Photographer: Andrew Harrer/Bloomberg

Central bankers are firing back at their own central bank.

Janet Yellen and Mario Draghi rebuffed a warning from the Bank for International Settlements that monetary authorities risked raising interest rates “too slowly and too late” to counter emerging asset bubbles.

“Monetary policy faces significant limitations as a tool to promote financial stability,” Yellen, the Federal Reserve chair, said on July 2, three days after the BIS published its advice. So-called macroprudential regulation should have the “primary role,” she said.

Draghi, the European Central Bank president, delivered what he called the “bottom line” the next day. “The first line of defense against financial stability risk should be the macroprudential exercise,” he said. “I don’t think that people would agree with the raising of interest rates now.”

Piling on, Bank of England Deputy Governor Jon Cunliffe said tightening monetary policy to curb asset values risked hurting the economy and so “should be seen as one of the last lines of defense” for stability. The BOE is already seeking to cool its property sector with measures to limit riskier mortgages and prevent an unsustainable buildup of consumer debt.

In Sweden, the Riksbank cut interest rates yesterday by a bigger-than-expected 50 basis points to ward off deflation, noting it is for “other policy areas to manage” rising household debt and housing markets.

“The message from the Fed as well as the ECB and Riksbank this week was that macroprudential policies will address any risks to financial stability while monetary policy remains loose for as long as it take to get a solid recovery and as long as inflation remains low,” Bank of America Corp. strategists said in a report to clients today. “The bottom line is that data, not asset prices, is what we think will drive monetary policies for now.”

It’s not the first time staff at the Basel, Switzerland-based BIS, which is owned by central banks and serves as a counterparty for them, has broken with their bosses. In 2003, BIS economists Claudio Borio and William R. White warned policy makers might need to raise rates to combat asset-price bubbles.

That advice was rejected too.

Comment by Whac-A-Bubble™
2014-07-06 11:04:34

“Central Bankers Fire Back at Their Own Club Over Bubbles”

I understand the problem of ‘friendly fire’ in combat zones, but in central banking? Who’d've thunk it?!

Comment by Neuromance
2014-07-06 16:22:33

“Success has a thousand fathers but failure is an orphan.”

Central bankers stepping out of line is indicative of turmoil which suggests some CYA positioning may be starting.

(Comments wont nest below this level)
Comment by Housing Analyst
2014-07-06 08:54:06

Carlsbad, CA Housing Prices Sink 4% At Peak Of Season; Inventory Balloons 43%


Comment by taxpayers
2014-07-06 09:10:05

trillion of dollars of MBS and CDO are still rated the same as US Treasuries.
= yikes

Comment by Whac-A-Bubble™
2014-07-06 11:07:06

There are no mysteries regarding this situation: The Fed and Treasury have backstopped MBS issued by Fannie Mae and Freddie Mac to make explicit the formerly implicit guarantee.

Comment by Prime_Is_Contained
2014-07-06 11:15:33

I was thinking the same thing, PB.

When the guarantee is explicit rather than implicit, the GSE issues _should_ be rated precisely the same as Treasuries. Why would they not be, when they are back by the same “full faith” and by the same taxing authority?

Comment by Whac-A-Bubble™
2014-07-06 13:31:48

Interest rates will stay low forevermore.

Comment by Whac-A-Bubble™
2014-07-06 13:33:58

Why interest rates may stay very low for a lot longer
U.S. Stocks Gain as Fed Cuts Stimulus Amid Economic Recovery
The long stretch of rock-bottom rates has been great for the stock market. Above, a trader works on the floor of the New York Stock Exchange as Janet Yellen, chair of the U.S. Federal Reserve, speaks during a news conference. (Jin Lee, Bloomberg)
* Year after year, analysts who predicted a sustained rebound in interest rates have been foiled
* Savers have almost $10 trillion sitting in bank accounts and money market funds, earning almost nothing

Since the financial crash of 2008, one of the biggest guessing games in the U.S. economy and markets has centered on interest rates — and when they would finally rise from the historic lows that followed the Great Recession.

But year after year, analysts who predicted a sustained rebound in rates have been foiled. The long stretch of rock-bottom rates has been great for many home buyers, corporate borrowers and stock markets. It has been murder on conservative savers, particularly older people with money in banks.

Now, with the U.S. economy showing resilience after a winter slump, the focus has again shifted to the question of when interest rates could begin to return to “normal” levels.

Yet many economists and investment pros believe that neither short-term nor long-term rates will go significantly higher, and stay there, in the next few years. More likely, they say, are modest increases that might even be quickly reversed.

Comment by rms
2014-07-06 14:19:03

“Interest rates will stay low forevermore.”

Attention pensioners and retirees! The Yellen cookbook, twenty Alpo recipes sure to impress your luncheon guests.

Comment by Patrick
2014-07-06 16:16:40


I would add to your list of pensioners and retirees, trust funds, insurance companies, graveyard sureties, university endowment funds, hospital trusts, registered education plans, deposits, accounts receivable, municipal and federal tax accounts, etc.

Comment by Whac-A-Bubble™
2014-07-06 17:02:29

The Outlook
As Food Prices Rise, Fed Keeps a Watchful Eye
Central Bank Officials Sometimes Look Past Food-Cost Increases
By Ben Leubsdorf and Jon Hilsenrath
July 6, 2014 2:50 p.m. ET
Hamburger prices rose after drought conditions reduced cattle herds. Bloomberg News

U.S. food prices are on the rise, raising a sensitive question: When the cost of a hamburger patty soars, does it count as inflation?

It does to everyone who eats and especially poorer Americans, whose food costs absorb a larger portion of their income. But central bankers take a more nuanced view. They sometimes look past food-price increases that appear temporary or isolated while trying to control broad and long-term inflation trends, not blips that might soon reverse.

The Federal Reserve faces an especially important challenge now as it mulls the long-standing dilemma of what to make of the price of a pork chop.

Comment by Whac-A-Bubble™
2014-07-06 17:41:43

Prediction: The Fed will revisit the old discussion about whether it is better to proactively lean against bubbles, or simply wait to deal with them until they are in view of the rear-view mirror.

Comment by Whac-A-Bubble™
2014-07-06 17:43:17

Yellen: Fed could raise interest rates to pop bubbles
Paul Davidson, USA TODAY 2:14 p.m. EDT July 2, 2014

Federal Reserve Chair Janet Yellen said Wednesday the central bank is prepared to raise interest rates to pop price bubbles in assets such as corporate or junk bonds if financial distress in those sectors developed and standard regulation were insufficient.

Yellen emphasized, however, that raising interest rates is a blunt tool and should be used only if regulatory measures, such as requiring banks to hold more capital, fall short.

Comment by Prime_Is_Contained
2014-07-07 21:05:18

Federal Reserve Chair Janet Yellen said Wednesday the central bank is prepared to raise interest rates to pop price bubbles in assets such as corporate or junk bonds if financial distress in those sectors developed and standard regulation were insufficient.

Yellen should do stand-up comedy. That’s funny stuff right there!

The coming “financial distress” in the junk-bond sector is incredibly predictable, and will occur immediately _after_ the Fed raises rates, of course. And that will cause them to raise rates _again_ in order to pop the bubble? How about popping it sooner, if you actually care to pop it?

Funny material, Janet!

Comment by Whac-A-Bubble™
2014-07-06 17:44:56

Fed won’t raise rates just to burst bubbles
By Annalyn Kurtz
July 2, 2014: 12:15 PM ET

No doubt about it: The Federal Reserve’s record low interest rates over the last few years have led some investors to take on riskier investments in search of higher returns.

This is part of the reason why stocks keep reaching record highs, demand for corporate bonds is rising, and volatility in the financial markets is low.

Even so, Federal Reserve Chair Janet Yellen says she’s not about to have the Fed raise interest rates merely to burst bubbles. Rather, whenever the Fed decides to raise rates, it will be because the central bank has achieved its other two primary goals: a healthy U.S. job market and stable prices, with inflation rising around 2% a year.

“I do not presently see a need for monetary policy to deviate from a primary focus on attaining prices stability and maximize employment, in order to address financial stability concerns,” Yellen said in a lecture at the International Monetary Fund in Washington, D.C. Wednesday.

Comment by Whac-A-Bubble™
2014-07-06 18:21:35

Fun fact: If the Fed achieves its target level of 2% annual inflation, the dollar will lose about half its value every 36 years:

(1-(1/1.02)^36)*100% = 51%.

Comment by Whac-A-Bubble™
2014-07-06 17:46:25

Progress noted: A decade ago, the Fed flat out denied the existence of asset price bubbles. Now at least they are implicitly acknowledging their existence, as they debate the best policy for dealing with them.

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