Once You Start Deflating A Bubble…
This is a weekend topic on the effects of Fannie Mae, Freddie Mac, the Federal Reserve’s bond ownership and deflation. From the CBO’s report, WARNING PDF. “Outlays increased for several major categories of spending: Outlays rose for the each of the three largest mandatory programs: Medicare,by $18 billion (or 15 percent), primarily because ofa large payment made to prescription drug plans in November 2014 to account for unanticipated spending increases in calendar year 2014; Medicaid, by $16 billion (or 23 percent), largely because some of the provisions of the Affordable Care Act did not take effect until January 2014; and Social Security benefits,by $9 billion (or 4 percent).”
“Much of the increase in spending occurred because payments to the Treasury from the
government-sponsored enterprises Fannie Mae and Freddie Macwere $32 billion less in December 2014 than they were in December 2013, when Freddie Mac made a one time payment of about $24 billion after a revaluation of certain tax assets significantly increased its net worth. (Those payments are recorded in the budget as offsetting receipts—that is, as negative outlays.)”
“Net Outlays for GSEs: Actual, FY 2014 -39 billions.”
The American Enterprise Institute. “The Fed’s $3.5T QE purchases have generated almost half a trillion dollars for the US Treasury since 2009. On its $4+ trillion portfolio of fixed-income securities, the Fed earned an average interest rate of about 3%, which generated the $116 billion of interest income last year for the Fed. To provide context for that amount of interest income, consider that all nearly 7,000 FDIC-insured US banks together earned only $116 billion in net income during the first three quarters of 2014, and will probably end up with about $155 billion in net income for the whole year.”
“After accounting for operating expenses and other costs (currency issue, interest expenses, dividends, etc.), the Fed paid ‘residual earnings’ to the US Treasury last year of $98.7 billion. That annual Fed distribution to the Treasury was the largest ever, and brings the total amount distributed since QE started in 2008 to almost half a trillion dollars — $469 billion in the six years from 2009 to 2014.”
“That was a point made today by the WSJ in its staff editorial ‘The Fed Cash Machine,’ which pointed out that QE has made the Fed’s annual distribution of ‘residual earnings’ a significant revenue source for the US Treasury: ‘For perspective, the entire federal budget deficit for fiscal 2014, which ended in September, was $483 billion. Without the Fed’s windfall, it would have been nearly $100 billion more. Corporate income tax revenue in 2014 was $321 billion, so the Fed turned over nearly 30% of the amount provided by every American corporation.’”
“Treasury is spending the Fed’s windfall, naturally, which means that when the QE boom ends the country will have to spend that much less or find the revenue somewhere else. The danger is that politicians are getting used to the money, which is one more reason for the Fed to begin winding down its balance sheet sooner rather than later.”
“Bottom Line: While the record transfer of almost $100 billion from the Fed to Treasury last year has gotten some media attention, what hasn’t been reported, except by the WSJ today is this: The monetary expansions known as QE1, QE2, and QE3 ended up being a gigantic transfer of wealth from the private sector to the public sector. By ‘acquiring’ almost $3.5 trillion in assets with a ‘magic checkbook’ that were previously held largely by private investors and the private sector, those trillions of dollars in Treasury and MBS securities, along with the billions of dollars in interest income those securities generate, got transferred to the Fed, which has then transferred almost half a trillion dollars in residual interest earnings to the US Treasury in the last six years.”
“Q: Is that fair/accurate to describe QE1, QE2 and QE3 — as monetary policies that ultimately transferred billions of dollars in private wealth to the US Treasury via the Fed? Or is it more accurate to describe it as printing money to finance the government’s budget deficit disguised to look like monetary policy, since the bond holders got paid for their securities? (Thanks to Jeff Dorfman for help with that second description.)’
“Update 1: Or here’s how Jon Murphy describes it in an email: ‘The Fed is just printing money and giving it to the Treasury but ‘laundering’ it through bonds.’ Update 2: Another way to think of the Fed’s $3.5 trillion acquisition of assets through QE1, QE2 and QE3 is to view the Fed as the ‘world’s largest hedge fund’ — see posts by Scott Grannis here and here for details.”
From Money Week. “Merryn Somerset Webb interviews Paul Hodges about the global economy’s ‘Great Unwinding’, and how Britain’s house prices could halve. Merryn: ‘Paul, when we last spoke you predicted a fall in oil price –you said that you thought the oil price would fall from $80 to $50 by the end of last year, and at the end of last year you were saying you thought it would be down at $50 in the first half of this year, so you’ve already been proven very, very right. Can we just talk briefly about what the basis was for that forecast?’”
“Paul Hodges: ‘Yes, it’s what we call the ‘great unwinding’ of policymaker stimulus that if you look at where we’ve been since our last interview here two years ago, central banks have pumped more and more money into the economy. As a result, we’ve had a sugar high, really, where financial markets just go up in a straight line. In China, people got the idea that somehow suddenly China had become middle class, and so there was this enormous demand and there was free money from the Fed and the Bank of England, so everything looked wonderful.’”
“‘It was a complete and utter charade from beginning to end. There has never been, since 2009, a single moment anywhere in the world where there was a supply shortage, a customer didn’t get the oil, the petrol, or anything else that they wanted, but it was all built on wishful thinking from the central banks. They were saying, ‘We can create demand by printing money.’ The problem is, if you look at the markets, the futures market, where the financial players took the money from the central banks and they went into the… They wanted a store of value, because every pension fund in the world knew that Ben Bernanke and Janet Yellen wanted to devalue the dollar. As a result of wanting to devalue the dollar, pension funds looked for a store of value. That, of course, was oil, because everybody uses it, very large market, and it’s priced in dollars.’”
“‘What you saw, instead of financial players and physical players – the oil companies, people like us who buy to use for transport and for heating and so on – instead of a balance of one-to-one, you’ve suddenly got six times as many financial players going into the market. What happens? Of course, the price rises and goes from $30 at the end of 2008 up to $120, because you can’t print oil in the way that you print money.’”
“Once you start deflating a bubble, it doesn’t go slowly, it bursts. This is what you saw happening in July and August. That was why we made the call in the middle of August, we said, ‘The oil price is now going to collapse, and the obvious logical corollary of that is the dollar is going to go very high indeed,’ and we’ve seen that – the oil price down 50%, the dollar up over 10%. The dollar going up 10% may not immediately, if you’re thinking in pounds and so on, become very important, but it’s absolutely critical because you’ve got $6trn or $7trn of debt in the emerging economies all tied to the dollar, all thinking, ‘We borrowed at 1%. Aren’t we clever?’”
“It was 1% then, but now it’s 1% plus 12% increased value of the dollar, so you’re going to see bankruptcies all over the emerging economies – and, of course, you’re going to see bankruptcies all over the States because people have spent $1trn.”
“It’s terrible, this word ‘trillion’. Before 2009 I didn’t know what the word ‘trillion’ was. I used to think billions were rather a lot.”
“Merryn: ‘So, bankruptcies in the US connected to the huge infrastructure spending in the energy sector?’ Paul Hodges: ‘Yes. The US economy is now riding for a fall. We don’t know how big it is, but if you look at jobs growth since 2009, it’s all – and I mean ALL, with capital letters – being tied into the oil and gas exploration bubble, so all the rest has not moved at all. If you look at the housing recovery, such as it’s been – it’s been 600,000 to one million, which sounds good, but when you’re coming down from two million it’s not so good – that 400,000, most of that new house building has been in Texas in the oil belt, because I was in Houston summer last year; 10,000 people a month were coming into Houston, so you’re building a lot of houses.’”
“Merryn: ‘So, the USA economic recovery has been very heavily leveraged to the shale boom, which in turn was caused by very low interest rates in QE.’ Paul Hodges: ‘Yes.’”
“Merryn: ‘So, as that reverses, we can only expect the US economic recovery to just disappear?’ Paul Hodges: ‘My view of it all is the Fed is actually irrelevant here, that the real action is over in China, that the Fed could do maybe a $10trn final blast, but would the new Congress actually allow that to happen? It’s an interesting question. I don’t know the answer, I just raise the question, but if you look at what’s happening in China, you see that the property market taxes… Property taxes paid last year in China fell 30%. That’s a pretty big downturn in one year.’”
“Merryn: ‘Final question: is it possible for a deflationary environment to persist when central banks can print as much money as they like and shovel it into the economy in a variety of different ways?’ Paul Hodges: ‘People have to want to spend, and if you don’t need to buy anything and if you are fairly cautious about knowing exactly how long you might live, then it’s quite difficult, I think, to encourage people to spend. The central banks, the economists, work on this theory, which was fine at the time – Modigliani’s theory – which said that we all know how long we’re going to live and therefore we consciously make a decision to hold back on consumption today so that we have something left for the future.’”
“‘That was fine if we were all dying at 50 because you weren’t holding back very much, you were just getting more money as you got… But if you’re living to 80 or 90, say, how long are we – you and I – going to live? We don’t know, so probably, if we’re sensible, we’re going to err on the side of caution.’”
“Merryn: ‘This is our worry – that they could. They have the ability to do so; anyone can create inflation if they really want to.’ Paul Hodges: ‘Yes, but what I hope is that common sense prevails and that we abandon these out-dated economic theories. Milton Friedman came along and he said that inflation was ‘Always and everywhere’ – and monetary – but he’s wrong, of course; he’s completely wrong. He was working during the baby boom in the States. The States had a 50% increase in the number of babies being born over an 18-year period. Of course there was massive demand, of course there was no supply…Friedman confused cause and effect.’”
“We’ve had six years, let’s face it, six years of central banks believing that Friedman was right and saying, ‘If we put out enough money, then we will end up with inflation. Sorry about that.’ Could we have some common sense on this which says, ‘If you’ve got an older population, you’re not going to want to spend,’ and could we please, instead of being negative about all these older people, could we not celebrate this and say, ‘Isn’t it wonderful that our society has achieved this?’ Does it really matter if we have GDP? Let’s face it, before 1929, which isn’t very long ago, nobody measured GDP, so for thousands of years people were pretty happy and getting by without thinking about…’”
Excellent research Ben…Thanks…
Provocative. Insightful. Great post. Thanks.
^lol
I don’t know if Hodges is right about why increased money supply isn’t creating inflation, but this issue is now front and center to the overall deflation/asset bubbles question. For many years, I would watch Greenspan print up a bunch of money and gold would do nothing. Yellen and the others have conjured many trillions; why have wages gone down? All we’re getting out of this are bubbles and income inequality.
Anyway, I recommend reading the interview with Hodges in full.
I wonder if the resident oil patch booster will show up today.
‘The oil price is now going to collapse, and the obvious logical corollary of that is the dollar is going to go very high indeed,’ and we’ve seen that – the oil price down 50%, the dollar up over 10%.
In my experience it is those that do not have the money that want to spend. That is why, I think, all the gimmicky things get a sales rush in the beginning and then taper off.
Obviously you had not yet visited the Bits Bucket as of the time when you made this post.
“In my experience it is those that do not have the money that want to spend.”
You have just described the customer base of my buddies who are in the payday loan business.
Your statement “… it is those that do not have the money that want to spend.” can easily be reversed to say “those who want to spend do not have the money”, which is a natch because those are the people who will spend every cent they can get hold of.
GIVE them money and they will spend every cent of it. RENT them money and they will spend every cent of it.
It’s tough to make a living giving money away to fools but it’s easy to make a living - a GOOD living - renting money to these same fools.
If you REALY WANT to flood the economy with money then do not hand over money to those who have money sense because those with money sense will end up saving the money rather than spending it. No, if you want to flood the economy with money then hand money over to those who do not have money sense. They will spend every cent they can get hold of, guaranteed.
There are few true guarantees offered in this world but, trust me, this is definitely one of them.
and I was ridiculed for paying everyone’s credit card down $3000 as a stimulus idea.
I don’t believe the Fed will ever stop bestowing monetary gifts upon bankers and the wealthy. It would take a complete collapse of the system for them to do so.
Uh…we had a complete collapse of the system in Fall 2008.
Result: The Fed bestowed more monetary gifts upon bankers and the wealthy than ever before.
Egads!!!!!!! We’re back at it then, aren’t we? Stagflation?
A second point I’m getting at here is this: a big chunk of government income is from the GSE’s and the Federal Reserves’ bond buying. They are sucking vast amounts of money out of the private sector. Think of it; MBS used to be in pension funds paying 5 or 7 or 9% interest. Now it’s 3% and the Fed is sitting on huge amounts. (Without having to disclose delinquencies, I’ll add).
Between the GSE takeover and the QE MBS buying, the federal government has seized a pretty big percentage of the economy.
I agree Ben…And I believe they just don’t know how they are going to unwind it short of very, very slowly…Like over years…
Doesn’t that make it pretty hard to determine the actual delinquency rate?
and the Fed is sitting on huge amounts. (Without having to disclose delinquencies, I’ll add).
Quite possibly the very reason that the Fed is sitting on huge amounts…
If a delinquency falls in the Fed’s asset pool, does it make a sound?
“(Without having to disclose delinquencies, I’ll add)”
Where does it say this?
As far as I understand they own MBS (mortgage backed securities), not mortgages. Unless they own ALL of the MBS in a pool, and control the servicer, the delinquencies would be reported (servicers report the delinquencies, not the owners of MBS).
I understand the belief that there is more delinquency than is being reported, but I’m still looking for evidence of a conspiracy (other than conjecture).
After all, if there was massive delinquency, the government wouldn’t be making as much money from holding the MBS, would it?
25 million excess empty and defaulted houses is no conspiracy Rental_Fraud.
Where are the books? Surely, there is some delinquency. What’s the percentage? This is an organization that fights a public audit. Now who else gets away with no public audit?
‘Analysts are struggling to estimate the size of resulting losses in the US$820bn of private label RMBS sold before the financial crisis, and investors are just waking up to how big a problem it could become.’
‘Fannie Mae’s general counsel held a conference call just before the Christmas holidays - all of its retained law firms were required to participate - to ask how the government-run mortgage agency could alleviate such losses, a person with knowledge of the call told IFR.’
“[Fannie Mae's] general counsel asked: ‘How bad is it?’” the person said, adding that one of the lawyers on the call answered: “We can’t even begin to tell you - there are so many loans.”
‘A spokesperson for the agency declined to comment. Alarm is increasing following a number of court cases across the US that have left mortgages voided even though borrowers have not paid a dime in years.’
http://in.reuters.com/article/2015/01/16/fanniemae-rmbs-idINL6N0UL2Q420150116
They throw out a number that’s almost a trillion bucks, saying they don’t even know how big it is. Why are these foreclosures not happening? Who’s going to lose? And if the loses get anywhere near that amount, who’s going to jail?
The important point here is that QE is deflationary. And Yellen is completely ignorant of that fact.
Wouldn’t foreclosures happening mean homeowners losing their homes?
Note the systemic injustice here:
– Renters are lower class citizens who get thrown out on their asses the minute they stop paying their mortgages.
– Homeowners are a specially privileged class who can stop making monthly payments and get years of forbearance and foreclosure relief.
“…they stop paying their mortgages.”
Oops…meant to say ‘paying their landlords’ mortgages.’
Unless they own ALL of the MBS in a pool,
Do you really doubt that they set out to accomplish that??!?
Given all of the private-label MBS they were buying, I can’t believe it was merely out of a desire to boost the market at large; if that had been the goal, it would have been more palatable, and equally effective to buy solely GSE-issue MBS.
Any chance the Fed will announce an oil purchase QE4 later this year, on the basis that sinking oil prices are deflationary?
That could make AlbqDanEsq’s seemingly ridiculous $80/bbl oil call by year-end 2015 come true post haste!
Keep your eyes peeled for a white paper on how the Fed should do more to help the oil market, similar to the one they published for housing in early 2012.
‘you’ve got $6trn or $7trn of debt in the emerging economies all tied to the dollar, all thinking, ‘We borrowed at 1%. Aren’t we clever?’
‘It was 1% then, but now it’s 1% plus 12% increased value of the dollar, so you’re going to see bankruptcies all over the emerging economies – and, of course, you’re going to see bankruptcies all over the States’
All this free money is looking to be costly all of a sudden. You know, before this QE stuff started, there were bubbles around, but not so much in places like Malaysia, Indonesia, the Philippines, Kurdistan. There’s now a RE bubble in Somalia! And of course, all this magic money has ginned up the bubbles in China, Australia, Canada, etc, far higher than 2008.
In hindsight, the oil was a big contributor. Just recently, the most expensive city was said to be in Nigeria. And that was due to oil.
A bubble can be built on the slimmest of illusions. I was thinking about Austin last night. What is really special about it? It doesn’t have oil. It has tech, but it isn’t some powerhouse of tech. Is live music really making it the most over-valued market in the US (according to Trulia). It’s a freaking college town with a state capital and a forest of condo’s surrounded by seas of cookie cutter houses.
I was thinking about Austin last night. What is really special about it ??
Not so sure its special because of these attributes but maybe, taken together, they attract people & investment…
High Tech
State Capital
University of Texas (48,000+)..
Its the most Liberal Town in a sea of Conservatism..
Web pages and Dell computers aren’t high tech. There are several colleges in Austin. The community colleges have over 100,000 students. But how do students support the house prices? They spend all their money at the bars.
I don’t know what’s going to happen in Austin. But there seems to be less fundamental support for house prices than Dallas or Houston, and Fitch and Trulia recently said the same thing. I’d even guess there is more tech and manufacturing in Dallas than Austin.
But how do students support the house prices? They spend all their money at the bars ??
Kind of thinking that maybe some of them stay after graduation…Start families etc. ?? I know that they do here coming out of SCU…Other than that I am not sure Ben…You know much more about it than mean other than what I read…Bret has a occasional post on it…I would not underestimate the only liberal town thing being a attraction…
But it’s always had that. Heck, I can remember when Austin was a cheap place to live. And it was a lot more fun back then. Traffic wasn’t bad. You and your friends could take a six pack down to Barton Springs and there was plenty of room. I used to go down to Sixth street and see a dozen bands without having to pay a cover. But the developers; they always wanted to be like Dallas, and they won out. Except Dallas and Houston are money centers. Austin never will be.
They ruined Hays County too:
‘More space and a less expensive cost of living — That’s what one Austin business says they’ve found in their new Hays County location. HHS, LLC., formerly Hospital Housekeeping Services, a company that provides hospital support services, announced their decision this week to depart their outgrown downtown Austin office in favor of a sprawling campus in Dripping Springs.The new corporate campus will be over one hundred and twenty acres.’
‘And they’re not alone in their search for space. The East Austin metal casting company Pure Castings will soon relocate it’s operations to Lockhart. City officials say the business needed more room to grow and couldn’t expand in Austin, a trend Greater San Marcos Partnership President Adriana Cruz expects to see continue.’
“I think we will see some additional companies as their priced out of the Austin real estate market and the central business district in particular, look to the surrounding communities,” Cruz said.’
‘The company will bring 86 corporate administrative jobs to Hays County with an average salary of $60,000.’
‘In addition to space, Terry says housing prices factored into the company’s strategy. “It’s really expensive to live in central Austin. And so we felt once we move out, there’s a lot of subdivisions that are within a 10 minute drive from our new campus,” he said.’
‘Data from the Texas Association of Realtors and Dripping Springs show housing prices are fairly comparable: about $308,000 versus $300,000 on average respectively.’
‘However, the prices drop steeply in surrounding areas throughout Hays County. Census data shows the average Hays County owner-occupied home value is around $175,000.’
But it’s always had that ??
Well, I guess thats what I meant when I said you know more about it than I….
He already knows that. And so do the rest of us.
‘Paul Hodges: Absolutely, because cash is actually going to be a very good investment because under deflation the value of cash goes up every day. The other thing about this, what we’re looking at today, people who remember 1973 and the oil price shock of the Arab oil boycott, that was the day almost, those few weeks, where people suddenly got the idea: “What I ought to do is I ought to borrow as much as possible and I ought to buy as quickly as possible, because the borrowing will go down because of inflation and it will be more expensive if I buy it in a week’s time.” You brought forward consumption.’
‘We are now – and it’s already happening, so we don’t have to talk about this as theory, this is already happening now – over the next few weeks we’re going through the deflation shock. The deflation shock means that by the summer people will say, “I don’t really need… It’s a lovely sofa, actually; I don’t think I need a new sofa just yet. Anyway, if I do, I could get it in another three or six months; there’s no great urgency about this. It will be cheaper then.”
‘Merryn: And the same with houses, so the fact that mortgage rates are now at their lowest ever, pretty much, and you can get a ten-year fixed-rate mortgage for the cheapest price since records began doesn’t mean that we should rush out and buy houses?’
‘Paul Hodges: The cost of a house is relative to earnings. At the end of the day, the interest… You were mentioning Minsky and the thing that Minsky highlighted was that you have to be able to repay the capital. It’s all very well repaying the interest, keeping going all that, interest-only mortgages and so on, but can you actually afford, if you’re in London, a £300,000 or £400,000 flat, a one-bedroom flat – lots of them around at that kind of price – when the average earnings in London are about £30,000?’
‘Paul Hodges: The cost of a house is relative to earnings. At the end of the day, the interest… It’s all very well repaying the interest, keeping going all that, interest-only mortgages and so on, but can you actually afford, if you’re in London, a £300,000 or £400,000 flat, a one-bedroom flat – lots of them around at that kind of price – when the average earnings in London are about £30,000?’
It’s pretty crazy how long mispricing has persisted under the Great Housing Bubble.
“‘It was a complete and utter charade from beginning to end. … They wanted a store of value, because every pension fund in the world knew that Ben Bernanke and Janet Yellen wanted to devalue the dollar. As a result of wanting to devalue the dollar, pension funds looked for a store of value. That, of course, was oil, because everybody uses it, very large market, and it’s priced in dollars.’”
How is that dollar devaluation effort working out for them?
Europe News
Euro’s Big Drop Puts U.S. Economy, Federal Reserve to the Test
Strengthening Dollar Will Make American Goods More Expensive Abroad and Could Slow Both U.S. Growth and Inflation
European Central Bank President Mario Draghi. Photo: Associated Press
By Jon Hilsenrath
Jan. 23, 2015 7:30 p.m. ET
The European Central Bank’s launch of an aggressive program this week to buy more than €1 trillion in bonds poses important tests for the U.S. economy and the Federal Reserve.
Europe’s new program of money printing—and the resulting fall in the euro—means the U.S. economy must deal with a rapidly strengthening dollar that will make American goods more expensive abroad.
The stronger dollar could slow both U.S. growth and inflation, giving the Fed some incentive to hold off on its plan to raise short-term interest rates later this year from near zero.
U.S. officials have been playing down that scenario, and, more broadly, resisting talk of a global currency war—competitive devaluations by countries eager to keep their currencies as low as possible to protect exports.
…
“We’ve had six years, let’s face it, six years of central banks believing that Friedman was right and saying, ‘If we put out enough money, then we will end up with inflation. Sorry about that.’”
FAIL.
Get the money into the hands of the right people (the people who cannot ever say “no” to spending money) and you will get your inflation.
‘On its $4+ trillion portfolio of fixed-income securities, the Fed earned an average interest rate of about 3%, which generated the $116 billion of interest income last year for the Fed. To provide context for that amount of interest income, consider that all nearly 7,000 FDIC-insured US banks together earned only $116 billion in net income during the first three quarters of 2014, and will probably end up with about $155 billion in net income for the whole year.’
The GSE’s paid the treasury almost as much as corporations last year. And now the GSE’s are dumping bad loans. Why was that little Reuters article put out (and ignored by the MSM) about the GSE lawyers reckoning they have over $800 billion in old, bad loans?
‘Why was that little Reuters article put out (and ignored by the MSM) about the GSE lawyers reckoning they have over $800 billion in old, bad loans?”
To soften things up slowly. You know damn well the losses are triple that amount or more.
“$116 billion of interest income last year for the Fed”
Isn’t that special. The private concerns that had these bonds before the Fed bought them would have has that $100 Bn of income per year (less defaults). Instead of having to wait 30 years to get their money back, they got it in a lump sum from the Fed, like a gargantuan reverse jubilee. The rest of us still owe the money, the bankers have it back already. So, spend, lend and speculate like there is no tomorrow.
What did the rest of us get for the $4 Tr it took to buy the Fed $116 Bn? We got falling wages and a doubling and trippling of the cost of food and fuel over the past six years.
I’ve been lucky during this, as an old single guy, my food/fuel costs are a small % and single malt has not increased one iota. Back when I had a full house, food was something like 20% of my budget. Doubling that is miserable, and would likely go on the credit card. So, for a few billions of revenue, the Fed only had to sink a hundred million or so of us into misery and deeper in debt. They should be dragged out and hanged.
Plain as day, as the Fed stopped shooting up the banks on QE, the price of basic things is miraculously falling off by half. With all the mines and wells and mills built in the past six years to meet this fake demand created by the Fed, unimaginable further declines are baked in. We’ll get lower wages, fewer jobs and oh, there’s still the debts. The Fed engineered a future depression when they started QE, but it’s not clear to me why they stopped voluntarily. Did they figure the boom was over before they decided to stop?
‘Merryn: One last question on demographics and the great unwinding: when will this demographic change mean UK house prices fall?’
‘Paul Hodges: I think they’re already falling, sad to say. I just wish they’d never got to these levels, but I think you’re going to see… You were saying recently that at the top end prices would be under 15 or 20%.’
‘Merryn: Yes, completely. Paul Hodges: We’ve seen price falls in the housing market in the past in the early ‘90s and they went down 50%, and I think that we’re at the start of that kind of decline now – as I think, indeed, fairly soon we will be at the start of that in the stock market as well. As I say, I’m not depressed about this, because it’s just something that we have to go through to get to reality.’
Sanford And Son: This Is The Big One!
https://www.youtube.com/watch?v=stdi-1tIUhM
Trivia (house on Eastern Ave. in Vegas)
There’s a youtube of him having a sale of all his possessions at the house when the IRS got him.
‘As I say, I’m not depressed about this, because it’s just something that we have to go through to get to reality.’
The depressing part is the massive and persistent effort to never allow markets to do their job of efficiently allocating resources to wants.
IMO you can’t let stuff that’s out of your control get you down. I’ve been lucky in life, in that every time I got depressed or felt sorry for myself, I would happen to come across someone with real problems. Every day above ground is a good day.
Exactly.
Frankly all this news about collapsing demand as a result of QE is optimistic to me and I think it’s a net positive for the economy in the end.
I agree with you. I was just complaining about something I don’t like about the status quo; I am not moping about or feeling like I can’t carry on with life over the matter.
I too agree.
We talked about the global interest rates problem and the high value USD on this board a few months ago.
Now the oil shock - Next housing because of it and less global demand.
Let the market find it’s own equilibrium.
From Hodges the money quote:
‘ What China is worried about is employment, and it’s also worried about the half of the country where incomes in the rural areas are still only about $1,000 a year – not a day, $1,000 a year. Most people in China, the average income is still only £4,000 or £5,000 a year; it’s very, very low.’
‘So what happened to all of the QE? Sure, the unemployment rate fell but much of it was due to part-time jobs. Consumer debt has been growing at best very slowly and today remains below levels seen prior to the 2008 financial collapse. But government debt has grown considerably and the liabilities of those outside the US has also grown even more. The US is the most indebted country in the world with $18 trillion plus of debt. Yet the US somehow maintains its AA+ credit rating only because they can service it by adding the interest payable to the debt. As to all of the debt outside the US in US$, it is estimated at roughly $9 trillion and given the currency of all other nations have fallen against the US$ it now means that those borrowers have a lot more of their home currency to pay back (to purchase the US$ necessary to repay the loan). There is growing concern that repayment problems could rise.’
‘Given low growth on the consumer side it is small wonder that the overall growth of the economy has been sluggish at best. But the stock markets have soared and the response from both the cutting of the key interest rate by the BofC and the massive QE program announced by the ECB had yet again another positive impact on the stock market. They soared. But is it at the risk of creating a bubble? And bonds have soared as well. Is that also at risk of creating a bubble? Everyone is reminded that bubbles eventually burst as was seen with the internet/high tech bubble of the late 1990’s and the housing bubble of the 2000’s. Not only did they burst but each time the central banks were called in to the rescue. And in the case of the bursting of the housing bubble the taxpayer was called in to bail out the financial institutions that were at the heart of creating the bubble in the first place.’
‘The actions of the SNB, the BofC and the ECB and before that the BOJ smack of possible desperation and panic setting in. The Fed is not immune as their day could most likely come as well.’
‘So what has this got to do with the Banks? The chart shown at the outset was of the largest bank in Canada and the largest bank in the US. The banks are/were at the heart of the 2008 financial crisis. Following the 2008 financial crisis there were calls for reform of the banking system. The banks in both the EU and especially in the US fought successfully against it. After all it would put a serious crimp in their operations. And who wants government interfering in how the private sector works.’
‘But as the chart of the Royal Bank of Canada and JP Morgan Chase demonstrates they both appear to have broken down from a long up-trend. No they have not yet broken down sufficiently. There is still time to recover and move to new highs. But banks are all about debt on their books. With record amounts of debt outstanding and the central banks creating the kind of conditions that resulted in the bursting of previous bubbles should one really feel that they this time they will get lucky?’
“Following the 2008 financial crisis there were calls for reform of the banking system.”
Bahahahaha … it’s always fun to start my mornings with a joke.
Oh, wait! There’s more …
“The banks in both the EU and especially in the US fought successfully against it. After all it would put a serious crimp in their operations.”
And children everywhere would suffer.
“And who wants government interfering in how the private sector works.”
Bahahahahahaha … and who is it that thinks bankers can’t have it both ways?
Capitalize the profits, socialize the losses.
Bahahahahahahahahahahahahahahahahahahahahahahaha
‘Venezuela’s currency woes an increasing threat to U.S. corporate profits’
‘Overall, foreign companies have an estimated $16 billion in outstanding dividends listed on their balance sheets that they have not been able to return to headquarters, according to Caracas-based research firm Ecoanalitica. The actual value of those assets could, though, be considerably less, depending on the exchange rates.’
“For a business like American Airlines, they have a bank account full of worthless monopoly money, and the only way it is worth something is if they can get an exchange,” said Russ Dallen, head of Caracas Capital Markets in Miami. “But the government doesn’t have any dollars to exchange, in size. They can’t pull out because not only will they not get the dollar at the original rate promised but the Venezuelan government said they would take the travel routes and never let them back into the country if they did.”
Bahahahahahaha … See? Bankers aren’t the only ones who are guaranteed to win the game of Gotcha.
‘Thursday, 16 Jan 2014′
‘Ben Bernanke, in what was billed as one of his last public appearances as Federal Reserve chairman, sat for a Q-and-A session at the Brookings Institution “Lords of Finance” author Liaquat Ahamed.’
‘Ahamed asked Bernanke how confident he had been, going into the Fed’s bond-buying program, that the theory of quantitative easing would work. “The problem with QE is it works in practice but it doesn’t work in theory,” Bernanke said to a round of laughter—rare for an audience of economists gathered to discuss monetary policy.’
“The problem with QE is it works in practice but it doesn’t work in theory,”
For a little while, at least…
“People have to want to spend, and if you don’t need to buy anything and if you are fairly cautious about knowing exactly how long you might live, then it’s quite difficult, I think, to encourage people to spend.”
Word got out that those born before 1958 would get everything the promised themselves in old age benefits, but those born after would have benefits taken away because they had “time to adjust.” “You better save” some of the same people were saying who were also saying “we want you to spend.”
Whether in advance or at the time, the big cut in what most Americans were paid when they want from pensions from undefined (and often eventually eliminated) contribution plans is going to lead to a huge cut in American consumption. Overconsumption in advance for some, basic needs for others at age 80 for others.
http://www.truth-out.org/news/item/28327-matt-taibbi-and-the-9-billion-witness-who-exposed-how-jpmorgan-chase-helped-wreck-the-economy
Long time HBBer’s might remember the Manhattan West from the 2009 Las Vegas Magical Misery Tour. It’s being imploded Feb 15th (17th by this account)
vegasinc.com/business/2015/jan/23/crumbling–strip-tower-las-vegas-scheduled-daytime/
The ground floor parts of the development - restaurants and retail - are being spared, but the nine-story residential tower is going bye-bye.
Better link.
http://www.vegasinc.com/business/2015/jan/23/crumbling–strip-tower-las-vegas-scheduled-daytime/
Thanks.
And I guess I should have put this in the Bits Bucket…
‘Southern Pacific Resource Corp.’s default is being seen in the bond market as a death knell for many of Canada’s startup oil-sands exploration companies in the wake of the collapse in crude prices. The Calgary-based developer was granted protection under Canada’s Companies’ Creditors Arrangement Act to pursue options that include restructuring debt and selling assets, Southern Pacific said.’
‘Fund managers say it’s only the first early-stage developer to seek court protection as oil prices hovering below $50 a barrel threaten projects.’
‘Southern Pacific borrowed C$600 million since 2011, mostly to develop fields in the Athabasca oil-sands fairway, taking advantage of the lowest borrowing costs on record as central-bank stimulus spurred a reach for yield among credit investors.’
“You had yield-chasers ignoring the underlying risks, and now we’re starting to see the consequences of that,” TriVest Wealth’s Pelletier said.’
‘Southern Pacific’s C$260 million of 8.75 percent notes due January 2018 were quoted at a price of 25 cents on the dollar Thursday, suggesting investors expected to recover a quarter of their principal.’
http://www.bloomberg.com/news/2015-01-23/oil-sands-startups-ask-for-whom-the-bell-tolls-amid-slide.html
Yield chasing? Oh, Jaaanet!
Yield chasing is the new black.
Perhaps the Federal Reserve Plan is to increase the interest rates to reverse the perverse financial nonsense that is killing the economy. Put yourself in their place. Continue on the path to destruction of the dollar or reverse the path and put the focus back on the politicians.
They raised rates in the 1979-1982 period ALOT, but inflation was raging at 10%+ levels at the time.
It’s quite a different situation when interest rates are hitting record lows on multiple continents, even after QE3 ended months ago.