Friday, September 30, 2005

Batonless, by Stephen Roach.

Global: Batonless

Stephen Roach (New York)

The Maestro has dropped his baton. In a series of stunning about-faces, Federal Reserve Chairman Alan Greenspan has just recast his perceptions of the critically important relationship between monetary policy and asset markets. Not only does he finally own up to the perils of America’s housing bubble, but he now concedes that speculative froth in asset markets may well have been a direct outgrowth of the Fed’s policy stance. These revisionist views are in stark contrast to the Chairman’s public stance over the last decade. This raises profound questions about the Greenspan legacy and also underscores the tough problems that are about to be passed on to his successor.

The first step in this two-part confession came in the form of a rare research paper just published by the Chairman and a Fed staffer (see Alan Greenspan and James Kennedy, “Estimates of Home Mortgage Originations, Repayments, and Debt on One-to-Four-Family Residences,” September 2005). On one level, this is a very technical paper, providing a detailed statistical decomposition of the sources of mortgage lending activity in the US. But on another level, it reveals the full force of one of the key drivers of the Asset Economy -- equity extraction from residential property. According to the Greenspan-Kennedy framework, US homeowners tapped the ever-expanding home equity till to the tune of about $600 billion in 2004 -- equivalent to about 7% of disposable personal income, or more than double the 3% share recorded in 2000. In a companion speech, Greenspan goes on to concede that this equity extraction from ever rising property values was large enough to have accounted for all of the decline in the personal saving rate since 1995 (see his 26 September speech, “Mortgage Banking”).

Bingo! It then follows that the substitution of asset-based saving (i.e., home equity extraction) for income-based personal saving created a major shortfall in national saving. And what is a saving-short US economy to do under such circumstances? Two choices -- curtail investment and grow more slowly or stay the course by importing surplus saving from abroad and running massive current-account deficits to attract that capital. Of course, it was an easy choice for the world’s leading economy -- witness America’s gaping current-account deficit running at close to an $800 billion annual rate in the first half of 2005. But with this easy choice has come tough consequences -- namely, a US current account deficit that accounts for fully 70% of all the external deficits in today’s unbalanced world. In short, equity extraction has spawned the “mother” of all imbalances -- not just for the US but for the global economy at large. This, in my view, is when asset bubbles become most destructive -- when they create distortions and dangers that transcend the asset class itself. America’s housing bubble and its current account deficit are joined at the hip -- and the rest of the world is being sucked into the funding side of the equation. And Alan Greenspan has just figured that out?

But that pales in comparison to the second step in this two part confession -- Greenspan’s admission that the Fed’s monetary policy stance may have played an important role in fostering asset bubbles and the imbalances they engender. In what he refers to as “the greatest irony of economic policymaking” the Chairman has also come around to the conclusion that success can breed peril -- or that sustained very low levels of nominal interest rates can give rise to asset bubbles (see his 27 September speech, “Economic Flexibility”). But this is not a shocker to anyone else. At low levels of inflation and the equally low levels of nominal interest rates that accompany such an outcome, excess liquidity can become a much more powerful force in shaping asset values than otherwise might be the case. The IT- and Internet-enabled technological breakthroughs were the icing on the cake in taking productivity growth higher and, as a result, in pushing inflation and interest rates lower.

So after all these bubbles, Greenspan finally gets it. Yes, under certain conditions, equity valuations can be turbo-charged by monetary accommodation. Those stars were in perfect alignment in the latter half of the 1990s. The Fed chairman appears to have come to the same realization with respect to property bubbles. Even couched in all the caveats of Fedspeak, this is a stunning admission for a central banker who has long been against the targeting of asset values. This gets to what I have long felt was Greenspan’s most egregious policy blunder -- failing to use the tools of monetary policy to nip the first bubble in the bud back in the late 1990s (see my 25 April 2005 dispatch, “Original Sin”).

What is particularly galling about this aspect of the confession is Greenspan’s effort to re-write the role he personally played during this era of froth. In his 27 September speech on flexibility, he notes, “As the FOMC transcripts of the mid-1990s duly note, we at the Fed were uncomfortable with a stock market that appeared as early as 1996 to disconnect from its moorings.” If the Chairman shared this discomfort, as the “we” in that statement seems to suggest, then why was he taking on the role ofcheerleader as the Nasdaq spiked toward 5000? Don’t forget this is the same central banker who proudly proclaimed in early 2000, “We may conceivably conclude from that vantage point that, at the turn of the millennium, the American economy was experiencing a once-in-a-century acceleration of innovation, which propelled forward productivity, output, corporate profits, and stock prices at a pace not seen in generations, if ever” (see his 13 January 2000 speech, “Technology and the Economy”). Selective recall or not, Alan Greenspan was the pied piper of the New Paradigm and the equity bubble it spawned. And up until recently, he took a similar tack with respect to the property bubble -- constantly maintaining that excesses in certain local real estate markets could not morph into a nationwide problem. With 25 states plus the District of Columbia now in double-digit house price appreciation mode over the last year, the Fed chairman suddenly sees the light!

Greenspan, of course, will not be there to pick up the pieces. That unfortunate task falls to his successor -- whomever that may be. History tells us that even under the best of circumstances, transitions to a new Fed chairman are fraught with peril. Financial markets are quick to test the new central banker. That was certainly the case when Alan Greenspan took over in August 1987 -- the stock market crashed two months later. That was also the case when Paul Volcker became chairman in August 1979 -- the bond market quickly tanked. And the onset of G. William Miller’s brief tenure in March 1978 ushered in a dollar crisis. Just from that perspective alone, there’s good reason to worry about the markets in early 2006. But there’s an even greater reason to worry about the coming transition to a new Fed chairman. Courtesy of bubble-induced distortions that Greenspan condoned, today’s saving and current-account disequilibria dwarf anything that a new chairman has had to face in the past. The average net national saving rate that Miller, Volcker, and Greenspan inherited was 7.4%; today it is 2% and likely to be a good deal lower in early 2006. Similarly, America’s current account deficit averaged -1.5% of GDP in the three most recent Fed chairmen transitions; today, it is closer to -6.5%.

In the end, America’s current-account funding problem remains very much a confidence game. To the extent, the confidence of foreign lenders is shaken as it normally is by the transition to a new Fed chairman, America’s unprecedented imbalances imply that financial market risks could be all the more acute. That could be the cruelest legacy of all for Alan Greenspan to leave to his successor. Right about now, the Maestro could certainly use a new baton

Thursday, September 29, 2005

Land of the Rising Sun

In this State Department post, they are talking about Japan finally emerging from the banking crising that ensued from the popping of their asset bubbles, in the 1980's. Again the 1980's! it seems like when banks give out bad loans, to people who can't really afford them, in a rising asset price environment (bubble), it only takes 15 years or so to clean up the mess.
When people realised that their assets (real estate/stocks) were not worth what they thought, they stopped spending. Furthermore, when the banks tried to foreclose on collateral that is now 20% of previously appraised values, it killed their balance sheets. Deflationary forces evidently still exist in Japan, however they may finally be emerging from their morass. It makes me think that if the housing bubble pops in 2006-2007, the US economy will be in the toilet until around 2025.


Falling Incomes.

Another housing bubble myth debunked. One of the so called "fundamentals" of the housing boom has been rising incomes. However, it seems if you look at the IRS's own numbers, incomes adjusted for inflation are down over the last five years. It's just more evidence of the delinking between fundamentals and asset prices.

Where's My Raise

Wednesday, September 28, 2005

Recession Coming?

It's been hard to come up with something to post, because so much ground was covered by other R/E blogs that I visit. However, nothing will kill a housing bubble more than a good recession, and some more "mainstream" economists are starting to talk the "R" word.


Sunday, September 25, 2005

Silicon Valley Madness

Another article about the bubble from Mercury News in the Silicon Valley. For me, the most important thing is the mentioning that high housing prices are becoming an impedement to hiring. This is really awful from a macroeconomic point of view. If people can't afford to live in an area, they certainly will not take a job there. This will create a negatively cascading chain reaction than can only propogage the end of this stupidity.


AlphaBear Soup!

A very bearish prognosis on the Anglo-Saxon economies in The Observer. Are they just trying to scare people enough to buy their book, or do they have a point? I think that some of their points are valid, especially regarding deflationary forces. However, I don't believe it will be quite as bad as they say. Anyway, I hope not. What is the benefit of being able to buy a home at a reasonable price when your countrymen are on a soup line? Let's pray that this can be done in a controlled fashion.


Saturday, September 24, 2005

Greenspan Unplugged.

At the recent IMF meeting, AG opined to his French counterpart that the U.S. has "lost control" over it's budget defecit. Well Duh! What did he think would happen with the Bush tax cuts. I cannot believe the irony. Furthermore, he hinted to the Frenchie that "interest rates will rise a little" for the remainder of his tenure. This is the guy who plunged interest rates to nothing to bail out the Money Guys, and now he laments. By the time the poop hits the fan, he will have exited stage left leaving the rest of us to get through this debacle. I guess even Greenspan doesn't have any more tricks up his sleeve.


More bankruptcy information

Another article about the new bk laws. The most interesting thing about this AP post is that it is published in the Miami Herald, and specifically mentions the superceding of the homestead exemption. If you bought within the last 40 months, you are only eligible to save $125,000 from your creditors. New McMillionaires have been warned.


IMF and Global Imbalances.

More about low risk premiums yada yada yada! Then a small pearl. The low interest rate environment won't last long. Obviously people are starting to understand that cheap money makes everything expensive, except appetite for risk.


You mortgage deduction will be in jeapordy.

A report by the GAO, they are stating in plain English that numerous tax deduction that we currently enjoy are unsustainable and will be gone at some point, including the mortgage deduction. This is because the baby boomers will require a huge tax base to support their unfunded, asset oriented, savings-less retirements. So another way that baby boomers will end up screwing the next generation. Let's go through the list. Stock bubble, real estate bubble, enormous debts and now it will be higher taxes. Thank you!


I just wonder.

An interesting article from money.cnn about the derivatives market. It just makes me wonder how much of the "connundrum" is really related to these types of instruments. If indeed these entities are using as much leverage as implied in the article, then they could have a large effect on long term rates. Could a blow up in one of these funds lead to a large spike in interest rates? It just seems to me that the money guys keep pushing forward with riskier and riskier schemes to make themselves money. As always, the taxpayer will be the insurers of last resort. Thank you AG for you put.


Friday, September 23, 2005

Rush to file for Bankruptcy!

Nice article talking about the mad rush to file for bk before the new law come in effect in October. The usual arguments given for and against the new laws. But what seems really interesting to me is just the sheer volume of debtors. Excess credit in any society is just bad. Lenin said that religion is the opiate of the masses. Perhaps easy credit is the new opiate.

Better File NOW!

Thursday, September 22, 2005

Harry Dent and RE

Nice article out of Naples area reviewing Harry Dent's advice for the stock bubble, and how people are using this rediculous logic to justify the housing bubble. Go baby boomers.


Wednesday, September 21, 2005

The Economist.

The Economist has an interesting commentary on AG, rising interest rates and stagflation. Nice read.

The Economist

Who needs and education?

"The numbers are stagerring" says this article about the number of new realtors and mortgage brokers in Florida. Their ranks have doubled in just four years. Can you immagine doubling the numbr of engineers, architects, computer programmers, teachers or any other profession in just four years. Regarding the labor arbitrage that is currently occuring in the world, Alan Greenspan say the solution is education. But how can you expect someone to become a professional that adds value to society of you can make big bucks selling houses or mortgages with very little training. It's kind of pathetic. I hope that our educational system will be able to absorb these people after the bust, and train them into productive members of our society.

Just got my lisence

Commercial RE summit.

At a large summit for commercial real estate investors, the topic of boom or bust came up. It's remarkable, but they admitted that prices will come down. Unheard of. Real Estate is cyclical they say. Really? Where is David Lareah? Though they predict a decline, they say it is not going to be like the internet disaster. With the degree of leverage we have in the market, it's hard to see a soft landing in a rising interest rate environment.

RE is cyclical

A technician picks a bone with AG

A stock market technician is picking a bone with AG, and crying uncle. The charts make for interesting reading.


Tuesday, September 20, 2005

Al Chapman

The great entrepeneur Al Chapman, who lost everything in the internet bubble, is now leveraging himself to his eyeballs in real estate. Hey, maybe in a few years there will be another mania that he can lose money in.

Al Chapman

Mario Gabelli

One of the great investors weighs on the housing bubble and the stock market. It always pays to listen to Mr. Gabelli.

Mario Gabelli

Monday, September 19, 2005

Hurricane Season from Fox News.

Nice article about the bubble from fox news.

Brace yourself

Sunday, September 18, 2005

Hockey season!

Nothing to do with housing, just a preview of the New Jersey Devils.

NJ Devils


A nice article from England showing the start of some fallout from their own bubble. The engine of their economy for 10 years or so was their housing bubble. As per Lord Keynes, the "animal spirits" of increased aggregate demand propagated through the housing bubble has made people incredibly indebted. Well as house prices stop going up, the debt seems less attractive to it's owner (as does the house). It turns out that this is just like an inverse Robin Hood senario, where creditors/businesses made money by regular people leveraging themselves into this bubble. This is shamefull central banking at it's worst. The Anglo-Saxon world will not be able to compete with the Chinese by propagating a housing bubble. I just pray this won't be another 1930's.

bad debt

Gary Shilling

A man with a remarkable forcasting track record cogently describing the madness and it's potential aftermath.

Garry Shilling

NYT uncorks the champagne.

I think it's a little premature to celebrate, but increased media coverage of the downside to this debacle is helpful. I mean if we built factories instead of condos and casinos, perhaps we wouldn't need to import so much from abroad. I believe poor people from abroad subsidizing our prodigal lifestyles with their savings is the most ironic thing I have ever seen. It's like the Rockafellers borrowing money from people on welfare to buy another yacht. I just pray that this doesn't end too badly.


Easy Money

Nice article in LA Times about easy credit. This practice is both awful and stupid. I guess awfully stupid. As always, the taxpayer will be the insurer of last resort.

take the money and run

Fed targets house prices.

Nothing new, but I though I would post it anyway.


Saturday, September 17, 2005

Statistical Anomaly

This is a very nice article that showes that the price of houses is so out of whack that is 2 standard deviations form historical means. It really quite remarkable. It just shows you what can happen to asset prices when rates are kept at a rock bottom level for so long. More shame for Alan Greenspan.


Wednesday, September 14, 2005

Fed Watch!

Nice article by FT conjecturing that Fed will raise rates on 9/20/05

Raise Rates

Sunday, September 11, 2005

Katrina and the Waves

This is a very depressing article from cnn. There is a large battle brewing between those who lost their homes from Katrina and their insurers. The main issue is of what caused the damages, flood or wind. The insurance companies, for obvious reasons, are claiming that the damages were caused by flooding, which are not covered by policies. The homeowner obviously hold a different point of view. What is interesting is that even those who hade flood insurance, it only covers $250,000. This is much less than the cost of building a shoreline house. It makes you wonder how many properties will have to go into default. Economic devastation.


Monday, September 05, 2005

The American Dream is taking a nap!

What has alway been the difference between Europe and the United States? Well there are many, but one of the main ones is that there was always upward mobility for people who worked hard and saved, regardless of social background. We did not have a caste system. However, one of the effects of this crazy asset economy has been the tremendous concentration of wealth by the elite. I am sure supply side economics, deregulation and tax cuts on capital gains and dividens all helped. This article points out very nicely how young working people are at enormous disadvantage as compared to previous generations. It's H. Ross Perot all over again, two bubbles removed. One of the interesting points it makes is that homeownership among younger people is way down, due to the enormous run up in prices. The only people that can get in are those with wealthy parents who give down payments. Peole like to say America is a meritocracy, and in many ways it is. But it is becomming more apparent that we have become a lot more like a European-style asset oligarchy.

Greenspan Screwed Working People

Sunday, September 04, 2005


Latest housing report from OFHEO


Saturday, September 03, 2005

Katrina and Oil

Reuters article that describes IEA chairman talking about a possible global energy crisis if US has to purchase gasoline on open markets, because of Katrina induced refinery shortages.

Fill My Hummer

Katrina and The Housing Bubble.

What effect will Katrina have on The Housing Bubble? I have thought about it for a few days and I have some ideas. The first question is will the Fed stop raising interest rates to see what effect Katrina will have on the economy/GDP. If they have a pause, this will surely prolong the onset to price deflation. My wife suggests that it could actually increase prices in uneffected areas, because of a 9/11 type flight to tangible assets by people seeking "safety". I tend to believe that this is possible in the short term. But unlike 2001, we are much more leveraged and broke. The ability to further leverage and spend is limited, though probably not exhausted yet. Another question one must ask is if Katrina will be enough to put the country into recession. I don't know the answer to that question, but if it does, it would be terrible for the housing market, as overly indebted individuals lose their jobs and thus their ability to maintain solvency. I have read estimates of 0.5-1.5 % decrease in GDP projections. We will see. Another factor one must look closely at is commodity prices. As oil sits around 70 dpb, it has to start having some bite on the spending habbits of joe six pack at some point. And with the winter season not far away, heating oil prices will hurt the balance sheet. My understanding is that N.O. was a major hub for importing of other commodities such as sugar and coffee. This can only further increase commodity prices and hence can lead to inflationary pressures that will force the Fed's hand regarding interest rate policy. Lumber: You have to be long lumber because of all the rebuilding that will have to take place. Although, if there is a concominant decrease in building elsewhere, this will probably be a wash. As always, we will have to wait and see how this unfolds.