U.S. Housing Mortgage Market Meltdown, More Pain To Come
Housing-Market / US Housing May 31, 2009 – 01:24 PM
By: Mike_Shedlock
T2 Partners has a phenomenal series of charts on the housing crisis stating Why There Is More Pain To Come.
The report is 69 pages almost all of them loaded with charts. I took a liberal selection below, adding plenty of comments, but please take a look at the original article for many additional charts. All charts below are from the article. Quotes from the article in italics. My comments are in plain text.
Case Shiller vs. Lawler
Nearly everyone is familiar with Case Shiller. I suspect most have not heard of Lawler. Interestingly there is a feud of sorts between the two as noted by the Wall Street Journal article Outlook for Home Prices Clouded by Spat Over Historical Trends.
Yale University economist Robert Shiller has often dazzled audiences with a chart showing home prices from 1890 to present. Someone even used Mr. Shiller’s chart to make a YouTube video that puts its viewer on a roller-coaster ride over peaks and valleys in home pricing. It’s a bumpy ride.
Now another economist, Thomas Lawler, says Prof. Shiller’s chart is “bogus.” Mr. Lawler says Mr. Shiller cobbled together data that are inconsistent and sometimes unreliable. Mr. Shiller defends his work and accuses Mr. Lawler of making “wild allegations.”
No one has found a precise way to measure changes in house prices. Because no two homes are exactly alike, changes in the price of one won’t necessarily be matched even by apparently similar homes nearby, much less those hundreds of miles away.
But that doesn’t stop analysts from extrapolating from what may be dubious data. In a March 30 report, T2 Partners LLC, a New York hedge-fund manager, drew on the Shiller chart to conclude that on average U.S. home prices need to drop another 13% to get back in line with the long-term trend.
Mr. Lawler has created an adjusted version of the Shiller chart, backing up his view that house prices already are nearing a bottom in much of the country. A T2 partner called Mr. Lawler’s critique “valid.”
I guess we need to define “nearing a bottom”. We also need to look at concentrations of houses. Does it matter much if home prices are bottoming across vast sections of the farm belt with low density houses if the big cities are still declining rapidly?
Certainly we are closer to a bottom than two years ago but I am betting the bottom is still years away although the rate of decline is slowing.
Mortgage Debt vs. Equity
Americans Have Borrowed Heavily Against Their Homes Such That the Percentage of Equity in Their Homes Has Fallen Below 50% for the First Time on Record Since 1945.
Gorged In Debt
Over the Past 30 Years, We Have Become a Nation Gorged in Debt – To The Benefit of Financial Services Firms.
Think that leverage is coming back? I don’t. The Effect of Household Deleveraging on Housing, Consumption and the Stock Market is going to be far greater than most realize. This bubble will not be reblown, just as the Nasdaq bubble was not reblown after the tech crash.
Peak Credit and her twin sister Peak Earnings have arrived.
Surge of Toxic Mortgages
It took a decade to blow the bubble. It is going to take more than a few years to clear it.
Fannie Mae and Freddie Mac Account for 56% of Mortgages
Private Label Mortgages (Those Securitized by Wall St.) Are 15% of All Mortgages, But Are 51% of Seriously Delinquent Mortgages.
Mortgage Delinquencies as Percentage of Loans
Nearly 8% of Mortgages on 1-to-4-Family Homes Were Delinquent or in Foreclosure as of Q4 2008.
This number is bound to get much worse, and/or taxpayer bailouts get much bigger given that job losses are over 500,000 for months on end. Moreover, Fitch estimates 75 percent of the modifications now being done through the administration’s Making Home Affordable program will re-default in six months to a year. Please see More Prime Foreclosures; More Re-Defaults for details.
Subprime Resets
Here’s the good news:
The Wave of Resets from Subprime Loans Is Mostly Behind Us.Alt-A Mortgage Resets
Here’s the bad news:
There Are $2.4 Trillion of Alt-A Mortgages and Their Resets Are Mostly Ahead of Us.Option Arm Oiginations
About $750 Billion of Option ARMs Were Written, Nearly All at the Peak of the Bubble.
Option ARMs by State
California accounts for 58% of all Option ARMs. Think Wells Fargo, a big option ARM player is going to come out of this glowing? Warren Buffett does. I don’t. Place your bets.
Option Arms Index vs. Fannie Mae 30 yr Index
Beginning in March 2005, High-FICO-Score Borrowers Opted for an Above-Market-Rate Option ARM in Exchange for the Low Teaser Rate
Option ARM Delinquencies
Delinquencies of Securitized Option ARMs Are Soaring
Cal Sales vs. Home Equity Loans
Think new car sales are going to come soaing back with rising unemployment and tightening loan standards? Think again.
Case Shiller vs. NAR Median Sales Price vs. OFHEO Index
Home Prices Are in an Unprecedented Freefall
Bubble Market Declines
The bubble markets (where most people live), have taken a brutal beating.
24% of Homeowners With a Mortgage Owe More Than the Home Is Worth, Making Them Far More Likely to Default
Shiller Lawler Trendlines
Home Prices Need to Fall Another 5-10% to Reach Trend Line
Whether you believe Shiller or Lawler, home prices still need to fall to reach the trendlines. Moreover there has never been a bubble correction in history that stopped right at the trendline.
Change In Nonfarm Payroll Employment
There have been job losses every month since December 2007. Moreover, there is no letup in sight as Continuing Claims Approach 6.8 Million, 17th Consecutive New Record.
The dip in initial claims from the March peak of roughly 650,000 is not accelerating very fast, if indeed at all. Those looking for a recovery in jobs soon are going to be disappointed.
Economists expect to see unemployment by 10% at the end of the year. I expect to see it at 9.8%+- by August and approaching 11% by the end of the year. Bear in mind the “stress-free tests” conducted by the Fed had an adverse scenario of 10.3% at the end of 2010.
Declines in Jobs vs. Past Recessions
The Decline from Peak Employment Now Exceeds the Past Five Recessions.
Total Bank Losses
Total Losses Are Now Estimated at $2.1-$3.8 Trillion – And Less Than Half of This Has Been Realized To Date.
Losses & Writedowns vs. Capital Raised
Institutions Have Been Able to Raise Capital to Mostly Keep Up With Writedowns, But This Will Likely Not Continue.
What can’t be paid back will be defaulted on. Consumers with no job have no chance of paying back those debts. Many others who could, won’t (because it is in their best interest to walk away). The Alt-A and Option ARM defaults are going to be massive.
Think this leads to inflation? Think again.
By Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit Sitka Pacific’s Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.
I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.
When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .
© 2009 Mike Shedlock, All Rights Reserved
Mike Shedlock Archive
Hopefully the economy will be able to rebound soon and the housing market will be able to bounce back up but it is hard to tell. A lot of people are resorting to affordable apartments that do the job of a good comfortable shelter instead of owning a house that they cannot pay for.
Comment by Affordable Apartments Dutchess County NY — June 10, 2009 @ 1:34 pm
No rebound, we still have alta-a and the ARM loans both of which out number sub prime, and both of which have the same level of foreclosure but at a much higher price, which means more pain for real estate.
Comment by whitelocust — June 13, 2009 @ 12:28 am
Actually, I think that since the housing crisis is linked to how the market has been tied up since the country started bailing out financial companies like Bear Sterns and Fannie Mae. When the markets clear, I think that this crisis will start being alleviated as well. In the interim, if one can’t truly purchase, there are rental complexes opening up in metro areas around the country that are affordable and show promise for long-term living until this can truly be resolved.
Comment by Liberty Commons — October 22, 2009 @ 3:53 pm
Nouriel Roubini apparently is predicting a global market crash
Many others are experiencing a “sense of foreboding,” according to Gillian Tett of the Financial Times. In a recent article, Tett quotes a banker correspondent:
“Forget about the events of the past 12 months. … The punters are back punting as aggressively as ever. Highly leveraged short-term trades are back in vogue as players … jostle to load up on everything from Reits [real estate investment trusts] and commercial property, commodities, emerging markets and regular stocks and bonds. …
Any sense of control is being chucked out of the window. After the dotcom boom and bust it took a good few years for the market to get its collective mojo back [but] this time it has taken just a few months. … Was October 2008 just a dress rehearsal for the crash when this latest bubble bursts?”
Tett concludes by saying, “It is crystal clear that the longer that money remains ultra cheap, the more traders will have an incentive to gamble (particularly if they privately suspect that today’s boom will be short-lived and want to score big over the next year). Somehow all this feels horribly familiar; I just hope that my sense of foreboding turns out to be wrong.”
The title of Tett’s article is “Rally fuelled by cheap money brings a sense of foreboding.” She refers to the same facts that I referenced a couple of weeks ago in the article “The current stock market bubble correlates with bailouts and stimulus,” Since that time, it’s been more and more widely recognized that the current stock market rally is being fueled by governments around the world pouring out free or low-cost money, via central banks and fiscal policy.
On CNBC on Monday morning, NYU professor Nouriel Roubini discussed explicitly how central banker policy was creating a “wall of liquidity” that was feeding a new worldwide asset bubble, growing larger than the last one. Along the way, he appears to be predicting a global market clash with near certainty.
The following is my transcription. The lines in brackets [] are paraphrases of interviewer questions.
“[Could we see the stock market run continue?]
Yes, in the short run what’s happening is that there’s a wall of liquidity, not just in the United States but around the world, that’s chasing assets — it’s equities, it’s commodities, it’s gold, it’s emerging market asset classes.
Nouriel Roubini (Source: CNBC)
Nouriel Roubini (Source: CNBC)
And now we have even the mother of all carry trades. Everyone is borrowing short, shorting the dollar, borrowing and investing in assets all over the world. Global equities, comodities, credit, emerging market asset classes.
The risk is however, right now people are borrowing at zero percent interest rates in the United States. Effectively the rate of borrowing is negative, because with the dollar falling — ?? in the capital gain, — you’re buying any asset around the world. All these assets are perfectly correlated.
Eventually, the dollar cannot keep on falling. Once the dollar stops falling, it reverses. You have a sudden reversal of the dollar, you have to close your shorts, you have to dump assets, and you could have a market crash all over the world. That’s a risk.
[Is that anywhere near happening?]
No, it’s not near happening because for the time being the Fed is keeping short rates at zero, expected to remain zero, and the Fed is becoming the biggest seller of volatility because it’s buying $1.8 trillion of Treasuries, agency debt and RMBSs, so volatility on the long end is low, and on the short end is zero, so this game is played until ????.
[Question about central banks]
There’s a gap between what you have to do for the real economy, and what you have to do for financial stability. The real economy is still weak. There’s deflation actually in the economy. Look at the cycle 2001-2006. They kept the fund rates all the way down to 1% through 2004, three years after the recession was over. Then they did step by step [raises of] 25 basis points every six weeks.
This time it’s the same, only worse. Output has fallen 4%, not 0.4%. Unemployment rate is going to peak at 10%, not at 6.5. We have actual deflation rather than risk of deflation.
So if the Fed wants to target the real economy and avoid deflation, it has to keep the Fed funds rate at 0 for longer. But if it does that, then you create another huge asset bubble.
With the carry trade, that asset bubble is now becoming global, and everyone has to follow U.S. monetary policy by intervening in a non-sterilized way. That eases money at reduced rates, and therefore we’re exporting our monetary policy to the rest of the world.
And that’s leading to a global asset bubble. And once there’s the unraveling of that carry trade that eventually is going to occur, because the dollar cannot keep on falling, then you can have a market crash on a global basis.
[q: Is this current asset bubble worse than the one that preceded the fall of Lehman?]
It could become worse because if the Fed keeps the rates at zero, and if the Fed keeps controlling and reducing volatility on the long end, then everybody is playing the same game. Everybody is buying dollars and going long in risky assets all over the world.
[Have we put out one fire, only to create another one?]
I think we have two objectives here — stabilize the real economy, and avoid financial instability. But we’re using one target, the Fed funds rate, to target the real economy, but we’re creating a new asset bubble, bigger than the previous one, and that’s a mistake we’re doing right now.”
Roubini’s reasoning can be summarized as follows:
* The Fed’s zero percent interest rate policy is creating a “wall of liquidity.”
* Investors are using the carry trade — borrowing dollars at zero interest rates, and buying risky assets around the world — equities, commodities, emerging market asset classes. This is creating a new asset bubble, bigger than the previous ones.
* This will continue as long as the dollar keeps falling. But eventually the dollar MUST stop falling.
* At that point, the carry trade will reverse, and investors will have to return the dollars they’ve borrowed. This means that they’ll all sell their equities, commodities, emerging market asset classes, all at the same time, creating a global market crash.
I’ve read through this transcript several times, and I don’t see that he’s left much doubt that this is going to happen. The only point of ambiguity in what he’s saying is the timing. He says that it won’t happen soon because the Fed will keep interest rates low for a while, but surely he realizes that isn’t the issue. The trigger will not be the Fed funds rate, which is set by policy; the trigger will be the ending of the fall of the dollar, and that’s set by the market. And with deflation already occurring, the dollar could stop falling at any time, irrespective of the Fed funds rate.
As usual, you have to ask the question, “What would Nouriel Roubini say if he believed that a global market crash was imminent?”
And the answer is that he’d be saying what he said in the above transcript.
He wouldn’t be talking about a global market crash at all if he thought it was a distant possibility; the fact that he seems to predict it indicates that he believes that it could happen in the near future.
I’ve always been puzzled by what people like Nouriel Roubini and Ben Bernanke really believe. As I’ve been saying for seven years, a market crash MUST occur with 100% probability by applying the Law of Mean Reversion. I don’t expect the man on the street to understand the Law of Mean Reversion, but I DO expect professors of economics at NYU and Princeton to understand the Law of Mean Reversion.
This is the first time that I’ve heard Roubini, or indeed any major financial official in Washington or around the world, predict a market crash. This is a big change in opinion by Roubini, or at least a big change in what he’s saying.
From the point of view of Generational Dynamics, the increasingly reckless behavior of financial institutions explains why there MUST be a major stock market crash, and that the worst, by far, is yet to come.
Citibank is an archetypal example of what’s going on. The financial engineers and managers at Citibank were prime perpetrators in defrauding investors and the public in creating structured securities that are now called “toxic assets,” and they did so in such a way that they could pay themselves billions of dollars irrespective of how many other people lost everything.
And now those same people at Citibank are charging millions of their own customers 30% interest, and using the money to pay themselves hundreds of millions of dollars in additional bonuses. This appears to me (as a non-lawyer) to be criminal extortion. Citibank appears to be turning into a criminal organization.
I’ve been talking for several years about the debauched and depraved abuse of credit that we’ve seen in financial institutions, and I’ve been increasingly sickened and disgusted as I’ve seen it get worse and worse, as long-time readers of this web site are well aware. But I just can’t find the words to describe what I’m seeing today in Citibank and elsewhere. I’ve lived a long life in America, and I’ve seen individual examples of criminal behavior, including such people as Bernie Madoff. But I’ve never seen any behavior so nauseating and loathsome as I’m seeing in Citibank and other places. I truly believe that many of these people are going to go to jail, as their counterparts did in the 1930s, and no one will be happier to see that than I will.
But getting back to the generational point, you can see why there MUST be a major stock market crash. The portion of the crisis that’s occurred so far has done nothing to curb the behavior of financial engineers and managers at Citibank in using fraud and extortion to pay themselves million dollar bonuses. The only thing that will stop them, and other bankers like them, is a financial crisis that will destroy Citibank itself. (This is why I often talk about the “The nihilism and self-destructiveness of Generation X.”) Citibank gouging and screwing their own customers with 30% interest rates is so self-destructive that it almost appears to be a last act of desperation.
(Comments: For reader comments, questions and discussion, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (27-Oct-2009) Permanent Link
Iran plays a grand game in international nuclear weapons talks
Will she or won’t she?
Whenever politicians something, I like to apply a simple test: What would the politicians be saying if the thing they’re denying is true? Usually, they’d be saying exactly the same thing. This doesn’t prove that what they’re denying is true, but it does prove that you can’t believe anything that the politicians say.
Applying this test to the hardline Iranian politicians, we ask ourselves, what would the politicians say under these assumptions:
* They have every intention of developing nuclear weapons.
* They don’t want to be bombed by Israel or the U.S.
* They don’t want any further U.N. or European sanctions.
Under those assumptions, the Iranians would say that they have no desire for nuclear weapons, and that they want to fully cooperate with the international community. And they would would stall and raise a lot of extraneous issues.
And of course, that’s exactly what they’ve been doing. That doesn’t prove that they’re developing nuclear weapons, but it does prove that you can’t believe anything they say.
The current drama began in mid-September when President Obama and the leaders of France and Britain disclosed that Iran had been constructing a secret nuclear processing plant in Fordo, a village about 115 miles south of Tehran. The disclosure was extremely embarrassing to Iran, and appeared to have infuriated two of Iran’s main supporters, Russia and China, who felt betrayed by Iran’s lying.
This was followed a few days later by a test-firing of new missiles capable of striking Israel.
Taken together, the two incidents raised many international alarm bells. American and Europe began considering new sanctions, and Russia and China indicated that they might not veto the sanctions in the U.N. Security Council. Some people feared that an air strike by Israel could be coming soon.
So Iran’s politicians moved quickly into obfuscation mode.
On October 4, an ebullient Mohamed ElBaradei, head of the U.N.’s International Atomic Energy Agency (IAEA) announced that Iran was moving away from confrontation with the West, and was agreeing to allow inspections of the Fordo plant by October 25 — allowing itself plenty of time to remove anything incrminating.
ElBaradei also announced that Iran would return to the negotiating table with the West. Strangely enough, Iran said nothing about these announcements. Nonetheless, ElBaradei’s announcements were enough to defuse talk of sanctions, at least for a while.
The negotiations have yielded a complex plan: Iran would ship most of its existing low-grade enriched uranium to Russia and France, where it would be processed into fuel rods with enriched uranium of a purity of 20 percent. This plan would guarantee that Iran would not develop uranium-processing facilities that could also provide weapons-grade material, but would still provide them with the enriched uranium for energy and medical needs.
Once again, it was ElBaradei who announced this plan on Monday, with Iran saying nothing. Iran was asked to approve the plan by Friday, but they keep asking for more time. If the assumptions that I listed above are correct, then they will find a way not to approve this plan.
While this discussion is going on, IAEA inspectors are now arriving at the Fordu nuclear plant to begin their inspection.
Iran’s politicians are well aware that it was Saddam Hussein’s refusal to allow IAEA inspections that caused the Clinton administration to bomb Iraq almost on a daily basis, starting in 1998, and the Bush administration to launch the 2003 ground offensive. They believe that by allowing inspections, they’ll defuse the West’s desire to bomb Iran’s nuclear installations or impose sanctions.
However, if we’re to judge what Iran’s Persian-language newspapers are saying, they have no intention whatsoever of agreeing to ElBaradei’s enriched uranium plan. While ElBaradei and western media have been have been bubbling with enthusiasm over the supposed success of this plan, sometimes calling it a victory for President Obama’s accommodating, non-confrontational approach to Iran, analysis by MEMRI of Iranian media produces these statements:
* “One thing is clear, namely that Iran will not lose its strategic reserves.”
* “The West – which a week or two ago thought with enthusiasm that Iran would be willing to hand over all its strategic reserves at once, [namely all] its [uranium] enriched to a low level, in return for a handful of promises – is now gradually learning that Iran has no intention whatsoever to do so. In fact, to put it as briefly as possible, Iran’s strategic choice in the Vienna talks is not to hand over its nuclear material and to receive it [back in the form of] nuclear fuel, because in principle, [Iran] cannot place the least bit of trust in the Western side to remain committed to its promises on this issue… Iran will never give up its strategic reserves.”
* “[Iran's] strategic options are either to purchase nuclear fuel or to enrich [uranium] to 20% inside Iran – and the West must choose between the two.”
* High level Iranian politician Ali Larijani said that the West was “obliged to provide Iran with enriched uranium for the research reactor in Tehran. Moreover, there is no guarantee that if a deal is struck, the West will [actually] provide Iran with the nuclear fuel [after it receives Iran's nuclear material].”
* One editorial said that the plan was an American trap personally designed by President Obama. An Iranian consent to this deal, the paper continued, would eliminate Iran’s achievements in the field of nuclear enrichment, and this in return for nothing more than “false promises and illusions.”
From the point of view of Generational Dynamics, one cannot simply stop here and conclude that Iran will reject the plan with 100% certainty. Iran is in a generational Awakening era, a time of enormous political turmoil, as could be seen with this summer’s student street protests, which are still continuing.
There are conflicting pressures in Iran, as follows:
* The Iranian people strongly support the development of nuclear technology, but it’s not clear that they support the development of nuclear weapons. The protestors are angry at the government for allowing this to turn into an international conflict, and this may force a compromise.
* On the other side, the hand of the hardliners who want to develop nuclear weapons has been greatly strengthened this week by the humiliating terrorist attack on the Revolutionary Guards by the al-Qaeda linked Jundullah terrorist group, whose base is in Pakistan. (See “Furious Iran blames Pakistan, US and Britain for Sunday’s terrorist attacks.”) The Iranians are well aware that Pakistan has an arsenal of nuclear weapons, and they foresee the possibility of a future war between the two countries.
The political turmoil gives rise to the possibility that Iran may agree to ElBaradei’s plan. But on balance, I estimate the chances to be vanishingly small. We can thus expect Iran to continue playing its grand game, and continue to tie the Western community into political knots.
(Comments: For reader comments, questions and discussion, see the Iran thread of the Generational Dynamics forum.) (26-Oct-2009) Permanent Link
The current stock market bubble correlates with bailouts and stimulus
This is another refutation of Richard Koo’s stimulus theories.
An analysis posted on the “Jesse’s Café Américain” blog provides an explanation for the current stock market bubble that’s been soaring since March. The analysis shows that stimulus, bailout and quantitative easing money from the government is highly correlated to the current stock market bubble, implying that this government money is pouring into stocks and boosting this new bubble.
The following graph of the adjusted monetary base provides an indication of the amount of money that’s been injected into the economy by means of bailouts, stimulus and quantitative easing:
Adjusted monetary base (Source: Jesse’s Café Américain)
Adjusted monetary base (Source: Jesse’s Café Américain)
The above graph shows that the monetary base has expanded from $900 billion in late 2008 to $1.9 trillion today, a $1 trillion increase in the last year.
But where has that $1 trillion gone?
In the past, I’ve posted several discussions on presentations by Richard C. Koo, Chief Economist at Nomura Research Institute, on the experience of the 1930s Great Depression and the 1990-2005 “lost decade” in Japan. (See, for example “Fiscal stimulus programs in 1930s and today.”)
The theory presented by Koo is the entire basis in mainstream macroeconomic theory justifying the large stimulus programs being implemented by the Obama administration, as well as by countries around the world. As explained in the Koo presentations, this theory is based on the following assumption: That the stimulus money will first create jobs, and then will return to the Treasury in the form of bond purchases, because there’s nowhere else for the money to go.
So where has all the money gone?
It certainly hasn’t gone into bank lending, as the following graph shows:
Total bank credit (Source: Jesse’s Café Américain)
Total bank credit (Source: Jesse’s Café Américain)
The above graph shows that bank lending has plummeted, even as $1 trillion in bailouts, stimulus and quantitative easing has poured into the economy.
This is what’s expected from Koo’s concept of “balance sheet recession,” his name for a deflationary spiral. During such a period, assets are destroyed, but debts remain, so everyone is in debt. People and businesses refuse to go even deeper into debt, and instead of spending any money they have, they either save it or use it to pay down debt. Either way, it goes into a bank, which (according to Koo) uses the money to purchase government bonds, thus returning the money to the Treasury. But the bank does not risk lending the money out, which is consistent with the above graph.
But what if the money was somehow being used to buy stocks? There’s certainly a correlation, as shown by the following graphs of the S&P 500 price/earnings ratio (also called “valuations”):
Price/earnings ratios, based on operating earnings and reported earnings (Source: Jesse’s Café Américain)
Price/earnings ratios, based on operating earnings and reported earnings (Source: Jesse’s Café Américain)
Notice that the as-reported P/E ratios began skyrocketing at exactly the same time that the stimulus money started pouring out. Also notice that the operating earnings P/E ratio has also been soaring.
(For a discussion of “operating” versus “as reported” earnings, see “Wall Street Journal sharply revises its fantasy price/earnings computations.”)
The following graph overlays the monetary base with the reported earnings P/E ratio:
Monetary base overlaid with price/earnings ratios based on reported earnings (Source: Jesse’s Café Américain)
Monetary base overlaid with price/earnings ratios based on reported earnings (Source: Jesse’s Café Américain)
These graphs show that the bailouts, stimulus and quantitative easing are highly correlated with this years stock market bubble. Correlation doesn’t imply causation, of course, but the size and duration of this year’s stock market bubble has been extremely puzzling, and this correlation provides a highly credible explanation.
This is an extremely significant conclusion because it strikes at the heart at the macroeconomic justification for the massive stimulus programs. For stimulus to work, it’s absolutely essential that the stimulus money create jobs and then come back into the Treasury through saving and debt reduction.
If the money is being channeled into the stock market, then much of it will “leak” out of the country into investments in other countries, thus defeating the purpose of the stimulus.
How much longer can this go on? How long can the Fed and the Treasury pour out hundreds of billions of dollars to expand the stock market bubble? That can’t be predicted, of course, but every bubble has to burst some time, and all it would take is some surprise event to trigger a panic.
The “Jesse’s Café Américain” article contains another interesting chart:
Wealth disparity — income share of top .01% of the population — 1913 to present (Source: Jesse’s Café Américain)
Wealth disparity — income share of top .01% of the population — 1913 to present (Source: Jesse’s Café Américain)
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Fiscal stimulus
The current stock market bubble correlates with bailouts and stimulus: This is another refutation of Richard Koo’s stimulus theories…. (14-Oct-2009)
Fiscal stimulus programs in 1930s and today: Did Hitler really do everything right?… (1-Apr-2009)
The effects of massive fiscal stimulus – Part II: President-elect Barack Obama is turning apocalyptic in his speeches…. (12-Jan-2009)
The economic outlook for 2009 : How we got to where we are today, who’s to blame, and where we’re going in 2009. (5-Jan-2009)
The effects of massive fiscal stimulus.: A study comparing Japan’s deflationary spiral with ours shows the way…. (24-Dec-2008)
One, Two, Three … Infinity: Watching the world spin out of control…. (25-Nov-2008)
I’ve often wondered about the wealth disparity and income inequality statistics. I’ve been reading for years that income inequality has been increasing, and I felt intuitively that this had to be related to the generational financial cycle.
This graph supports the conclusion that income inequality is a generational trend. It seems that income inequality increases substantially during the generational stock market, real estate and credit bubbles, and then presumably crashes along with the stock market.
In fact, we can think of wealth disparity as just one more bubble that’s still growing today, and will crash along with the other bubbles.
I was shocked earlier this year when Citibank, Bank of America and other banks announced that they would continue paying million dollar bonuses. These and other banks had caused the financial crisis by creating worthless structured securities and fraudulently selling them to investors. Paying big bonuses to people who defrauded the public for years is, at the very least, a public relations disaster.
What’s become apparent in the last few months is that this disaster goes far beyond simple public relations. Citibank, Bank of America and other banks have been screwing and gouging their own customers in order to provide the cash flow to justify the million dollar bonuses. Stories abound about banks arbitrarily raising interest rates to 30%, doubling or tripling minimum payments, or engineering phony fees of hundreds or thousands of dollars per customer.
In one sense, this should be no surprise at all. The same people who made billions of dollars selling worthless structured securities to investors are now making billions of dollars by gouging their own customers. They’ve changed only their methods, not their patterns of behavior.
As I’ve mentioned several times on this web site, when I was growing up in the 1950s, my parents and my teachers really hated bankers, but I never understood why. I sure understand why today. Bankers did exactly the same kinds of things in the 1930s that they’re doing today. Many bankers went to jail by the end of the 1930s, and the rest of them were hated for decades.
If you look at the narrative that I’ve presented in this article, you can see some ironies. These banks have received hundreds of billions of dollars in bailout money, and are benefiting from the stimulus and quantitative easing programs. They aren’t lending any of this money to consumers, since credit card defaults might reach as high as 10-15%, and they’re evidently not investing the cash in safe Treasuries. Instead, a lot of the money is being channeled into stock market bubble, and when that bubble bursts, they’re going to lose much more money than they would have from credit card defaults.
That’s not all. If you look at the last graph above, the wealth disparity graph, and you see what happened in the 1930s, then you can predict what’s going to happen before long now. That wealth disparity is going to disappear, as the Principle of Maximum Ruin catches up with the bankers who have been perpetrating all these misdeeds, defrauding investors and gouging customers. It’s a modern morality play.
From the point of view of Generational Dynamics, you can see how the circle is closing. I know that long-time readers of this web site are sick and tired of hearing me endlessly talk about the “The nihilism and self-destructiveness of Generation X,” and how the lethal combination of greedy, nihilistic Gen-Xers, along with greedy, incompetent Boomers, has brought about the current financial disaster.
Now we’re beginning to see how the people in this lethal combination used destruction and nihilism to lay the seeds for their own self-destruction. Not only will most of them lose all their ill-gotten wealth, but many of them will go to jail. The rest will be hated for decades.
To that end, a significant criminal trial began on Tuesday. Two former Bear Stearns executives, Ralph Cioffi and Matthew Tannin are charged with securities fraud and face 20 years in prison if convicted.
It’s no surprise that Bear Stearns executives defrauded investors. (See, for example, “Bear Stearns bails out defaulting hedge funds, preventing broad market meltdown.”) But there’s increasing momentum in public opinion building that people who perpetrated this fraud should be punished, just like the 1930s.
As I’ve said many times, there’s no doubt whatsoever that fraud was rampant. It was absolutely clear by 2006 that the real estate bubble was bursting, and that the computerized risk models that had been used to justify the creation of mortgage-backed structured securities were based on incorrect assumptions. If investment bankers had been honest, then they would have warned their investors that something was wrong. Instead, they redoubled their efforts to sell these securities (now called “toxic assets”), paying themselves huge commissions for each sale. Thus, there’s absolutely no doubt at all that massive fraud was going on. However, this is all circumstantial evidence, not enough to convict anyone in court.
And political figures are just as guilty as investment bankers. This has nothing to do with any political party. You have Robert Rubin from the Clinton administration, Henry Paulson from the Bush administration, and Larry Summers from the Obama administration — all of them made many millions of dollars participating in this fraud, and they’re still running things. Journalists are to blame as well. They’ve lied about this fraud because they didn’t want to lose advertisers.
In the Ralph Cioffi / Matthew Tannin case that begins today, prosecutors have obtained the e-mail messages they exchanged in March 2007. These messages indicate that they were telling each other that the funds were likely to crash, while they were telling investors that they were solid. If prosecutors obtain a conviction against Cioffi and Tannin, then they will have opened the door to obtaining convictions against other investment bankers.
This brings us back to the original subject of this article. Cioffi and Tannin are typical of an entire generation of investment bankers, real estate execs, politicians, journalists, and others who believe that rules don’t apply to them, and they’re allowed to screw anyone they want to make as much money as they want. The bailout, stimulus and quantitative easing money is supposed to be used for consumer loans and job creation. Instead, it’s being channeled into the stock market bubble, undoubtedly by people who are paying themselves fat commissions for brokering stock purchases. This causes even more damage to the economy in general, and encourages ordinary investors to invest in the bubble, and risk losing everything.
In other words, the same people who created the financial crisis for their own gain are now prolonging and worsening the financial crisis, for their own gain.
(Comments: For reader comments, questions and discussion, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (14-Oct-2009) Permanent Link
The housing bubble began in 1995.
This means that the housing crisis will last for almost another decade.
Pundits, politicians, journalists and Nobel prize winners have all been looking at various political explanations of the housing bubble. For years, they said the bubble didn’t exist at all, but late in 2007 when it clearly was leaking, they blamed it on Alan Greenspan or George Bush, using some tortured logic.
Almost none of the mainstream analysts and economists even admitted that there was a real estate bubble until 2006 or so, when Nouriel Roubini discovered the bubble and announced it to the world. By that time, it was already pretty clear that it had begun to leak.
I started writing about the real estate bubble in 2004, but I too thought at that time that it was caused by the low near-zero interest rates that Alan Greenspan and the Fed had put into effect. I later rejected that view, as I came to understand that the bubble occurred in countries around the world.
I’ve just become aware of a 2002 research report by Dean Baker of the Washington-based Center for Economic Policy and Research. This paper shows clearly that the real estate bubble began in 1995, the same time as the dot-com bubble.
Baker shows this in several ways, but the following graph shows it most clearly:
Cost of owning real estate versus renting, 1975-2002 (Source: Dean Baker)
Cost of owning real estate versus renting, 1975-2002 (Source: Dean Baker)
This graph compares real estate prices with rental prices. As you can see, the two graphs began diverging significantly in 1995, with cost of ownership surging.
This REALLY makes a lot of sense, because it corresponds exactly to the start of the dot-com bubble. Furthermore, although the real estate bubble didn’t START in 2003, it really skyrocketed starting in 2003, and that also corresponds to the huge credit bubble.
Let’s take another look at this chart, that I first posted in 2007:
Generational ‘moods’ overlaying Dow Industrials since 1950
Generational ‘moods’ overlaying Dow Industrials since 1950
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I described this chart in detail in the above-mentioned article, but here I only wish to relate this chart to this new information about the real estate bubble.
The point of inflection that occurred in 1995, the time when all the Great Depression survivors disappeared (retired or died), and Boomers rose to senior management positions. At this time, the cautious investment strategies of the risk-averse Depression survivors were replaced by the reckless investment strategies of the Boomers. We now know that the real estate bubble began at the same time of generational change.
Then, in 2003, the credit bubble exploded, and so did the real estate bubble.
This really ties things together from the point of view of Generational Dynamics. It’s always bothered me a little that the real estate bubble apparently began in 2003, but now with the real estate bubble starting in 1995, along with the dot-com bubble, everything fits together.
Now, there’s a little more to this story.
I found my way to the 2002 paper on the housing bubble through a blog entry by its author, Dean Baker. Baker was commenting on a NY Times article that congratulated President Obama, Timothy Geithner, Lawrence Summers, Ben Bernanke and Henry Paulson because “the financial crisis of 2008 turned out to be far less bad than it could have been.”
Here are some excerpts:
“What If the Captain of the Titanic Managed to Get Three Quarters of the Passengers on Life Boats?
David Leonhardt wants to congratulate the gang that led us into the worse economic downturn in more than 70 years because it will not be as bad as the Great Depression. Yes, the downturn could be worse, but let’s be serious.
This crash was 100 percent preventable to anyone watching the economy and capable of doing 3rd grade arithmetic. The housing bubble was easy to see and it should have been obvious that its collapse would devastate the economy. …
This is a complete disaster. Any custodian, dishwasher or shoe salesperson who showed the same degree of incompetence on their job would be fired instantly. There is no reason that the country should engage in this soft bigotry of low expectations when it comes to economic policy. This crew blew it just about as badly as anyone conceivably could. Saying that you didn’t give us another great depression is not exactly a winning re-election slogan.”
This is what drives me crazy. Here’s a guy from a Washington DC economic think tank. He’s done the research. He’s established that the real estate bubble is correlated to the technology bubble. He offers no opinion at all as to what happened in 1995 to cause both bubbles to start growing; indeed, he has no idea why the bubbles occurred at all, and why they began in 1995, as opposed to 1985 or 2005. He doesn’t even pretend to have the answers to these questions.
And yet, even though he has no idea about how the bubble started, he’s ABSOLUTELY CERTAIN he knows all the answers about how to keep the bubble from crashing. He says, “This crash was 100 percent preventable to anyone watching the economy and capable of doing 3rd grade arithmetic. The housing bubble was easy to see and it should have been obvious that its collapse would devastate the economy.”
Well how the hell was the crash preventable? Perhaps he thinks that Congress could have passed a law making it illegal for bubbles to crash. What more could President Obama, Timothy Geithner, Lawrence Summers, Ben Bernanke and Henry Paulson have done beyond what they did do — flood the economy with trillions of dollars worth of bailouts, stimulus and quantitative easing?
In fact, now that we know that the housing bubble began in 1995, we can draw some further conclusions: Since the bubble started leaking in 2006, it lasted for 11 years, and so we can apply the Law of Mean Reversion and, assuming that it leaks at roughly the same rate that it grew in the first place, the housing crisis will last 11 years, until 2017.
The credit and real estate bubbles were hundreds of trillions of dollars in size, and growing. To say that the crash was preventable is typical of the nonsense produced by economists today.
Speaking of economists who produce lots of nonsense, Nobel prize winning economist Paul Krugman has just written a lengthy article titled, “How Did Economists Get It So Wrong?” Krugman won the Nobel Prize because he met the prize committee’s major criterion: Hatred of George Bush. In his columns, he’s pretty much given up any pretense of economics, since each conclusion he reaches is based on ideological considerations. One of the major reasons that economists got it so wrong is that they interpret everything through an ideological filter. Krugman’s new article might be called an ideological history of economics of the 20th century. Pathetic.
At any rate, now that we know that the housing bubble began in 1995, we know that it couldn’t have been caused by George Bush or Ben Bernanke. It also wasn’t caused by Alan Greenspan’s near-zero interest rate policy, since that began in 2002. Ideologues on the right might try to blame it on President Bill Clinton, but that’s silly as well. The real estate and dot-com technology bubbles were caused by the disappearance of the risk-averse Great Depression survivors from senior management positions in the early 1990s, and the dumb investments made by Boomers when they reached those senior management positions.
(Comments: For reader comments, questions and discussion, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (8-Sep-2009) Permanent Link
Comment by whitelocust — October 28, 2009 @ 5:02 am