正文
Mortgage Market Off the Rails, Economy to Follow
Whip Asset Price Deflation Now (WAPDN?)
by Eric Janszen
WAPDN may not have the same "ring" to it as President Gerald Ford'sunpopular disco era attempt at populism, his ill-fated "Whip InflationNow" anti-inflation campaign, but it will work just as well–not at all.
According to WikiPedia:
The whole idea seems silly today–because it was. Might such a ludicrousanti-inflation scheme be considered by a U.S. President today? Ofcourse not, but not because Americans are any more wise to monetaryprinciples. Recall post-9/11 speech by President Bush to encourageconsumers, formerly known as citizens, to keep spending or else "theterrorists win," in effect, to Whip Deflation Now. That worked becauseasking Americans to spend more is like asking crack addicts to smokemore. Sure, says the addict. Got more credit crack? Of course we did.
The latest effort by government to engineer money aggregates viagovernment consumer behavioral engineering promotions arrived yesterdayin the form of a tiny bailout of a small bit of a subset of the nowrapidly collapsing U.S. housing market. This was aimed not so much tokeep consumers spending as to keep the Democrats from hogging thepopulist limelight.
Some day all this direct consumer and voter lobbying will come back tohaunt us. All governments propagandize their citizens to supportgovernment economic policies, whether to save or not save, usually fordecades at a stretch, only to run into economic circumstances thatcause the carefully cultivated religious observance of economic policyto backfire.
Take Japan in the 1990s, for instance. Since after WWII, the governmentdemanded citizens sacrifice and hoard, and so they did. Between 1945and 1990, Japan became the greatest national saver and creditor onearth. The Japanese people's compliance with policy, which isconsistent with an anti-debt culture, made Japanese mercantilisteconomic policy possible. In the early 1990s after the asset pricecrash and banking crisis, when Japan began to experience goods andservices price deflation, the government attempted to reverse decadesof propagandizing and get the people out to the malls to spend, spend,spend. Turning Japanese savers into American-style spenders turned outto be as futile as President Ford’s experiment in the U.S. in the 1970sto do the reverse.
Japanese politicians are not greater fans of a market's naturaltendency to deliver V-shaped price corrections, preferring an elongatedU or, if possible to engineer, an endless string of nominal "_" markswhile inflation eats away at the real price the flat line represents ona graph. What the Japanese got for their efforts to manage the collapseof the 1980s asset price hyperinflation was an economy that hassee-sawed in and out of recession for going on 20 years while inflationputtered between plus and minus two percent.
The Great Depression was American’s last lesson in the wisdom of savingfor a rainy day. For several generations since it’s been bailoutcity–and nothing teaches spendthrift habits like the moral hazard ofrepeated, multi-generational debtor bailouts.
Each time recession approaches, the first casualty of U.S. politicians’refusal to discourage voters’ propensity to borrow and spend is thecurrency itself, repeatedly thrown under the bus in the name ofeconomic stimulus every time the economy attempts to rid itself of theaccumulated excesses of the previous period of economic growth.President Nixon was the first to do so without ceremony, but subsequentadministrations have been no less inclined, albeit far less obvious,about it when the need arose.
After spending decades coddling U.S. consumers, I mean, citizens withbailouts that encouraged them to borrow and spend beyond their means,the penultimate was achieved in Q4 2005 when the household savings rateturned negative.
In the midst of decades of government manipulation ofmarkets, the ideology of free-markets blossomed. The apparent paradoxcan be witnessed on a typical day on Wall Street. While Chip Mason,chief executive and founder of Legg Mason whined Wednesday that theTreasury Department needs to put $20 billion into the plannedstructured investment vehicles superfund designed to rescue the creditmarkets from the disaster that Wall Street created by sellingover-rated and, thus, over-priced credit products to pension funds fromGermany to Florida, a free market for hot dogs thrives on the streetbelow. If hot dog vendors could figure out how to get together, borrowbillions, lever it up and bet it on a market whose crash threatens theU.S. economy, that might change. But for how, it’s just one guy’s hotdog’s or another’s.
Airbag Economy
The latest effort to inflate the economic airbags came from the head ofU.S. Treasury Department, Secretary Andrew William Mellon, who resignedfrom his position as the head of the nation’s largest bank to take theposition, now serving Republican President Hoover. Oops. Sorry. Wrongpost credit bubble era. I meant Treasury Department Secretary HenryPaulson, who resigned from his position as the head of the nation’slargest bank to take the position, now serving Republican PresidentBush. And, no, today’s credit crisis has not resulted from cascadingdebt defaults after more than 50% of the nation’s banking resourceswere committed as margin credit to hyperinflated stock prices throughnon-transparent cross-investments among investment trusts. One coulddraw a virtuous comparison to the recent commitment of 60% of loans onthe balance sheets of the nation’s banks to mortgage debt backingtrillions of dollars of mortgages collateralized by hyperinflatedhousing prices and funded by risky and over-priced securitized debtinstruments, but you have to drawn the line somewhere. We draw it here:we’re much, much smarter today than those dopes back in the 1920s and1930s. To wit:
Scooting ahead to a more modern instance of the practice of pricefixing, we arrive at the 1960s to find government as unhappy with thepolitical consequences of too high commodity and wage prices as withthe political fallout of collapsing asset prices.
President Kennedy in 1962 criticizes the U.S. steel industry for raising
prices. Politicians like markets when they deliver rising asset prices,
but not rising commodity or wage prices. Those are bad.
Governments don’t like markets when they are delivering falling asset
prices, either. That’s bad, too.
Today we have both rising commodity and, soon, rising wage pricescombined with falling asset prices. This combination will tax even themost creative politician’s price control measures: how to make WallStreet and Main Street happy at once?
The market solution for the inflation cycle that started around thetime of Kennedy’s speech did not appear for another 20 years: stopprinting so much goddamn money. It happened under Paul Volcker’s Fed inthe early 1980s. Two successive massive recessions destroyed thepricing power of commodity producers and wage earners, wrecked theunions and thereby broke the primary means of transmission of inflationinto the price cycle, ushering in the golden age of credit and assetprice inflation.
Today, the market solution for falling real estate hyperinflation cycleis equally simple: let prices clear the market. That’ll never happen.Specific policy responses are difficultly guessed at with anycertainty. We ask our contacts in the know but it’s apparent that thefull scale and extent of the economic problem that confronts us, andthem, has yet to dawn fully on the geniuses who created this mess, sothey haven’t had a chance–yet–to develop equally ingenious “fixes.” Orif they have, they aren't letting on.
The Housing Crash has not Started Yet
It surprises us that housing prices are falling as quickly as they areso early in the correction process. Our January 2005 forecast notes agreater than 90% correlation between housing prices and employment, andthat not until unemployment rises do real estate prices in a bust beginto decline in earnest. Yet here we are with unemployment still below 5%and, according to a reporting of Case-Shiller by Moody’s last week,housing prices fell at a 6.5% annual rate in the 3rd quarter of 2007.
Herb Greenberg at Marketwatchissued a report by Mark Hanson, a 20-year veteran of the mortgageindustry, who has spent most of his career in the wholesale andcorrespondent residential arena. The headlines:
To further underscore the breadth of the problem, we note one itemstood out in the Fed’s quarterly Flow of Funds report issued Thursday:
So much for the “ownership society.”
The desire by Bush and Paulson to put the U.S. mortgage train back onthe rails via price-fixing mortgage rates is understandable, but theresults will be the same as for any price-fixing operation: economicactivity will decline as capital is withdrawn from the markets. Afriend of iTulip's we visited in New York City last week, a veteran ofWall Street who started at Chase in the mid 1980s and became asuccessful hedge fund manager later, asked, If the government can annulcontracts between bond issuers and bond buyers, who will want to issuebonds and who will want to buy them? Bloomberg quoted Kenneth Hackel,managing director of fixed-income strategy at RBS Greenwich CapitalMarkets who explained, “It could end up there's less confidence in theviability in the bond markets and the mortgage markets going forwardand it could lead to higher interest rates and higher mortgage ratesfor everybody.”
In case you are tempted to go around the Treasury Dept. manipulatedmortgage bond market and go directly to the source, not so fast. OnDecember 3, the Treasury announced that effective January 1, 2008 theannual purchase limit for savings bonds will be reduced to $5,000 peryear from $30,000. Further, our reading is that an individual, asidentified by a social security number, cannot purchase more than$20,000 worth of a series (e.g., EE or I) bonds total ever. We’ll keepour eye on changes in TIPs purchasing rules for signs the governmentmay be worried about excessive inflation-indexed bond liabilities asthe political pressure to inflate away debt mounts.
Back in 1998 when we were researching iTulip, we wereleft wondered how the Fed, President Hoover, and Congress managed tobotch the government response to the 1930s asset bubble price deflationto the point where the banking system and economy, for all practicalpurposes, collapsed. It appeared at times that actions were deliberateand coordinated, with rate cuts, tax cuts, and other bailouts. At othertimes actions seemed to stop. The reaction of the Bank of Japan andJapanese government in the early 1990s also evidenced confusionmanifested by flip-flopping and at times contradictory policies, withone hand of government on the print lever and the other on the brakes.We wondered how the U.S. political system was likely to respond to theevent, some years off in the future from those heady dot com days, whenthe U.S. credit bubble and asset hyperinflation had its day ofreckoning. Market commentator Doug Noland has tirelessly documented thebubble’s development for over a decade.
After years of wondering, now we are getting our answer.
Inflation is Political
Our bet has been a similarly elongated and drawn out collapse, in andout of recession, ala Japan since 1992, but with inflation stubbornlyin the three to nine percent range, unless outside events invoke a moresudden inflation and get the process over with more expeditiously.
Deciding our long term investment allocations in the mix of theseprobabilities–a long inflation, a foreign dollar repatriation fueledinflation spike, and the Next Bubbles–in the next cycle will keep usbusy for years to come.
Whip Asset Price Deflation Now (WAPDN?)
by Eric Janszen
WAPDN may not have the same "ring" to it as President Gerald Ford'sunpopular disco era attempt at populism, his ill-fated "Whip InflationNow" anti-inflation campaign, but it will work just as well–not at all.
According to WikiPedia:
Whip Inflation Now (WIN) was anattempt to spur a grassroots movement to combat inflation byencouraging personal savings and disciplined spending habits incombination with public measures, urged by U.S. President Gerald Ford.People who supported the mandatory and voluntary measures wereencouraged to wear "WIN" buttons, perhaps in hope of evoking inpeacetime the kind of solidarity and voluntarism symbolized by theV-campaign during World War II.Alas, grass rootswere no match for the government printing press, and though inflationfollowing Ford's famous "WIN" speech October 8, 1974 declined from aninsolent height of 8% to a more respectful 2%, it shot up to animpudent 9% then rose to stand contemptuously at 10% in 1979.
The whole idea seems silly today–because it was. Might such a ludicrousanti-inflation scheme be considered by a U.S. President today? Ofcourse not, but not because Americans are any more wise to monetaryprinciples. Recall post-9/11 speech by President Bush to encourageconsumers, formerly known as citizens, to keep spending or else "theterrorists win," in effect, to Whip Deflation Now. That worked becauseasking Americans to spend more is like asking crack addicts to smokemore. Sure, says the addict. Got more credit crack? Of course we did.
The latest effort by government to engineer money aggregates viagovernment consumer behavioral engineering promotions arrived yesterdayin the form of a tiny bailout of a small bit of a subset of the nowrapidly collapsing U.S. housing market. This was aimed not so much tokeep consumers spending as to keep the Democrats from hogging thepopulist limelight.
Some day all this direct consumer and voter lobbying will come back tohaunt us. All governments propagandize their citizens to supportgovernment economic policies, whether to save or not save, usually fordecades at a stretch, only to run into economic circumstances thatcause the carefully cultivated religious observance of economic policyto backfire.
Take Japan in the 1990s, for instance. Since after WWII, the governmentdemanded citizens sacrifice and hoard, and so they did. Between 1945and 1990, Japan became the greatest national saver and creditor onearth. The Japanese people's compliance with policy, which isconsistent with an anti-debt culture, made Japanese mercantilisteconomic policy possible. In the early 1990s after the asset pricecrash and banking crisis, when Japan began to experience goods andservices price deflation, the government attempted to reverse decadesof propagandizing and get the people out to the malls to spend, spend,spend. Turning Japanese savers into American-style spenders turned outto be as futile as President Ford’s experiment in the U.S. in the 1970sto do the reverse.
Japanese politicians are not greater fans of a market's naturaltendency to deliver V-shaped price corrections, preferring an elongatedU or, if possible to engineer, an endless string of nominal "_" markswhile inflation eats away at the real price the flat line represents ona graph. What the Japanese got for their efforts to manage the collapseof the 1980s asset price hyperinflation was an economy that hassee-sawed in and out of recession for going on 20 years while inflationputtered between plus and minus two percent.
The Great Depression was American’s last lesson in the wisdom of savingfor a rainy day. For several generations since it’s been bailoutcity–and nothing teaches spendthrift habits like the moral hazard ofrepeated, multi-generational debtor bailouts.
Each time recession approaches, the first casualty of U.S. politicians’refusal to discourage voters’ propensity to borrow and spend is thecurrency itself, repeatedly thrown under the bus in the name ofeconomic stimulus every time the economy attempts to rid itself of theaccumulated excesses of the previous period of economic growth.President Nixon was the first to do so without ceremony, but subsequentadministrations have been no less inclined, albeit far less obvious,about it when the need arose.
After spending decades coddling U.S. consumers, I mean, citizens withbailouts that encouraged them to borrow and spend beyond their means,the penultimate was achieved in Q4 2005 when the household savings rateturned negative.
 |
Airbag Economy
The latest effort to inflate the economic airbags came from the head ofU.S. Treasury Department, Secretary Andrew William Mellon, who resignedfrom his position as the head of the nation’s largest bank to take theposition, now serving Republican President Hoover. Oops. Sorry. Wrongpost credit bubble era. I meant Treasury Department Secretary HenryPaulson, who resigned from his position as the head of the nation’slargest bank to take the position, now serving Republican PresidentBush. And, no, today’s credit crisis has not resulted from cascadingdebt defaults after more than 50% of the nation’s banking resourceswere committed as margin credit to hyperinflated stock prices throughnon-transparent cross-investments among investment trusts. One coulddraw a virtuous comparison to the recent commitment of 60% of loans onthe balance sheets of the nation’s banks to mortgage debt backingtrillions of dollars of mortgages collateralized by hyperinflatedhousing prices and funded by risky and over-priced securitized debtinstruments, but you have to drawn the line somewhere. We draw it here:we’re much, much smarter today than those dopes back in the 1920s and1930s. To wit:
As the current government and Wall Street engineeredcredit bubble implodes–and as Fed rate cuts, special Fed services atthe Discount Window, and the short term goods export boosting effectsof currency depreciation start to wear off–this next series ofanti-asset price deflation measures, our read of history tells us, willbe of a price-fixing variety."Nextto food and clothing, the housing of a nation is its most vitalproblem. . . . The sentiment for home ownership is embedded in theAmerican heart [of] millions of people who dwell in tenements,apartments and rented rows of solid brick. . . . This aspirationpenetrates the heart of our national wellbeing. It makes for happiermarried life. It makes for better children. It makes for courage tomeet the battle of life. . . . There is a wide distinction betweenhomes and mere housing. Those immortal ballads, 'Home, Sweet Home,' 'MyOld Kentucky Home' and 'The Little Grey Home in the West' were notwritten about tenements or apartments. . . . They were written about anindividual abode, alive with tender associations of childhood, thefamily life at the fireside, the free out-of-doors, the independence,the security and the pride in possession of the family's own home. . .. Many of our people must live under other conditions. But they neversing songs about a pile of rent receipts. . . ."Over these warm words andsome 1,900 others like them President Hoover had worked with a fullheart for two months. One evening last week he took them all, in theform of a keynote address, to Constitution Hall and there, in a voicebrimming with emotion, delivered them to the assembled delegates of thePresident's Conference on Home Building & Home Ownership. At thisgreat gathering President Hoover again demonstrated his ability andleadership in an unofficial activity outside the constitutional realmof the Presidency.
The conference's major purpose, President Hoover said, was "tostimulate industrial action," not "to set up government in the buildingof homes." To promote home owning the President urged a better systemof home financing, thus keying his program in with his proposed HomeLoan Discount system.
Home, Sweet Home, TIME Magazine, December 14, 1931
Scooting ahead to a more modern instance of the practice of pricefixing, we arrive at the 1960s to find government as unhappy with thepolitical consequences of too high commodity and wage prices as withthe political fallout of collapsing asset prices.
President Kennedy in 1962 criticizes the U.S. steel industry for raising
prices. Politicians like markets when they deliver rising asset prices,
but not rising commodity or wage prices. Those are bad.
Governments don’t like markets when they are delivering falling asset
prices, either. That’s bad, too.
Today we have both rising commodity and, soon, rising wage pricescombined with falling asset prices. This combination will tax even themost creative politician’s price control measures: how to make WallStreet and Main Street happy at once?
The market solution for the inflation cycle that started around thetime of Kennedy’s speech did not appear for another 20 years: stopprinting so much goddamn money. It happened under Paul Volcker’s Fed inthe early 1980s. Two successive massive recessions destroyed thepricing power of commodity producers and wage earners, wrecked theunions and thereby broke the primary means of transmission of inflationinto the price cycle, ushering in the golden age of credit and assetprice inflation.
Today, the market solution for falling real estate hyperinflation cycleis equally simple: let prices clear the market. That’ll never happen.Specific policy responses are difficultly guessed at with anycertainty. We ask our contacts in the know but it’s apparent that thefull scale and extent of the economic problem that confronts us, andthem, has yet to dawn fully on the geniuses who created this mess, sothey haven’t had a chance–yet–to develop equally ingenious “fixes.” Orif they have, they aren't letting on.
The Housing Crash has not Started Yet
It surprises us that housing prices are falling as quickly as they areso early in the correction process. Our January 2005 forecast notes agreater than 90% correlation between housing prices and employment, andthat not until unemployment rises do real estate prices in a bust beginto decline in earnest. Yet here we are with unemployment still below 5%and, according to a reporting of Case-Shiller by Moody’s last week,housing prices fell at a 6.5% annual rate in the 3rd quarter of 2007.
Herb Greenberg at Marketwatchissued a report by Mark Hanson, a 20-year veteran of the mortgageindustry, who has spent most of his career in the wholesale andcorrespondent residential arena. The headlines:
Sub-primeis what is being focused upon to draw attention away from the fact thelenders and Wall Street banks made all loans too easy to attain foreveryone.Reinforcing Hanson’s point that the debt crisis isgeneralized and will therefore be hard to manage, our own real estateexpert Sean O’Toole based in California, CEO of ForeclosureRadar.com,tells us that for every home that sold in CA last quarter, five wentinto foreclosure. At normal sales transaction volumes, currentinventory is good for five years’ demand, up from the usual six months’supply. Of course, sales transaction volumes are far from normal; theyare less than half.
Sub-prime aren’t the only kind of loans imploding.
We have 90% fewer qualified buyers for five-times the number of homes.
To further underscore the breadth of the problem, we note one itemstood out in the Fed’s quarterly Flow of Funds report issued Thursday:
Federal Reserve: Home equity falls in 3QFor the first time since WWII, the average U.S.“homeowner” will own less than half their home. If this comes to pass,and we have no doubt that it will, it’s time to officially shelve theterm “homeowner” as under no definition we are aware of does a personhave the right to declare ownership of an asset in which he or she doesnot have a controlling interest.
(AP) Dec. 6, 2007
The amount of equity homeowners hold intheir homes slipped in the third quarter to the lowest level on record,just above 50 percent, according to a report from the Federal ReserveThursday.
In its quarterly U.S. Flow of FundsAccounts, the central bank reported that homeowners' percentage ofequity dipped to 50.4 percent from 51.1 percent from the previousquarter. On average, housing is Americans' single largest asset.
Economists expect this figure, equal to the percentage of a home'smarket value minus mortgage-related debt, to tumble even further asfalling home prices eat into equity. Itcould easily drop below 50 percent by the end of next year, someexperts say, marking the first time homeowners will owe more than theyown since the Fed started recording the data in 1945.
So much for the “ownership society.”
The desire by Bush and Paulson to put the U.S. mortgage train back onthe rails via price-fixing mortgage rates is understandable, but theresults will be the same as for any price-fixing operation: economicactivity will decline as capital is withdrawn from the markets. Afriend of iTulip's we visited in New York City last week, a veteran ofWall Street who started at Chase in the mid 1980s and became asuccessful hedge fund manager later, asked, If the government can annulcontracts between bond issuers and bond buyers, who will want to issuebonds and who will want to buy them? Bloomberg quoted Kenneth Hackel,managing director of fixed-income strategy at RBS Greenwich CapitalMarkets who explained, “It could end up there's less confidence in theviability in the bond markets and the mortgage markets going forwardand it could lead to higher interest rates and higher mortgage ratesfor everybody.”
In case you are tempted to go around the Treasury Dept. manipulatedmortgage bond market and go directly to the source, not so fast. OnDecember 3, the Treasury announced that effective January 1, 2008 theannual purchase limit for savings bonds will be reduced to $5,000 peryear from $30,000. Further, our reading is that an individual, asidentified by a social security number, cannot purchase more than$20,000 worth of a series (e.g., EE or I) bonds total ever. We’ll keepour eye on changes in TIPs purchasing rules for signs the governmentmay be worried about excessive inflation-indexed bond liabilities asthe political pressure to inflate away debt mounts.
 |
After years of wondering, now we are getting our answer.
Inflation is Political
Thousands protest over China ant aphrodisiac schemePrinciples of government response to economic crisis aremost clearly demonstrated at the extreme. The example above is whathappens when a government creates an expectation on Main Street thatthe government is there to make them whole after the markets, run byracketeers, make off with their savings. We aren't seeing any U.S.citizens taking to the streets. But as the economic problems intensifyin 2008, the stresses will crop show up ever more obviously in thepolitical process and perhaps the crime rate. The squeaky wheels onWall Street got the first grease, but as the squeaking spreads, soshall the grease.
November 21, 2007
BEIJING (Reuters) - Thousands of people innorth-eastern China have protested on the streets and surroundedgovernment offices demanding help recovering money from aget-rich-quick scheme to raise ants to make an aphrodisiac tonic.
Hundreds of anti-riot troops and police inShenyang, capital of Liaoning province, were deployed to stopprotesters reaching the provincial government and Communist Partyheadquarters, residents said on Wednesday.
The investors -- many of them laid-offworkers or farmers -- put their savings into Shenyang's Yilishen Groupfor a scheme in which they raised ants to provide ingredients for ahealth tonic promising an aphrodisiac boost.
The tonic was promoted on television byZhao Benshan, the country's best-known comic who specialises in playinginnocent bumpkins with a north-eastern twang.
Our bet has been a similarly elongated and drawn out collapse, in andout of recession, ala Japan since 1992, but with inflation stubbornlyin the three to nine percent range, unless outside events invoke a moresudden inflation and get the process over with more expeditiously.
Deciding our long term investment allocations in the mix of theseprobabilities–a long inflation, a foreign dollar repatriation fueledinflation spike, and the Next Bubbles–in the next cycle will keep usbusy for years to come.
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