Tuesday, May 31, 2022

S&P Core Logic Case-Shiller Home Price Indices – Housing Still Booming

Today’s S&P Core Logic Case-Shiller Home Price Indices Report indicated that nationally, seasonally adjusted home prices increased a notable 2.55% in March rising a whopping 20.55% above the level seen a year earlier.  The 20-city index also increased notably rising 3.07% on the month and 21.17% above the level seen in March 2021 while the 10-city index increased 2.84% and 19.51% respectively. 

It’s important to note that this data lags a bit and that most (if not all) home sales included in today’s data-set likely settled while mortgage interest rates were still in the 3 percent range.
That said, the Case-Shiller home price index is really the “gold standard” in home price data and very accurately reflects the price trends in the tracked markets.  There are other home price indices that also merit attention and I will feature these in due time. 

The methodology behind the Case-Shiller indices was really a significant innovation in that it succeeded in eliminating the distorting effects that are present in the simple median or average home price data published by the National Association of Realtors by utilizing a three month moving average of the price change in numerous sale pairs (i.e. a house that recently transacted with a true “arms-length” sale thereby creating a pair of true market settled prices between the current and last sale) and then value-weighting to adjust for changes in house quality. 

As I understand it, Dr Case and Dr Shiller formulated this approach and implemented the construction of these indices for some time just using research students, a significant achievement given the labor involved in gathering and vetting all the source data.

A short digression though… 

 When I was more actively blogging way back in 2008, I was pleasantly surprised by how approachable and accessible Dr Case was.  He was very enthusiastic about interacting through email, over the phone and in person (at presentations) and he even submitted a post for me to exclusively publish on my blog entitled “Why Am I Optimistic” (replete with data, docs and excel files and, funny enough, all attached to a single email entitled “answer to the daggers”) within which he made a very measured and sensible analysis of the housing market and some predictions that, looking back at them now, were pretty darn accurate particularly with respect to the Boston market in which we both lived. 

Further, he was very encouraging of my development of Blytic.com (mothballed at this point... someday I’ll get back to it), an early macro-econ data service very similar to (but pre-dating) the Fed 

Fred system and his feedback was very motivating and made a huge impression on me while I was in the throes of that endeavor. 

When he retired in 2009, I was sad to learn that he had done so because he had unfortunately developed Parkinson’s disease and really saddened to hear of his passing in 2016 at the way too young age of 69. 

Dr Case was a great teacher and even though I never attended a single class of his at Wellesley, my interactions with him over those years leaves me with a sense of being very fortunate to have been one of his many students.  

The following data visualization (click for dynamic view) shows the S&P Core Logic Case Shiller Home Price National Index since late-2006 with the index value (in blue) on the left axis and the year-over-year change (in red) and month-to-month change (in green) on the right axis.

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Monday, May 30, 2022

Great Power, Questionable Responsibility

Financialization, as I have pointed out before, allows for some truly powerful dynamics that would not otherwise be available to market participants but, as the old comic book adage states, “with great power, comes great responsibility” and responsible use of innovations in finance, being subject to the whims and foibles of human nature, has lead to significant economic calamity.

Think of the farmer who has to contend with the ever-changing variables of his trade; weather, pests, labor, material input costs all in advance of the day when his crops or livestock are ready for market and in the hope that the prices they will fetch are favorable by the time he gets them there.

This is clearly a significant challenge and even with decades of direct experience and generations of shared knowledge, success comes with considerable risk and failure comes frequently as the result of circumstances that are beyond his control.

But with the right dose of financial engineering, namely commodity futures contracts and commodity exchange markets, farmers and their counterparts (wholesalers, buyers, etc.) are able to spread risk, allowing participants to enter into “forward” contracts (for delivery of real product) that are themselves “fungible” and able to be continuously traded for better, even more efficient agreements given the ever changing conditions and considerations specific to a given participant.

Commodity futures markets, originally pioneered in the 1700 and 1800s, have been continually modernized to the point where contracts can now be traded digitally through the Chicago Mercantile Exchange (CME) or the New York Mercantile Exchange (NYMEX) by traditional market participants as well as strictly speculative actors who view these contracts as purely financial abstractions traded to gain a desired level of price exposure to a given commodity for their own purposes (e.g. hedge funds and other money manager seeking to perform hedging activity).

Further, in the last two decades, the advent and popularization of the exchange traded fund (ETF) has allowed money managers to utilize digital commodity futures contracts to create highly liquid funds traded as shares on typical stock exchanges with marketable, sometimes even comical ticker symbols (e.g. COW for livestock commodities, CORN for corn, JOE for coffee) thereby allowing retail investors to effortlessly buy and sell these commodities at will through any typical stock trading console and even utilize “put” and “call” options contracts to trade with leverage.

Stop and take a moment to really think about the above detailed scenario; layers of complex financial arrangements standardized and simplified through fungible abstractions that are then pooled and package and digitized, and yet packaged again all working to motivate interests and, more importantly, enabling capital from countless participants to flow freely in vast pools of financial liquidity spreading risk and powering participation on a scale that the original “real” goods market participants could scarcely ever imagine.

But what are the limits of this type of financial engineering?

Commodities, while a great tangible example of successful financial engineering (at least to date that is) are hardly the only asset class in finance involved in packaging, pooling and spreading risk through highly engineered financial innovation.

In 2008, the world was made acutely aware of the potential downsides of financial engineering as the U.S. housing bubble imploded, disclosing the fragility of the highly complex financial arrangements that undergird the U.S. mortgage market.

Who can forget the endless panic and hand wringing that ensued as the various “tranches” of securitized mortgage assets (the famed packaged “mortgage backed securities”) hung in the balance and with each leg down in home prices and up in foreclosures, went bad like so many rotting fruit in baskets of otherwise healthy produce.

Make no mistake, like the commodity example, the whole complex of mortgage financialization was resting on a foundation of real assets, real mortgages tied to actual real estate, that were packaged and re-packaged into financial products that gave the investor class price exposure to the U.S. housing market.

These highly financilized mortgage securities, once viewed as “good-as-gold” nearly riskless investment products found their way into safe income producing funds the world over, and, when the tide turned on housing, sullied whole portfolios, destroying wealth in grand scale and ultimately bringing the global economy to the brink of collapse.

A truer example of shared risk has never existed as foreclosure activity that in past eras would have been born directly by the local banking system within the affected real estate market (or markets… see the Savings and Loan crisis of the late 1980s) instead, decimated the value of assets that were now, through the miracle of financial engineering, spread far and wide.

When the fate of the world economy seemed bleakest, the “Apex-lender of Last Resort”, the Federal Reserve itself, ultimately choose to step in, backstopping and bailing-out failed banks, broker dealers and other financial institutions, absorbing “toxic” assets and thereby assuming the liabilities of a generation of “high finance” who had previously viewed themselves as the “masters of the universe”.

Further, the mortgage market, being seriously impaired (and even non-existent in some lending categories) required the Fed to also step up and start lending through the giant government-sponsored enterprises (GSEs, Fannie Mae, Freddie Mac and Ginnie Mae) in an effort to maintain a degree of market function.

This portion of the Fed’s “quantitative easing” (QE) campaign saw the Fed minting monetary base at breakneck speed, ultimately creating about $2.7 trillion (to date) and deploying that capital by purchasing mortgage-backed securities directly from the GSEs on an on-going basis.

In fact, Bloomberg recently estimated that even today, as much as 30% of the overall U.S. mortgage market is still being financed directly by the Federal Reserve.

So, roughly two thirds of the U.S. mortgage market is organic natural market function while a whopping one third is still, even to this day some thirteen years after the housing debacle, being essentially centrally planned and facilitated by unconventional monetary policy and specifically fueled through direct injection of fiat money creation.

This outcome, unlike the prior commodity example, clearly is not desirable and illustrates the risks involved with financial innovation.

The mortgage market was transformed by financial engineering from a relatively simple and mostly local traditional banking function into a global market of deeply liquid securitized mortgage assets, thereby spreading and even amplifying through leverage, the risk of a single nation’s property market across the entirety of the global financial system.

In the end, the unwinding of this massive financial scheme worked to impair the U.S. economy and degrade the credibility of its central authorities (both fiscal and monetary), thereby undermining the worlds principal monetary regime and leading to our current era of rampant speculation in stocks, housing and other speculative assets and, likely, a new even more difficult economic reckoning as the Fed is now forced to rise to the challenge of somehow drawing down excessive accommodation in the face of the monetary inflation it caused through its own prior policy. 

There is no doubt by now that, through financial engineering, our financial institutions and central authorities are very “powerful” but given all that we have witnessed in the last two decades of economic tumult, one has to wonder if history will ultimately judge us to be truly “responsible”.

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Friday, May 27, 2022

Personal Consumption Expenditures – Gas Prices Drive Inflation

Today’s release of the Personal Income and Outlays Report showed that personal income increased by $89.3 billion in April (rising 0.4% from March) while disposable personal income increased $48.3 billion (rising 0.3%) and personal consumption expenditures increased $152.3 billion (rising 0.9%) over the same period.

Clearly, consumers are increasing spending particularly as the COVID-19 pandemic become more of a distant event and the process of post-pandemic normalization continues but today’s report also indicated that durable goods (appliances, furniture, autos) consumption expenditures increased by 2.4% on the month while nondurable goods (food, fuel , clothing, soap etc.) consumption expenditures actually declined by 0.1% over the same period.

The gasoline and other energy nondurable goods consumption expenditures sub-component increased at a whopping 8.6% on the month while the food nondurable goods consumption expenditures remained largely flat at 0.04%.

So, it appears that consumers are spending significantly more on energy (an obvious fact for anyone filling up at a gas station recently), which is impacting spending on both food and other nondurable goods, a classic stagflationary pricing dynamic.

Historically, increasing energy costs is nearly synonymous with general inflation (a fundamental driver) and very clearly influences the PCE-deflator index (price index baked off of personal consumption expenditures data as opposed to the traditional consumer price index CPI), one of the Feds preferred measures of inflation. 

The following data visualization (click for dynamic version) shows The U.S. Energy Information Administration’s price index for all formulations of gasoline reflecting the weighted average price of gasoline as of this Monday (in blue) on the left axis and the year-over-year percent change (in red) of the Personal Consumption Expenditures deflator index on the right axis.

Notice that the general relationship indicates high correlation between the average price of gasoline and the annual rate of change in the PCE-deflator as well as the fact that (the more timely) gasoline prices appear to be indicating that there is more inflation to come.

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Wednesday, May 25, 2022

Federal Reserve’s FOMC Meeting Minutes - A Transitory, Political Charade

Today’s release of the FOMC meeting minutes shows that the Fed is still way behind the curve as they continue to characterize current inflation as a primarily transitory symptom “… reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures” rather than a largely monetary phenomena.

Further, citing the war in Ukraine and the COVID-19 lockdowns in China, the Fed portrays recent world events as “… creating additional upward pressure on inflation”.

This is simply a charade as the Fed adopts a common strategy used in the political arena, attempting to shift the blame of inflation from their own 13-year long escapade of monetary recklessness to a number of recent topical anomalies.

The Fed continues the political spin indicating that they intend to “achieve maximum employment and inflation at the rate of 2 percent over the longer run” and that with the “appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong”, a nonsensical goal and conclusion given that the primary purpose of increasing the Federal Funds rate is to create unemployment  (i.e. tighter business conditions leading inevitably to trimming of payrolls).

What we are seeing is a Fed that continues to willingly stay behind the curve likely in a misguided effort to balance political considerations with their actual mandated function.

If the Fed is to really combat monetary inflation (again, caused by their own highly unusual, highly risky policies) they will need to put all political considerations aside and fully embrace their current task of contracting the monetary base and, through that, the economy as a whole.

They will inevitably be causing a “hard landing” resulting in lots of unemployment, a major economic reckoning and much pain for most of the American population but this is the price that needs to be paid in order to ensure fidelity of our economic system.

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Tuesday, May 24, 2022

New Residential Sales and Construction – New Housing Collapse 2.0

Today’s release of the New Home Sales Report shows that housing is now firmly reflecting the negative effects of the quickly darkening economic conditions and sharply rising mortgage rates with sales of new single family homes plunging to a seasonally adjusted annual rate of 591,000, a decline of 16.6% below the prior month’s rate and 26.9% below the rate seen one year ago. 

Further, today the latest release of the New Residential Construction Report showed that, single family permits issued, the most leading of indicators for single family homes, declined 4.6% since the prior month and 3.73% below the level seen one year ago clearly indicating that home builders are pulling back on future supply in the face of the a downdraft in current demand.

The following data visualization (click for dynamic view) shows New Home Sales since 2020 with the index value (in blue) on the left axis and the year-over-year change (in red) and month-to-month change (in green) on the right axis. 

The following data visualization (click for dynamic view) shows New Home Sales since 2005 with the index value (in blue) on the left axis and the year-over-year change (in red) and month-to-month change (in green) on the right axis.

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Monday, May 23, 2022

The Last Kicked Can

Economist Herbert Stein's old adage that “If something cannot go on forever, it will stop", puts our current predicament into perspective perfectly.   

Our economy has been distorted irreparably by negligent monetary and fiscal policy that is reaching an “end-of-life” of sorts, losing effectiveness, revealing consequences and providing yet another painful lesson in the deficiencies of top-down central planning.  

While the mere existence of the Federal Reserve System or any other system of central banks or centralized monetary control for that matter, represents an experiment in financial engineering (… actually there have been a series of failed experiments), our current trial of command-and-control monetary scheming, while long running, has proved to be nothing short of ruinous. 

For the last 50 years, the Federal Government and Federal Reserve, working in tandem, essentially debased our economic system, starting with the final abandonment of the “gold standard” in 1971 (providing the full flexibility of a fake fiat money system) and leading to the present day, after 10 years of post-Great Recession reckless fiscal and monetary policy and 2+years of truly outlandish pandemic-era schemes that saw the Federal Government’s total public debt soar roughly $20 trillion to stand at just over $30 trillion while the Federal Reserve’s total assets (mostly U. S. Treasury securities, about $5.7 trillion, and Federal agency debt and mortgage-backed securities of about $2.7 trillion) bloat by roughly $8 trillion over the same period. 

In the intervening years there were various other lesser "moral hazard" inducing episodes (e.g. Greenspan-era responses to the Crash of 87, LTCM, Dotcom Crash), but what initially set us on our current course of persistent inflation and oncoming economic calamity was the unprecedented and reckless overreaction to the 2007/08 national housing bubble bust which was the moment that fiscal and monetary authorities “crossed the Rubicon” on a one-way escapade that eventually set up the truly distorted and insane response to the COVID-19 pandemic panic. 

In the face of the fear of the consequences of the bursting of the national housing bubble, the Federal Government and Federal Reserve “blinked”, and in a supposed noble attempt to blunt the severity of the oncoming “Great Recession”, “kicked the can down the road” by propping and pumping and bailing using every conceivable means at their disposal and even inventing a number of novel fiscal and monetary schemes as well. 

Never before had the Federal Reserve attempted such a colossal bail out of the entirety of the economic system acting as the apex-lender of last resort, backstopping both troubled financial firms holding illiquid mortgage-backed assets as well as bailing out the Federal Government itself, by stepping up to fill in as an immense direct buyer of government treasury and agency debt securities thereby singlehandedly financing large portions of government policy. 

On the fiscal side of the equation, the Federal Government sought a number of irrational goals; From sanctioning and even assisting failed homeowners in breaking the contractual obligations of their home loans to creating the first never-ending unemployment benefits program, a “clunker” automobile buy-back boondoggle and even bailing out various auto manufactures; from TARP and TANF and HARP to HAMP, the Federal Government left no stone unturned when providing an endless array of unearned “benefits” so long as all efforts appeared to “reinvest” in America and the American Recovery. 

Taken together, these efforts by the Federal Reserve and Federal Government did work to induce confidence in the population, putting a floor under the stock market in March of 2009 (an outcome expressly desired by then Fed Chair Ben Bernanke in 2011) and generally dulling the pain of this epic financial meltdown, but at the cost of the fidelity of our economic system and a future more fundamental reckoning as we are all eventually forced to square off against an inevitable harsh reality. 

Despite much intellectual hand-wringing waving with regard to the Feds post-2008 activities and its effect on the presence or absence of velocity of money; to gain a sense of the scale of their activities, it is important to note that it has been estimated that roughly 30% of the overall U.S. mortgage market is directly financed by the Federal Reserve.  

This means, more specifically, that even to the present day (obviously well beyond the 2007/08 housing collapse), for 30% of all home sale transactions involving a mortgage (i.e. specifically, the transactions involving Fannie Mae, Freddie Mac or Ginnie Mae guaranteed MBS) the mortgage lender is the Federal Reserve itself. 

Where does the Fed get the “money” to provide for all these loans? It just creates it from thin air, a series of bits on their digital balance sheet. 

To put this in perspective, just the roughly $2.7 trillion minted by the Fed expressly for lending through Fannie, Freddie and Ginnie, is equivalent to the total lifetime earnings of over one million U.S. households. 

This level of extensive money creation combined with the “moral hazard” of continuous crisis-politics driven Federal policy has worked to debase our money system as well as our population’s common sense and basic recognition of risk, breeding outsized expectations for the role of government and a lack of respect (domestically at least) for the dollar.  

Taken together, this resulted in a kindling of sorts, laying-in a blanket of potential high energy “money” awaiting a spark to set off a conflagration of pernicious and persistent inflation and ultimately leading to the dreaded wage-price spiral. 

It appears that the COVID-19 panic and the associated period of utter insanity worked to provide that spark, driving authorities to their furthest excursion into fiscal and monetary “la la land” doubling down on all prior malfeasance and radically influencing American’s sense of value leading to epic levels of speculation in stocks, housing and digital tokens and other speculative assets. 

Now, after 13 years of reckless economic mismanagement, we again find ourselves holding the can. 

Our authorities naturally will want nothing more than to stride back and give it another good kick, but this time they won’t because they can’t. 

This approach could not go on forever, so now, finally, it will stop.

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Wednesday, May 18, 2022

Chicago Fed National Financial Conditions Index – Recession Signal

Today’s release of the Chicago Fed National Financial Conditions Index (NFCI) shows pretty clearly that financial conditions are quickly becoming stressed with the index reading 0.012, the first positive value since the panic that ensued in March 2020 due to COVID-19 but, more importantly, the first notable positive reading since the period surrounding the mop-up of the Great Recession. 

The NFCI provides a comprehensive weekly update on U.S. financial conditions in money markets, debt and equity markets and the traditional and “shadow” banking systems.  Positive values indicate financial conditions that are tighter than average, while negative values indicate financial conditions that are looser than average.

A key component of this data-set, the “adjusted” index, isolates a component of financial conditions uncorrelated with economic conditions to provide an update on how financial conditions compare with current economic conditions.

The following data visualization (click for dynamic view) shows the Chicago Fed “Adjusted” National Financial Conditions Index since mid-2007 as well as recession bands denoting the start and end of the “Great Recession” and the “Mini-Recession” that occur following the COVID-19 panic.

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Monday, May 16, 2022

The Fading Trades of the Decade

Oh how the mighty have fallen!  This current stock market rout, which by my reckoning has only just begun, is already taking a serious toll.

The slightest earnings miss or forward guidance disappointment and then… Let the punishment begin!  The Street dumps shares en-masse and issues reset down 10-30%.

In the era of the “Everything Bubble” you should expect no less given this bull-market inflated on trades that were the absolute antithesis of value investing or any other sound long-term, fundamentals-based, investment strategy.  

Short term hyper-enthusiastic blind-speculation is the dominant function of today’s stock-jobber and this type of “investing” (with reckless abandon) is a story as old as “investing” itself and with an inevitable ending that we are well aware of if not yet willing to consciously admit.

But the real bull-run we have today is not in stocks, housing or cryptos but in the ranks of stock-jobbers themselves!   

The Fed’s misguided decade+ long 0%-interest rate policy and associated quantitative easing madness has created the most fundamental and widespread bubble in history… the “Everything Bubble” where white-hot money coupled with a multitude of innovations in financialization and an utter lack of any basic risk-free or nominal-risk real returns has pushed wide swaths of the population, particularly those of retirement age who historically should have no exposure to risky assets, into an excessively speculative posture.

For the young, the downdraft will be similar to the lessons learned by past generations.  They will take their shellacking losing 15-30% on their housing assets or 50-80% on their stock portfolio or 100% on their various crypto holdings or possibly even all three but the primary lesson will be positive, namely that real wealth does not accrue overnight and certainly not as a function of other speculators feverish FOMO.

For the old, the Boomers, on the other hand, we are in uncharted territory!

Far too many Boomers are fully invested and with their average age somewhere in the 60s, this generation is wholly unprepared to either wait-out another major economic collapse or replace the lost wealth through some form of current income.

The most sensible strategy for any Boomer today is to hedge their bets and move away from risk, dispensing with stocks and other highly speculative holdings and preparing for a long, dull and boring period of modest fixed-income particularly as rates reset upwards.  

Boomers may ultimately loose wealth in real-terms with this strategy but even with a 5% annual loss in real purchasing power, they will still have about 60% of their wealth 10 years from now, an obviously better trade than possibly taking a 40%-60% (or more) haircut right now.

But they can’t all de-risk at once!  That’s not really how the game works on Wall Street.

So, what we are seeing today are the makings of an obvious, and probably epic, stock market bust as Boomers race for the exists but, when they fail to all successfully pile out of stocks, what then? 

They will probably ultimately turn to tapping other, more tangible real wealth, such as their housing assets, to fund their ongoing needs.

But in an era of rising interest rates and likely falling home prices (… coming soon), don’t expect them to just take out HELOCs to ATM their current homes.  It will be much more sensible to simply sell their property and set their sights on a new house or condo in a lower cost of living area.

So, you can see where all of this is going… a Fed-fueled highly speculative decades-long frenzy in stocks and other highly risky assets gives way to a transformative macro-economic function as an immense aging generation downshifts to a more sensible, more conservative wealth preservation strategy for the final phase of their lives.

How well we will all manage this complex period of inflation and deflation is hard to predict but, with past periods of economic tumult as a guide, it is safe to say that there will be much friction, many bag-holders, many losers and some winners.

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Friday, May 13, 2022

Primary Mortgage Market Survey – Mortgage Rate Meltup!

The most recent Primary Mortgage Market Survey® published by Freddie Mac® shows that mortgage rates are simply exploding higher with the average rate for a 30-year fixed rate mortgage jumping over 50 basis points since just last week and rising a whopping 80% since this time last year to stand a 5.3% while the average rates for both the 15-year fixed rate mortgage and 5/1-year adjustable rate mortgage followed similar trends.

This uptrend in mortgage rates is truly unprecedented with the year-on-year increase far surpassing any prior period including the early 1980s when then-Fed Chair Paul Volcker was fully engaged in battling persistent inflation by bringing the Fed Funds rate up to 22% (... more deep historical macro analysis). 

The following data visualization shows the Average Rate for a 30-Year Fixed Rate Mortgage since 2017 with the index value (in blue) on the left axis and the year-over-year change (in red) and month-to-month change (in green) on the right axis.

The following data visualization shows the Average Rate for a 30-Year Fixed Rate Mortgage since 1971 with the index value (in blue) on the left axis and the year-over-year change (in red) and month-to-month change (in green) on the right axis.

Thursday, May 12, 2022

Producer Prices Index (PPI) April 2022 - Food On Fire!

Looking a little deeper at today’s Producer Price Index (PPI) report makes it pretty clear that our current bout of inflation is not only sustained, but placing a historic burden on consumer’s fundamental cost of living with finished consumer foods climbing 1.84% since March and a truly stunning 34.9% since April 2021.

While historically very volatile, consumer foods have never increased this sharply on an annual basis, nearly doubling the last most significant annual rate and far outpacing the levels seen in the 1970s when inflation was such a persistent and prominent issue (... more deep historical macro analysis).

The following data visualization shows PPI Finished Consumer Foods since 2017 (click for dynamic view) with the index value (in blue) on the left axis and the year-over-year change (in red) and month-to-month change (in green) on the right axis.

The following data visualization shows PPI Finished Consumer Foods since 1975 (click for dynamic view) with the index value (in blue) on the left axis and the year-over-year change (in red) and month-to-month change (in green) on the right axis.

Wednesday, May 11, 2022

The Financialization of the Everything Bubble


In a world awash in financialization, how is one to differentiate something from nothing?

The home you live in seems pretty tangible; it's framed with wood and finished with sheet rock and glass and stone.  It’s got a roof of asphalt or shake or slate, a paved drive and a yard of grass. 

It's also got "equity".  What a great term... “Equity”.  

People say "My house has equity" while bankers say "Your home has x amount of equity" almost as if this "equity" is a tangible attribute of the property, like the number of bedrooms or bathrooms.

But, the number of bathrooms doesn't decrease with adverse market conditions and neither can the home house more people when conditions improve.

So to an extent, "equity" is just a fiction... an ephemeral financial estimate of your net stake (after debt and transaction fees and with respect to current market conditions) in the house were you to liquidate it at this very moment.

But yet, it’s not a total farce as we all know people who have accomplished some substantial things with their "equity".  Real things, like educating their children or funding a vehicle purchase, a vacation or even covering critical matters like unexpected healthcare costs.

And therein lays the beauty and utility of traditional financialization.

A relatively simple conceptual framework is built up around a tangible asset, codified in a contract that once agreed to and executed, binds all parties to a specific performance based on expected conditions and norms.

Homeowners can access their real estate wealth without liquidating their actual property; farmers and wholesalers can make forward agreements (for delivery of real product) that are themselves fungible and able to be continuously traded into a secondary market of futures contracts for better, even more efficient agreements given ever changing conditions and considerations;  borrowers (both individuals and firms) can tap future expected income in the form of short or long-term credit while investors can hold stock in a business and, in so doing, share in the current profits and even the estimated value associated to future earnings.

All of this is made possible through the wondrous multitude of innovations in financialization.  
But too much financialization, as we have today, has worked to distort our sense of value, stoking our "animal spirits" and empowering the darker instincts of human nature.

Instead of freeing stranded value or binding voluntary parties to practical arrangements, rampant financialization has overwhelmed our sense of tangible value, ultimately stimulating immense mal-investment and inefficient and even absurd allocation of resources.

Whole cottage industries of dealers, brokers, agents, lawyers, underwriters and waves of other service-providers and middlemen have evolved over time to get their piece of our over-financialized economy while lawmakers, freed from the bounds of practical current accounting by epic monetary charades, craft policy in their never-ending quest to produce programs and initiatives that buy them votes. 

Over time, our whole economy has come to reflect, in one way or another, this distorted sense of value. 

As one fiction has piled atop another, we have gotten further and further from the fundamentals which, when taken together with our natural enthusiasm for technological progress, has made us apt to believe almost anything.

Should investors be suspicious of stocks with outlandish P/Es?

Can homes be so valuable that prices can continuously outpace incomes year in and year out?

Is $40 billion a fair amount to allocate to arm an ally in the support of the latest foreign policy concern? What about $1.37 trillion to fund 50 years of a supplemental nutrition program? 

Can an endlessly reproducible JPEG image or the “first tweet” really be worth millions if it's simply packaged and traded as an NFT?

Is $349 for an Andrew Dice Clay Cameo a fair price, particularly considering that you can get a Gary Busey for just $46 more or a Tommy Chong for $199 less?

What is a dollar actually worth?

Someday, possibly soon, we may really find out.

Monday, May 09, 2022

Bubbles and History, Harshly Rhyming


Mark Twain’s old adage that “History Doesn’t Repeat Itself, but It Often Rhymes” by my reckoning has never been more accurate with respect to the markets (both stocks and housing) but the difference between this cycle and the last is not just measure and verse but a long list of ever accumulating liabilities that will make this a harsher passage.

In many ways today’s economic climate bears a striking resemblance to the conditions that existed prior to the 2008 financial crisis.

Both periods saw historically accommodative central bank policies enacted to combat “temporary” crisis (then, the dot-com bust/911, now 2008 crisis itself and COVID-19 bookending the expansion) leading to obviously overheated conditions (in both stocks, housing and other assets) and then, finally, an accumulation of substantial head winds and a complicit Federal Reserve peddling “noble lies” in an feckless effort to obscure the severity of the situation.  

In 2007/08, Bernanke continuously insisted that “sub-prime is contained” while it obviously wasn’t, and the market bought that notion, until it didn’t. 

Today, Powell  pushed “inflation is transitory” while it also was obviously not, and the market bought that notion, until now. 

With the bear market pattern in stocks firmly established and a sell-off underway, we are currently experiencing a 2007/08-like recognition of the liabilities that have accumulated and the systemic risk they pose. 

One key point of difference though is that in 2007/08 the threat came as a result of the fallout associated to the bursting of the “Housing Bubble” while today, we are seeing a burst of the “Everything Bubble”. 

Coming as a direct result of the Federal Reserve and Federal Government’s (as well as their global counterparts) reckless efforts to bail out bag holders and prop up the failed economy in the wake of the “Great Recession”, these fraudulent “authorities” sowed the seeds of what will likely be seen as the single greatest economic calamity in human history.

Fearing the political consequences of the economic reckoning that was the housing downturn, the Feds embraced a policy of fiscal stimulus and money-printing the likes of which has never been seen and the scale of which most Americans don’t fully understand. 

The Fed not only supported the financial system through their conventional policy tools (Fed Funds rate, lender of last resort, discount window), they implemented unconventional measures (quantitative easing) that saw them purchasing trillions of dollars of mortgage securities and treasury securities from the Treasury and Federal agencies thereby directly funding much of the expansion seen since 2008. 

Where did this money come from to fund all of this economic activity?  

Nowhere.  This “money” was just bits on the Federal Reserve’s digital balance sheet. 

To put this in perspective, just the $2.715 trillion minted for mortgage backed securities alone is the equivalent of over 1 million American households’ lifetime earnings.  

But the Feds money creation provided no additional productive output… there was no real production associated to this effort, it was just more “hot” money available to chase existing goods and services as well as stimulate a multitude of options for mal-investment . 

So, it is no wonder that we are living in a time where bubbles abound… stocks, housing, cryptos, NFTs, Robinhood… the peak of the Everything Bubble brought boundless optimism for fast money across a host of asset classes and markets.   

But with this period drawing to a close and the Feds hands tied by un-tethered inflation and their credibility now firmly debased, how will the “authorities” respond to the oncoming economic calamity?

My guess is not very well.   

Aside from purely economic considerations, we now have a population deluded into believing the false notion that our federal authorities with their seemingly unending largess can ALWAYS step in to blunt any turmoil. 

From my perspective, we have stretched this falsity about as far as conceivably possible and are likely moving closer to a period where we all will learn hard lessons in the fundamentals… lessons that we should have learned last cycle. 

This downturn will be harsher and more punitive as the fiction of limitless economic engineering gives way to an unforgiving reality.

Stocks down, Housing down... everything down.

Thursday, May 05, 2022

Hello Again! Now Where Do We Go From Here?


Its been quite a while since I posted to this blog!  

So long, that there is a good chance that some percent of my original readers from back in 2006 are already dead!

Oh well... as Keynes noted "In the long run we are all dead" so why not try to read the macroeconomic tea leaves and attempt to discern some "signal" from the "noise" of this nutty world while we wait out the inevitable cold hand of the Reaper?

First, I thought I might take a moment to recap a bit...

I started this blog back in 2006 in a fit of therapeutic rage (...something like scream therapy but on the web) while working through the frustrations of my own housing situation and the bubbly times we were all living in back then.

It was very obvious to me in 2005 - 2006 that we were at a pivot point... the housing market had topped and the massive bubble was about to burst, likely bringing with it, all the attendant collateral damage.. recession (maybe even depression), unemployment, crashing prices, fire, brimstone!

I truly did (as my pseudonym implies) sell my home at the "top of the market" though there were other circumstances that prompted that sale other than simply a seriously committed bubble trade.

In the years following the economic collapse, I continued to blog and watch the housing market evolve and eventually, in 2010, I bought a new home at what turned out to be pretty close to the "bottom of the market" in my area, though again, there were other circumstances that prompted that purchase... you can only wait on the sidelines for so long!

Throughout the years of blogging about housing and the macro-economy, I developed a pretty clear sense of my own position on economic matters and a better ability to communicate that position.

Generally speaking, I like to think of my views as that of a Austrian-economic realist living in a post-Keynesian hellscape replete with decades socialist malfeasance, fraud and mal-investment.  

But unlike many an economic "perma-bear" or doomsayer, I don't have any inherent ingrained philosophical reason to be pessimistic about the course of the economy... my pessimism, as I see it, is rooted in the basic "realist" understandings that human organizations are no less human than the constituent humans themselves (i.e. you have both the wisdom of the crowd as well as the madness), and that, over the course of the last 100 years (or so) we have allowed the sophistry and pomp and circumstance of our central planner overlords (both the Fed, Federal Government, and Globalists) to plan so much that they planned us all into a position where the path of least resistance leads to doom or at least a major wash-out reckoning.

From that perspective, I was able to get a lot of things right back in mid-oughts but I did also get some major points wrong.

So what did I get so wrong?  

While I correctly predicted the oncoming train-wreck that was the 2008 economic crisis, I thought that this event would be the seminal event of our lives... a second "Great Depression" leading to a period of deflation so substantial that only a major reformation of our monetary and political system could address.

Clearly, I seriously underestimated the power of the "full faith and credit" of the the Federal Reserve, the U.S. Federal government and the Globalist central bankers and planners.

As the collapse ensued (in the U.S., Europe and across the globe more widely), month by month and year after year, it was met with a steady stream of monetary depravity with central schemers bailing and printing and pumping the scale of which has never been seen in human history.

This on-going debasement of all that is real and true and honest, continued, largely unabated throughout the 2010s and only popularly fell out of the news cycle (likely to the great relief of central banks) with the election of Donald Trump, when the ascendance of this political firebrand completely overwhelmed the media and the collective zeitgeist. 

Still though, the Federal Reserve continued its recklessly accommodative policies, pumping, printing and quantitatively easing like there were no tomorrow, all ultimately with the explicit purpose of serving to artificially support the housing market, grossly inflate the stock market and, probably the most fundamental distortion, directly financing the Treasury in what can only be seen as the final metamorphosis of our system into a zombified and degenerate faux-economic con-game.

Even after only a mild attempt at re-normalization of the Federal Funds rate between 2016 and 2019, the Fed had to reverse course after barely reaching about 2.5%.  Clearly, the now highly rate-sensitive economy could not even withstand a moderate withdrawal of monetary stimulus.

During the fall of 2019, the Fed was even working to assuage concerns about tumult in the "repo market", and clearly retreated back to projecting a on-going accommodative policy when, in the face of the COVID-19 debacle, it abruptly gave up on any normalization charade and reset the Federal Funds rate back down to the zero-bound.

So, my primary oversight, as I currently see it, was really just one of timing.

I still hold that we are hurtling headlong to a fundamental wash-out epic economic reckoning, but the now older and (hopefully) somewhat wiser me knows that predicting this type of event, even to the precision of years, is folly.  

There is no Nostradamus and the last thing anyone really needs in this hyperbolic world is someone making up timed predictions just for the sake of of righteousness.

Going forward, I'll attempt to simply interpret the latest economic events and present my thoughts on where we are and where we may be going, particularly with respect to my overall thesis as stated above.

So, with that background context out of the way, let's take a look at the current picture to start our conversation about where things may be heading for the economy.

Not only is the recent bout of inflation not transitory (as Fed Chair Powell recently admitted), it is more than likely totally un-tethered, coming NOT only as a result of recent, COVID-era disruptions and emergency money creation, but as the sum total of ALL the reckless malfeasance and money creation that ensued since 2008.

The system is absolutely primed with hot money leading to epic levels of mal-investment... a fact that is easy to see simply by observing such recent manias as the Robinhood-powered meme-stocks, the tens of thousands of cryptos (with the special exception of bitcoin), NFTs, and now a new, absolutely absurd, housing market mania.

As for stocks, it seems pretty clear at this point that we are now well into a bear market with NASDAQ peaking last November, and the S&P and Dow peaking in early-2022.  

Similar to the 2007 and early 2008 period, the jig is up on stocks, the bear pattern has taken over and all we have to do now is wait for the bottom to simply drop out.

This is a particularly troubling moment for this type of stock market selloff given that 70 million Baby Boomers are now closer to their 60s and 70s where many will simply not have enough time left on this planet to wait out another major market downturn and certainly not the will or ability to replenish their losses.

This new stock market route will not be like the last one in one very important way though... there will not be some magical Federal Reserve prestidigitation that can magically be just whipped up to get things rolling again.... this time the market will have to bottom and (eventually) heal and mend of its own merit, a process that could take considerably longer (.. please refer to Nikkei 1990 to today) than anyone now expects.

Housing will likely be the next shoe to drop... but let's make that the topic of the next discussion.

Best to all!