| The term red pill and its opposite, blue pill, are pop culture terms that have become a common symbol for the choice between the blissful ignorance of illusion (blue) and embracing the sometimes painful truth of reality (red). |
| Take The Journey |
|
|
- Superior Biotechnology Leads to Superior Drugs
- The Delusion of Regulating Risk
- Talk of a Greek Exit Gets Louder
- Doug Casey on Taxes and Freedom, Part II
- Is Facebook the Rusty Hinge of the Stock Market?
- Fitch Downgrades Japan
- Doug Casey on Taxes and Freedom
- Greeks Run on Banks as Euro-Confidence Wanes
- To the Class of 2012
What If Housing Is Done for a Generation?
What if housing valuations are in a structural, multi-decade decline?
A strong case can be made that the fundamental supports of the housing market– demographics, employment, creditworthiness and income–will not recover for a generation. It can even be argued that housing has lost its status as the foundation of middle class wealth, not for a generation, but for the long term.
Let’s begin by noting that despite the many tax breaks lavished on housing–the mortgage interest deduction, etc.–there is nothing magical about housing as an asset. That is, its price responds in an open, transparent market to supply and demand and the cost of money and risk.
There are a number of quantifiable inputs that feed into supply and demand–new housing starts, mortgage rates and income, to name three–but there are other less quantifiable inputs as well, notably the belief (or faith) that housing will return to being a “good investment,” i.e. rising in price roughly 1% above the rate of inflation.
If this faith erodes, then the other factors of demand face an insurmountable headwind, for the most fundamental support of housing is the belief that buying a house is the first step to securing middle class wealth.
Rising rates of homeownership require five conditions:
1. Favorable demographics: a cohort of potential buyers that is larger than the cohort of potential sellers.
2. Rising household formation rates: an expanding population does not necessarily translate into rising rates of household formation. If the number of people per household goes up, then the number of households can plummet even as population expands.
3. A large cohort of creditworthy potential buyers: that means buyers with savings, buyers with sufficient income to pay the mortgage and buyers with low debt loads.
4. An economy that generates rising incomes to support homeownership.
5. An unshakable belief that owning a house is a favorable and secure investment that will rise in value in the decades ahead.
If the first four conditions have eroded, then the belief in the permanence of a rising housing market will also erode.
Continue reading
Why Not Print More Money?
In the past we have jokingly discussed the creation of a Death Star as the way the world can save itself by printing an almost infinite amount of money to support growth. As almost everyone, especially the MMT crowd it seems, can plainly see, if printing some money is good (well it must be, markets are up) then printing more money must be better, right? Well, no (as we discussed in detail here). There are unintended consequences and as we pointed out recently, we are already seeing less and less effervescence in the real economy from QE’s impact and the spectre of the inflationary pressures that implicitly limit the ‘benefit’ of this action is nowhere more painful than in energy prices (and in fact the price of anything in relative limited supply as opposed to cash which is printed daily). Professor Antony Davies, of Duquesne, takes this subtle concept to task in this exceptionally straightforward 206-second video on money as an IOU and its solution to the caveman’s ills providing the background for why money’s inherent value is relinquished once it becomes printed en masse. Printing more money doesn’t make more goods and services appear, simply spreads the… Continue reading
There’s No Painless Way Out
Uncle Sam’s bills of almost $4tn per year relative to his income of just over $2tn means that he does what most American’s do – he borrows money – and it is this simple fact that underpins the reasoning that there is no painless way out of the mountain of debt that we have amassed over the last few decades. While none of this is new, the straightforward nature of this video’s message makes it hard to argue, from anything other than an ivory tower, that this supposed self-sustaining print-and/or-borrow-fest can go on forever. Paying off your mortgage with your credit card remains the clearest analogy of what is occurring and while the Mutually Assured Destruction case is made again and again for why the analogous credit-card-providers will never halt our limit, it seems increasingly clear that the fiat money fiasco has switched regimes to chaos rather than the apparent nominal calmness of the great moderation.
The Simple Problems Of Too Much US Debt
In a succinct and chart-laden presentation, Professor Antony Davies, of Duquesne, offers a simple perspective on just how bad things are for the US (in terms of debt or obligations). Putting the interest cost in the context of war-spending, his analysis is interesting given the recent and dramatic rise in interest rates. Current interest payments, given the US Government’s lowest ever 3% interest cost, are $440 billion, or three times the annual operating expenses of the Iraq and Afghanistan wars. While his discussion of a market-set interest rate is perhaps a little off-the-mark given the extent of QE programs and their reach-around prime-dealer duration-reducing effects, it is nevertheless true that the more money the government is spending on interest, the less money is available to provide services and his punchline on what happens should rates rise even modestly from here sums the real problem the US faces (even as a currency issuer as opposed to a currency user – given the inherent instability that making totalitarian use of the reserve status would incur).
CONSUMER CREDIT DEMOLISHES EXPECTATIONS, GROWS $19 BILLION
It’s hard to think that the economy is going into any kind of recession with numbers like these. For the second straight month we just got a HUGE number on consumer credit
Cnosumer credit expanded by $19 billion in December. That’s far more than the $7 billion that was expected by economists.
Revolving consumer credit (credit cards) grew by $4.1 billion sequentially, and is basically flat from last year again (up barely).
One more point on this: A lot of people think that US consumer have too much debt, and that a big number here is “bad” and we could imagine that being true. But if we’re talking about cycles, and whether the economy is in rebound or recession mode, re-expanding credit is OBVIOUSLY what you want to see.
Read the full announcement here.
This chart from Reuters’ Soctty Barber basically tells it all.
It’s a very slow week economic data-wise, but this is the biggie…
Consumer credit for December comes out at 3:00 PM ET.
Analysts expect $7 billion worth of new credit for the month. That’s down from $20.3 billion in the month before.
Remember, last month REVOLVING consumer credit registered flat year over year growth for… Continue reading
The Federal Reserve’s Explicit Goal: Devalue The Dollar 33%
The Federal Reserve Open Market Committee (FOMC) has made it official: After its latest two day meeting, it announced its goal to devalue the dollar by 33% over the next 20 years. The debauch of the dollar will be even greater if the Fed exceeds its goal of a 2 percent per year increase in the price level.
An increase in the price level of 2% in any one year is barely noticeable. Under a gold standard, such an increase was uncommon, but not unknown. The difference is that when the dollar was as good as gold, the years of modest inflation would be followed, in time, by declining prices. As a consequence, over longer periods of time, the price level was unchanged. A dollar 20 years hence was still worth a dollar.
But, an increase of 2% a year over a period of 20 years will lead to a 50% increase in the price level. It will take 150 (2032) dollars to purchase the same basket of goods 100 (2012) dollars can buy today. What will be called the “dollar” in 2032 will be worth one-third less (100/150) than what we call a dollar today.
The Fed’s zero interest rate policy accentuates the negative consequences of this steady erosion in the dollar’s buying power by imposing a negative return on short-term bonds and bank deposits. In effect, the Fed has announced a course of action that will steal — there is no better word for it — nearly 10 percent of the value of American’s hard earned savings over the next 4 years.
