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Now Even Paul Krugman Of The New York Times Is Admitting That The Next Crisis Will Likely Be Worse Than 2008

Now Even Paul Krugman Of The New York Times Is Admitting That The Next Crisis Will Likely Be Worse Than 2008

There is a growing consensus that once the next economic crash finally arrives that it will be significantly worse than what we experienced in 2008.  This is something that I have been saying for a very long time, but now even mainstream economists such as Paul Krugman of the New York Times are admitting the reality of what we are facing.  And without a doubt, the stage is set for a historic collapse.  We are living at a time when everything is in a bubble – the current housing bubble is much larger than the one that collapsed in 2008, student loan debt has now surpassed the 1.5 trillion dollar mark, corporate debt has doubled since the last financial crisis, U.S. consumers are 13 trillion dollars in debt and the federal government is nearly 22 trillion dollars in debt.  And even though stock prices have fallen dramatically in recent weeks, the truth is that stocks are still wildly overpriced.  What goes up must eventually come down, and Paul Krugman insists that we “are poorly prepared to deal with the next shock” and that “there’s good reason to think it will be worse”

“We are poorly prepared to deal with the next shock,” Krugman said. “Interest rates are still close to zero in the US and in most of the rest of the advanced world. The fiscal policy we did was badly handled in the aftermath of the 2008 crisis, and there’s no particular reason to think it will be better. In fact, there’s good reason to think it will be worse.”

Hmmm.

Where have I heard talk like that before?

You know that it is very late in the game when even Paul Krugman can see what is coming.

…click on the above link to read the rest of the article…

Mortgage Rates May Hit 6% Sooner, as Fed Sheds Mortgage-Backed Securities, But What Will that Do to Housing Bubble 2?

Mortgage Rates May Hit 6% Sooner, as Fed Sheds Mortgage-Backed Securities, But What Will that Do to Housing Bubble 2?

Mortgage rates are climbing faster than the 10-year Treasury yield.

The average interest rate for 30-year fixed-rate mortgages with conforming loan balances ($453,100 or less) and a 20% down-payment rose to 5.17% for the latest reporting week, according to the Mortgage Bankers Association(MBA) today. This is the highest average rate since September 2009 (chart via Investing.com):

Many people with smaller down payments and/or lower credit ratings are already paying quite a bit more. Top-tier borrowers pay less.

Thus, mortgage rates have moved a little closer to the next line in the sand, 6%, which is still historically low. At that point, the interest rate would be back where it had been in December 2008, when the Fed was unleashing its program of interest rate repression even for long-dated maturities via QE that later included the purchase of mortgaged-backed securities (MBS), which helped push down mortgage rates further.

Now the Fed is shedding Treasury securities and mortgage-backed securities, and we’re starting to see the impact on mortgage rates: The difference (spread) between the 10-year yield and the interest rate of the average 30-year fixed-rate mortgage has widened sharply.

Since the beginning of the year:

  • The 30-year mortgage interest rate has risen 95 basis points, or nearly 1 percentage point (from 4.22% to 5.17%).
  • The 10-year Treasury yield has risen 71 basis points (from 2.46% to 3.17%)
  • The spread between the two has widened from 176 basis points on at the beginning of January to 200 basis points now.

In other words, mortgage rates are climbing faster than the 10-year Treasury yield, now that the Fed has begun the shed mortgage-backed securities. This is expected. It’s part of the QE unwind – it’s part of the Fed exiting the mortgage market and pulling its support out from under it.

But 6% is still low:

…click on the above link to read the rest of the article…

Home Affordability: Canada vs. US

Homes are unaffordable in the US, but the situation is far worse in Canada.

Point2homes has an interesting set of charts on Home Affordability In Canada vs the US.

Key Findings

  • The average Canadian has to dish out a whopping 56% more to buy a home, or 25% more to rent one compared to ten years ago, but the median wage in Canada only went up 15%.
  • The average home price in the U.S. increased at a much slower rate (24%), while the median income went up by 18%.
  • Since 2008, the Canadian dollar lost approximately 25% of its power compared to the American dollar, going from almost perfect parity to a much lower exchange rate.
  • The affordability crisis worsened in Canada, where the housing market went from “seriously unaffordable” to “severely unaffordable”, but the American housing market remained in the “seriously unaffordable” category.
Real Housing Prices
  • Eight years into the new millennium, the U.S. marched head first into one of the worst economic crises in its history following the bursting of the housing bubble. Canada’s real estate bubble hasn’t yet popped and the country has not yet seen a major decline in home prices, but the Canadian economy experienced its own share of turbulence following the oil price crash from 2014 and the burst of China’s speculative bubble.
  • And now, 10 years after the housing crisis that destabilized the U.S., some analysts claim that Canada faces a similar scenario if it stays the course: household debt currently exceeds 100% of GDP, according to data released by the Bank for International Settlements, the average home price went up 56% in ten years, while the median wage per household only increased 15% during the same period, and loose lending is on the rise.

…click on the above link to read the rest of the article…

Foundation and Empire

Foundation and Empire

Thomas Cole, “The Consummation of Empire” (1836)

Every vice of the Empire has been repeated in the Foundation. Inertia! Our ruling class knows one law; no change. Despotism! They know one rule; force. Maldistribution! They know one desire; to hold what is theirs.

That quote is the narrative crux of Isaac Asimov’s second book of the Foundation trilogy, Foundation and Empire (1952). It’s the fatal flaw of the Foundation, formed originally as a noble form of galactic government, but now no better than (and easy pickings for) the Empire.

Hold that thought.

The narrative crux of the second note of the Things Fall Apart trilogy, Things Fall Apart (Part 2), can be found in the following chart. It’s the relationship between U.S. household net worth (how rich we are) versus U.S. GDP (how much our economy has grown) from 1951 through today.

Both data sets are in nominal dollars (meaning neither is adjusted for inflation), both are compiled by the same people (the Fed) using the same methodology, and both are normalized at 100 to show growth rates. It’s an apples-to-apples comparison, so don’t @ me about semi-log charting – it adds nothing here.

For 46 years, from 1951 to 1997, we were no more and no less rich than our economy grew. Which makes sense. That’s the neutral vision of monetary policy, where you’re not trying to pull forward future growth through leverage and easy money in order to create more wealth today.

For the past 20 years, however, we have had a series of wealth bubbles – first the Dot-Com bubble, then the Housing Bubble, and today the Financial Asset Bubble – that have made us richer than our economy grows. Each of these bubbles was intentionally “blown” by the Fed through monetary policy.

The “Nightmare Scenario” For Beijing: 50 Million Chinese Apartments Are Empty

Back in 2017, we explained why the “fate of the world economy is in the hands of China’s housing bubble.” The answer was simple: for the Chinese population, and growing middle class, to keep spending vibrant and borrowing elevated, it had to feel comfortable and confident that its wealth would keep rising. However, unlike the US where the stock market is the ultimate barometer of the confidence boosting “wealth effect”, in China it has always been about housing as three quarters of Chinese household assets are parked in real estate, compared to only 28% in the US, with the remainder invested financial assets.

Source: Xinhua

Beijing knows this, of course, which is why China periodically and consistently reflates its housing bubble, hoping that the popping of the bubble, which happened in late 2011 and again in 2014, will be a controlled, “smooth landing” process.  For now, Beijing has been successful in maintaining price stability at least according to official data, allowing the air out of the “Tier 1” home price bubble which peaked in early 2016, while preserving modest home price appreciation in secondary markets.

How long China will be able to avoid a sharp price decline remains to be seen, but in the meantime another problem faces China’s housing market: in addition to being the primary source of household net worth – and therefore stable and growing consumption – it has also been a key driver behind China’s economic growth, with infrastructure spending and capital investment long among the biggest components of the country’s goalseeked GDP. One result has been China’s infamous ghost cities, built only for the sake of Keynesian spending to hit a predetermined GDP number that would make Beijing happy.

…click on the above link to read the rest of the article…

Here Comes The Housing Bust “Reverse Wealth Effect,” Australia Edition

Here Comes The Housing Bust “Reverse Wealth Effect,” Australia Edition

For the past few years, homeowners just about everywhere have been able to finesse life’s problems by thinking “at least my house is going up.” This home equity accretion allowed them to buy stuff on credit, safe in the knowledge that even as they maxed out yet another credit card their net worth continued to rise. They felt smart and confident, in other words, and so continued to behave in ways that the modern world defines as normal and natural.

But now that’s ending. Home prices have stopped rising in many places and in a few canaries in the financial coal mine have begun to plunge. Here’s what “plunge” means for Australians:

House prices ‘falling by over $1,000 a week’ in Sydney and Melbourne, Deloitte says

The boom time is over and we’re now officially experiencing the “house price fall we had to have”, according to Deloitte Access Economics’s latest business outlook.

It has found what many had been predicting: prices are dipping as interest rates are rising, with our biggest cities feeling the winds of change most keenly.

“Our house prices here in Australia had streaked past anything sensible by way of valuation,” said Deloitte partner Chris Richardson.
“Now, finally gravity has caught up with that stupidity and prices are falling.

“In Sydney and Melbourne, housing prices are falling by over $1,000 a week.”

Prices had surged across the country over the past five years as historically low interest rates have driven Australians to load up on debt, while investors had also cashed in.

Not if, but by how much
Housing forecasts have gone from disagreement over whether home prices will fall to debates about how much they’ll decline.

…click on the above link to read the rest of the article…

Did The Nasdaq Bubble Just Burst?

Regular readers will recall when back in March, Bank of America cautioned that after the tech bubble in 2000, the housing bubble in 2006, we were witnessing the third biggest bubble of all time: the e-Commerce bubble.

Well, after several weeks of sharp volatility which has hammered tech stocks, slammed momentum trades and hurt growth factors, the tech sector is once again sharply lower after hours largely on the back of disappointments from Google and Amazon, with the  ETF which tracks the Nasdaq 100 dropping about 2%, and threatening to slide back into a bear market.

The reason for this latest weakness in the QQQs may be that investors are finally realizing that the latest Nasdaq bubble may have popped, if for no other reason than what is shown in the Bloomberg chart below: namely revenue growth at the two e-commerce titans, Google and Amazon, appears to have finally peaked.

Granted, the decline is not in revenue but in revenue growth, however when investors are already beyond skittish about peak earnings, a slowdown in the second derivative may be all they need to sell now and ask questions later. Which may explains why FANG stocks are all sharply lower after hours as the market begins to reasses just how much longer the “e-commerce bubble” as defined by Bank of America has left before it pops…

Ten Years After the Last Meltdown: Is Another One Around the Corner?

Ten Years After the Last Meltdown: Is Another One Around the Corner?

September marked a decade since the bursting of the housing bubble, which was followed by the stock market meltdown and the government bailout of the big banks and Wall Street. Last week’s frantic stock market sell-off indicates the failure to learn the lesson of 2008 makes another meltdown inevitable.In 2001-2002 the Federal Reserve responded to the economic downturn caused by the bursting of the technology bubble by pumping money into the economy. This new money ended up in the housing market. This was because the so-called conservative Bush administration, like the “liberal” Clinton administration before it, was using the Community Reinvestment Act and government-sponsored enterprises Fannie Mae and Freddie Mac to make mortgages available to anyone who wanted one — regardless of income or credit history.

Banks and other lenders eagerly embraced this “ownership society”’ agenda with a “lend first, ask questions when foreclosing” policy. The result was the growth of subprime mortgages, the rush to invest in housing, and millions of Americans finding themselves in homes they could not afford.

When the housing bubble burst, the government should have let the downturn run its course in order to correct the malinvestments made during the phony, Fed-created boom. This may have caused some short-term pain, but it would have ensured the recovery would be based on a solid foundation rather than a bubble of fiat currency.

Of course Congress did exactly the opposite, bailing out Wall Street and the big banks. The Federal Reserve cut interest rates to historic lows and embarked on a desperate attempt to inflate the economy via QE 1, 2, and 3.

…click on the above link to read the rest of the article…

Violence, Public Anger Erupts In China As Home Prices Slide

Last March, we discussed why few things are as important for China’s wealth effect and economy, as its housing bubble market. Specifically, as Deutsche Bank calculated at the time, “in 2016 the rise of property prices boosted household wealth in 37 tier 1 and tier 2 cities by RMB24 trillion, almost twice their total disposable income of RMB12.9 trillion.” The German lender added that this (rather fleeting) wealth effect “may be helping to sustain consumption in China despite slowing income growth” warning that “a decline of property price would obviously have a large negative impact.”

Naturally, as long as the housing bubble keeps inflating and prices keep rising, there is nothing to worry about as the population will keep spending money buoyed by illusory wealth appreciation. It is when housing starts to drop that Beijing begins to panic.

Fast forward to today, when Beijing may be starting to sweat because whereas Chinese property developers usually count on September and October to be their “gold and silver” months for sales, this year has turned out to be different. As the SCMP reports, not only were sales figures grim for September, but the seven-day national holiday last week also brought at least two “fangnao” incidents – when angry, and often violent, homeowners protest against price cuts offered by developers to new buyers.

These protests are often directed at sales offices, with varying levels of intensity – from throwing rocks to holding banners and putting up funeral wreaths. The risk, of course, is that as what has gone up (wealth effect) will come down, and as home ownership has remained the most important channel of investment for urban households in China in the past decade, price cuts have become increasingly unacceptable and a cause for social unrest.

…click on the above link to read the rest of the article…

The Great Financial Crisis: Bernanke and the Bubble

The Great Financial Crisis: Bernanke and the Bubble

Ben Bernanke responded to Paul Krugman’s post last week, which agreed with my argument that the main cause of the Great Recession was the collapse of the housing bubble rather than the financial crisis. Essentially, Bernanke repeats his argument in the earlier paper that the collapse of Lehman and the resulting financial crisis led to a sharp downturn in non-residential investment, residential investment, and consumption. I’ll let Krugman speak for himself, but I see this as not really answering the key questions.

I certainly would not dispute that the financial crisis hastened the decline in house prices, which was already well underway by September of 2008. It also hastened the end of the housing bubble led consumption boom, which again was in the process of ending already as the housing wealth that drove it was disappearing.

I’ll come back to these points in a moment, but I want to focus on an issue that Bernanke highlights, the drop in non-residential investment following the collapse of Lehman. What Bernanke seemed to have both missed at the time, and continues to miss now, is that there was a bubble in non-residential construction. This bubble essentially grew in the wake of the collapsing housing bubble.

Prices of non-residential structures increased by roughly 50 percent between 2004 and 2008 (see Figure 5 here). This run-up in prices was associated with an increase in investment in non-residential structures from 2.5 percent of GDP in 2004 to 4.0 percent of GDP in 2008 (see Figure 4).

This bubble burst following the collapse of Lehman, with prices falling back to their pre-bubble level. Investment in non-residential structures fell back to 2.5 percent in GDP. This drop explains the overwhelming majority of the fall in non-residential investment in 2009. There was only a modest decline in the other categories of non-residential investment.

…click on the above link to read the rest of the article…

There’s a New Crash Coming

There’s a New Crash Coming

Donald Trump is the epitome of irrational exuberance.

You might remember that phrase from the 1990s. Alan Greenspan, the head of the Federal Reserve at the time, was describing how the tech boom was creating a bubble by generating enthusiasm way out of proportion to the actual value of the new companies.

Such an unwarranted economic boom was hardly something new, so it was easy to predict what would happen next. Periods of irrational exuberance — whether the dot-com expansion, Dutch tulipmania in the 17th century, or the housing bubble in America of the 2000s — have always led to a sudden crash and a serious hangover.

And now, here we go again.

Trump, always exuberant when talking about himself and his putative accomplishments, loves to boast about how well the American economy is chugging along. The stock market reached its all-time high at the end of August. In its second quarter this year, U.S. economic growth was 4.1 percent. Unemployment remains below 4 percent, and inflation remains moderate. Even wages are going up.

Irrationality enters the picture because there’s little if any connection between the president’s policies and the outcomes he lauds (since these trends began before he took office). Also, the prosperity that has resulted from this economic expansion has largely been enjoyed by the wealthier sectors of society. Finally, Trump’s economic fever dream is fueled by an enormous and growing amount of debt.

When it comes to irrational exuberance, it’s never if there will be a bust but when. On the tenth anniversary of the financial collapse of 2008, it’s worth looking at the potential pinpricks that will pop Trump’s hot-air balloon and send America crashing back to earth.

Mountains of Debt

…click on the above link to read the rest of the article…

Evidence The Housing Bubble Is Bursting?: “Home Sellers Are Slashing Prices At The Highest Rate In At Least Eight Years”

Evidence The Housing Bubble Is Bursting?: “Home Sellers Are Slashing Prices At The Highest Rate In At Least Eight Years”

The housing market indicated that a crisis was coming in 2008.  Is the same thing happening once again in 2018?  For several years, the housing market has been one of the bright spots for the U.S. economy.  Home prices, especially in the hottest markets on the east and west coasts, had been soaring.  But now that has completely changed, and home sellers are cutting prices at a pace that we have not seen since the last recession.  In case you are wondering, this is definitely a major red flag for the economy.  According to CNBC, home sellers are “slashing prices at the highest rate in at least eight years”…

After three years of soaring home prices, the heat is coming off the U.S. housing market. Home sellers are slashing prices at the highest rate in at least eight years, especially in the West, where the price gains were hottest.

It is quite interesting that prices are being cut fastest in the markets that were once the hottest, because that is exactly what happened during the subprime mortgage meltdown in 2008 too.

In a previous article, I documented the fact that experts were warning that “the U.S. housing market looks headed for its worst slowdown in years”, but even I was stunned by how bad these new numbers are.

According to Redfin, more than one out of every four homes for sale in America had a price drop within the most recent four week period…

In the four weeks ended Sept. 16, more than one-quarter of the homes listed for sale had a price drop, according to Redfin, a real estate brokerage. That is the highest level since the company began tracking the metric in 2010. Redfin defines a price drop as a reduction in the list price of more than 1 percent and less than 50 percent.

…click on the above link to read the rest of the article…

Even Mortgage Lenders Are Repeating Their 2006 Mistakes

Even Mortgage Lenders Are Repeating Their 2006 Mistakes

You’d think the previous decade’s housing bust would still be fresh in the minds of mortgage lenders, if no one else. But apparently not.

One of the drivers of that bubble was the emergence of private label mortgage “originators” who, as the name implies, simply created mortgages and then sold them off to securitizers, who bundled them into the toxic bonds that nearly brought down the global financial system.

The originators weren’t banks in the commonly understood sense. That is, they didn’t build long-term relationships with customers and so didn’t need to care whether a borrower could actually pay back a loan. With zero skin in the game, they were willing to write mortgages for anyone with a paycheck and a heartbeat. And frequently the paycheck was optional.

In retrospect, that was both stupid and reckless. But here we are a scant decade later, and the industry is headed back towards those same practices. Today’s Wall Street Journal, for instance, profiles a formerly-miniscule private label mortgage originator that now has a bigger market share than Bank of America or Citigroup:

The New Mortgage Kings: They’re Not Banks

One afternoon this spring, a dozen or so employees lined up in front of Freedom Mortgage’s office in Mount Laurel, N.J., to get their picture taken. Clutching helium balloons shaped like dollar signs, they were being honored for the number of mortgages they had sold.

Freedom is nowhere near the size of behemoths like Citigroup or Bank of America; yet last year it originated more mortgages than either of them, some $51.1 billion, according to industry research group Inside Mortgage Finance. It is now the 11th-largest mortgage lender in the U.S., up from No. 78 in 2012.

private label mortgage lenders

…click on the above link to read the rest of the article…

Housing Bubble Pops in Sydney & Melbourne, Australia

Housing Bubble Pops in Sydney & Melbourne, Australia

And with impeccable timing, an immense flood of new construction.

In Sydney, breeding ground for one of the world’s biggest housing bubbles, prices of single-family houses dropped 7.3% in August, compared to a year earlier. Prices of “units” — condos in US lingo — fell 2.2% year-over-year. Price declines were the sharpest at the high end, with prices down 8.1% in the most expensive quarter of home sales. Prices of all types of homes combined fell 5.6%, according to CoreLogic’s Daily Home Value Index. The index is down 5.8% from its peak last September:

Melbourne, where the inflection point has been lagging a few months behind Sydney’s, is in the process of catching up. Over the three month-period, June-August, prices fell 2.0%, making Melbourne the weakest housing market among the capital cities. By segment, house prices fell 2.7% from a year ago while condo prices still inched up 1.5%. At the most expensive quarter of sales, prices fell 5.2% from a year ago. For all types of dwellings combined, prices declined 1.7% year-over-year, to the lowest level since early June 2017, according to CoreLogic. Prices are down 3.6% from their peak at the end of November 2017:

Corelogic tracks the largest five of Australia’s eight capital cities in a separate index. Due to the size of their housing markets, Sydney and Melbourne weigh the most. In the remaining three of the five capital cities in the index, prices were mixed in August:

  • In Brisbane, home prices inched up 0.9% year-over-year.
  • In Adelaide, home prices ticked up 1.0%.
  • In Perth, home prices fell 2.0%, with houses down 1.5% and condos down 4.4%. Prices have been skidding since late 2014, when Western Australia mining boom turned into a mining bust.

The aggregate five capital cities index fell 3.1% in August year-over-year. The index has declined month-to-month for 11 months in a row and is down 3.5% from its peak in October 2017:

…click on the above link to read the rest of the article…

More Evidence The Economy Is Deteriorating

More Evidence The Economy Is Deteriorating

“Financial-market and economic prospects remain far shy of the hype and headlines, amidst tanking consumer optimism and negative revisions to recent reporting.” – John Williams, Shadowstats.com

The economy may seem like it’s doing well if you are part of the upper 10% demographic. Though, in reality, for most of the upper 10%, doing “well” has been a function of having easy access to credit. NASA Federal Credit Union is offering 0% down, 0% mortgage insurance for mortgages up to $2.5 million.

Someone I know suggested the tax cut stimulus had run its course. But the narrative that the tax cuts would stimulate economic activity was pure propaganda. The tax cuts stimulated $1 trillion in expected share buybacks and put more money in the pockets of corporate insiders and billionaires. The average middle class household spent its tax cut money on more expensive gasoline and food. Since the tax cut took effect, auto sales and home sales have declined. Retail sales have been mixed. However, it’s difficult to distinguish between statistical manipulation and inflation. I would argue that, net of real inflation and Census Bureau statistical games, real retail sales have been declining.

As an example, last week Black Box Intelligence released July restaurant sales. While comparable store sales were up 0.54% over July 2017, comparable restaurant traffic was down 1.8%. On a rolling three months, comp sales are up 0.46% but comparable traffic is down nearly 2%. With traffic declining, especially a faster rate relative to the small increase in sales, it means the sales “growth” is entirely a function of price inflation. If Black Box Intelligence could control it’s data for price increases, it would show that there is no question that real sales are declining. I have been loathe to recommend shorting restaurant stocks because, for some reason, the hedge funds love them.

…click on the above link to read the rest of the article…

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