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Why Assets Will Crash
Why Assets Will Crash
This is how it happens that boats that were once worth tens of thousands of dollars are set adrift by owners who can no longer afford to pay slip fees.
The increasing concentration of the ownership of wealth/assets in the top 10% has an under-appreciated consequence: when only the top 10% can afford to buy assets, that unleashes an almost karmic payback for the narrowing of ownership, a.k.a. soaring wealth and income inequality: assets crash.
Most of you are aware that the bottom 90% own very little other than their labor (tradeable only in full employment) and modest amounts of home equity that are highly vulnerable to a collapse of the housing bubble. (The same can be said of China’s middle class, only more so, as 75% of China’s household wealth is in real estate, more than double the percentage of wealth held in housing in U.S. households.)
As the chart illustrates, the top 10% own 84% of all stocks, over 90% of all business equity and over 80% of all non-home real estate. The concentration of ownership of assets such as vintage autos, collectibles, art, pleasure craft and second homes in the top 10% is likely even greater.
The more expensive the asset, the greater the concentration of ownership, as the top 5% own roughly 2/3 of all wealth, the top 1% own 40% and the top 0.1% own 20%. In other words, the more costly the asset, the narrower the ownership. (Total number of US households is about 128 million, so the top 5% is around 6 million households and the top 1% is 1.2 million households.)
This means the pool of potential buyers is relatively small, even if we include global wealth owners.
…click on the above link to read the rest of the article…
Skyrocketing Costs Will Pop All the Bubbles
Skyrocketing Costs Will Pop All the Bubbles
The reckoning is coming, and everyone who counted on “eternal growth of borrowing” to stave off the reckoning is in for a big surprise.
We’ve used a simple trick to keep the status quo from imploding for the past 11 years: borrow whatever it takes to keep paying the skyrocketing costs for housing, healthcare, college, childcare, government, permanent wars and so on.
The trick has worked because central banks pushed interest rates to zero, lowering the costs of borrowing more as costs continued spiraling higher.
But that trick has been used up. The next step–negative interest rates–has failed to spark the “growth” required to pay for insanely overpriced housing, healthcare, college, childcare, government, etc.
We’ve reached the end of the line on lowering interest rates as a way of borrowing more to keep our heads above water. We’ve reached the point where households and enterprises can’t even afford the principle payments, i.e. no interest at all.
How are banks supposed to make money at zero interest rates? By charging outrageous overdraft fees and offering marginally qualified borrowers sky-high credit cards, and getting in on the federally guaranteed mortgage/student loan racket, that’s how.
The point here is the discipline of rising costs has been destroyed by easy money. Take higher education as an example. If there was no federally backed student loan “industry,” universities would have been forced to innovate 20 years ago to lower costs and improve the market value of their “product.”Instead, they left their bloated cost structure untouched as it spiraled ever higher, and simply passed the higher costs onto students, who have had to borrow over $1.5 trillion to feed the bloated higher education cartel.
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“It’s Nuts” – The Fed Has Created A “Monstrous Beast Of Over-Inflated Valuation”
“It’s Nuts” – The Fed Has Created A “Monstrous Beast Of Over-Inflated Valuation”
“Own risk assets…everywhere… everywhere” says Embark Group’s CIO Peter Toogood, exclaiming that “this is nothing to do with fundamentals anymore, fill your boots, why not?”
After The Fed entirely flip-flopped from last year, the clearly frustrated manager notes the facts behind the so-called market, “flooding the repo market with $400, $500 billion from The Fed to stop it collapsing after it reversed course massively from last year…”
“..we’ll just keep pumping… and we’ll just keep pumping… and it’s not QE they tell us, definitely not QE… and its worked for the last 8 years so we’ll just keep pumping more…”
It’s quit simple, Toogood notes, “all CTAs have gone long, most macro funds are long, the biggest engines in London are as long as they can be… and vol is on the floor…”
“Just keep going…” he chides sarcastically:
“…until you don’t, until the music stops… I’m being incredibly flippant but for a very good reason… there is no logic to [buying risk assets like equities] other than to chase the gilded lily… it’s nuts!”
The anchor attempted to get the conversation back on track, by mentioning earnings, to which Toogood scoffed –
“Earnings! Earnings? Are they relevant?”
As the chart below shows, no!
Everything has changed, “we’ve gone from tightening mode to loosening mode, extremely loose… The Fed says ‘rates are on hold’ but we’ll just keep this ‘little’ repo thing going a little while longer…“
Toogood then took aim at the farcical “phase one” trade deal with China that “doesn’t actually mean anything” and warned that the next year will be full of “phase two talks are going well” jawboning.
This is not reality, “the world was slowing down long before this trade deal became the biggest issue.”
…click on the above link to read the rest of the article…
A Modest Proposal for the Fed
A Modest Proposal for the Fed
Quantitative easing, the program of asset buying initiated by the US Federal Reserve Bank in 2008, represents the most profound monetary experiment in the history of the world. Between fall of 2008 and fall of 2014, three successive rounds of QE quadrupled the monetary base of the world’s most-used and dominant currency, from less than $1 trillion to more than $4 trillion. The Fed literally created new money, bought Treasury debt and mortgage-backed debt (of dubious character) from commercial banks, and credited them with new reserves.
It was a great trick. If QE can be done without adverse effects or with few adverse effects, it represents nothing short of monetary alchemy (h/t Nomi Prins). Everything we thought we knew about the Fed as backstop lender of last resort to commercial banks, as hallway monitor of inflation and unemployment, is out the window.
If QE works, then every government on earth must take notice of the opportunity to effectively recapitalize their own banks and industries free of charge. QE turns central banks into kings of capital markets, into active participants in the economy. As one twitterati put it, expansionary QE created the biggest untold American story of the last twenty years: the Fed can now inflate and deflate assets, devalue savings, influence wages and productivity, encourage corporate malfeasance, and engineer balance sheets—all the while creating economic winners and losers.
What politician or central banker could resist?
Recall how defenders of QE not only argued it was necessary, but beneficial. Paul Krugman was among the worst offenders, insisting that low interest rates would mitigate any harms from such rapid monetary expansion. These defenders dismissed, and continue to dismiss, what is now obvious: since 2008 the US economy has experienced significant asset inflation in equity markets and certain housing markets, plus a creeping but steady rise in many consumer prices.
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Bank of England Could ‘Trigger the Next Financial Crisis’
Bank of England Could ‘Trigger the Next Financial Crisis’
It’s not some wayward doom-and-gloomer who said it, but the Economic Research arm of Natixis, the investment bank of France’s second largest megabank, Groupe BPCE.
The analysis was talking about the Bank of England. But the Fed and other central banks, with their ingenious monetary policies, have created similar scenarios where only the nuances are different. And now these “triggers for the next Financial Crisis” are cluttering the future, enough to where an investment bank, an entity that has tremendously benefited from these monetary policies, is beginning to fret.
“We are concerned about the UK economy,” Natixis starts out, though the UK economy is currently the shining model in Europe, where a tsunami of money and government coddling of banks appear to have solved all problems.
The analysis goes through its logic step by relentless step. Since the Financial Crisis and the deep recession it brought to the UK, growth has largely been powered by the inflation of asset prices.
UK household demand “reacts strongly to changes in property wealth,” the report said. So soaring home prices entail a sharp rise in consumption, a phenomenon that appeared in 2003, then 2006, and most recently in 2013. This is followed by a tidal wave of home buying, which started in 2004 (three years before the Financial Crisis) and once again in 2013. It’s followed by a similar tidal wave of housing starts. All of which give a strong boost to economic growth.
That “wealth effect” for property-owning households is paralleled by similar effects on the corporate side. Soaring commercial real estate prices and skyrocketing share prices “helped kick-start corporate investment” from 2005 to 2008 – just before the Financial Crisis – and once again after 2010, when commercial property prices and share prices were re-soaring. Natixis:
It is clear that the expansionary monetary policy pushed up asset prices from 2002 to 2007, from 2010 and especially 2013.
So what’s the outlook? More of the same.
…click on the above link to read the rest of the article…
