(image by Dees Illustrations)
"Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done."
~~John Maynard Keynes, The General Theory of Employment, Interest and Money
It's too bad Keynes isn't around today to see how the toxic combo of financial engineering, central bank liquidity and fraud have transformed the world's biggest economy into a hobbled, crisis-prone invalid that's unable to grow without giant doses of zero-rate heroin and mega-leverage crack-cocaine. This is exactly what the British economist warned about more than half a century ago in his magnum opus, "The General Theory..." that you can't build a vital, prosperous economy on the ripoff, Ponzi scams of Wall Street charlatans, mountebanks and swindlers. It can't be done. And, yet -- here we are again -- in the middle of another historic asset-price bubble conceived and engineered by the bubbleheaded crackpots at the Federal Reserve. Go figure?
Just take a look at housing, which is at the end of an astonishing 18-month run that was entirely precipitated by what?
Consumer confidence, bigger incomes, credit expansion, growing revenues, pent-up demand?
No, no, no, no and no. Economic fundamentals played no part in the so called housing rebound. In fact -- as everyone knows -- the economy stinks as bad today as it did four years ago when the government number-crunchers announced the end of the recession. The reason prices have been rising is because of the Fed's loosy-goosey monetary policy (fake rates and QE), inventory suppression, bogus gov mortgage modification programs, and unprecedented speculation. (mainly Private Equity and investors groups) Those are the four legs of the stool propping up housing. Only now it looks like a couple of those legs are in the process of being sawed off, which is going to put downward pressure on sales and prices. Take a look at this from DS News:
"A majority of experts surveyed by Zillow and Pulsenomics expect large-scale investors will pull out of the housing market in the next few years...
"Out of 110 economists, real estate experts, and investment strategists surveyed in Zillow's latest Home Value Index, 57 percent said they think institutional investors will work to sell the majority of homes in their portfolios 'in the next three to five years.' These investors are largely credited with propping up housing during its recession, helping to keep sales volumes from plummeting too far.
"While their withdrawal will most certainly affect today's still-fragile market -- 79 percent of those surveyed said the impact would be 'significant or somewhat significant' should investor activity curtail this year." (Experts Predict Level Playing Field as Investors Withdraw, DS News)
This is what we were afraid of from the very beginning, that the big PE firms would pack-it-in and move on once they'd made a killing, which they have, since prices soared 12 percent in one year. Now they want to get out while they getting is good, which means that -- in some of the hotter markets where investors represented upwards of 50 percent of all purchases -- there will have to be a new source of demand. Unfortunately, the demand for housing has never been weaker.
Sales are down, purchase applications are down, and the country's homeownership rate has slipped to levels not seen since 1995, 18 years ago. The Fed's $1 trillion purchase of mortgage backed securities (MBS) and zero rates have done nothing to stimulate "organic" consumer demand. Zilch. No "trickle down" at all. All the policy has done is generate a temporary surge of speculation that's distorted prices and created conditions for another big bust. Get a load of this article from Housing Perspectives:
"Although household growth is the major driver of housing demand, getting an accurate picture of recent trends in this measure is difficult...In its recent release, the HVS reported annual household growth of just 448,800 in 2013. This represents a 48 percent drop in household growth relative to that from 2012 and marked the lowest annual household growth measure since 2008, in the depths of the Great Recession (Figure 1).
Repeat: "...a 48 percent drop in household growth relative to that from 2012 and marked the lowest annual household growth measure since 2008, in the depths of the Great Recession."