Category Archives: Manias

Housing Collapse Redux

Take a look at this chart:

2022-11-16_07-05-40_0

That is a collapse in process. An unprecedented collapse in modern times. Perhaps 1346-53 showed something similar. It will take 4-6 months to work its way into the hard data, but it is coming. Recall Stephanie Pomboy’s observation that in July of 2008, inflation was at 5.6%. By July of 2009, it was at -2.1%. There’s a Fed pivot of some kind. Now look at John Hussman’s pivot chart:

Bears follow pivot

Which clearly shows that the real bear market will follow the pivot. Then contemplate another of Hussman’s charts which shows the potential losses from here:

Potential Losses

Now look at the international context. China has its own housing bubble collapse going on, to say nothing of choking its economy with a stupid Covid strategy because a dictator like Xi cannot admit error. Europe is seized with political correctness, internal division over immigration from Africa and an energy catastrophe. Oh and there’s a proxy war with Russia going on and another with China waiting in the wings, to say nothing of a demented President. Just don’t choke on that turkey.

Lehman II?

The second-largest crypto exchange, FTX, has halted withdrawals and appears to be bust. Formerly valued at $32 billion, one must assume that it is now worth a lot less than that. The largest exchange, Binance, negotiated a non-binding bailout agreement and then withdrew it after a look at the books. I wonder if this is crypto’s Lehman moment? The time when the fantasy meets hard, cold reality?

Edit: FTX has/had more than five million customers worldwide. The Miami Heat’s home stadium, named FTX Arena, will be getting a new name. Porn movie producers Bang Bros. tweeted that their 2019 $10 million bid for the naming rights was still good, and they added that they promised that a lot fewer people would be f***ed.

Disintegration

The world is disintegrating. Trust has been lost, both within countries and between countries. Without trust, economic relationships cannot operate.

China

China is a poor country, despite the glitz and glamor of its big cities and its showpiece infrastructure, with a per-capita annual GDP of about USD 11,000.

Chairman Xi presented his plan for world domination at the opening of the party congress. Not going to happen, sir. Your country is an economic and social house of cards that is in the process of collapsing. The housing market, investment of choice for the masses, is a bubble bursting and desperate local governments are even buying their own land use rights from themselves or one another because retail buyers have left the building. So to speak. Your Covid-zero policy has shaken the people’s faith in the benign CCP, while wreaking destruction on millions of small businesses. Unemployment is high and rising, college graduates cannot find jobs. Biden’s withdrawal of support for your semiconductor industry has condemned it to a bleak future without the production technology that your people cannot build. Export demand from the rest of the world is shrinking fast. Sir, your country is likely heading for a deep economic depression and social turmoil. This will further weaken China’s positioning for the world hegemony which you desire.

United States

In the USA, we live in a world now that George Orwell and Aldous Huxley would readily recognize. The state has commandeered the legacy media, as well as the new social media, to not only put out the “progressive” state’s version of reality but to identify, spy on, ostracize and  punish critics and dissenters.

President Biden, your “progressive” policies are not working. Democrat-run inner cities are being abandoned to crime and homelessness. Illegal immigrants are flooding in without any prospects for employment or training. You are continuing to feed the inflation which is mostly damaging the people you claim to represent. Your support for expansion of NATO triggered the invasion of Ukraine, with severe economic and social consequences.

You and your Democratic predecessors, notably Hillary Clinton, have created a deeply divided society, with those who have drunk the purple Kool-Aid and accept the state’s lies and propaganda on one side, and those with a more traditional view of reality on the other. Neither side trusts the other, respects the other’s views, or is willing to compromise. Both sides are preparing for more direct conflict as the sporadic clashes increase in frequency and severity. This is a recipe for a failing state with extremism on both sides. Negative economic consequences are to be expected.

Europe

Neither China nor Europe are democracies – by design. The architects of the European Union claimed that, since democracy had enabled Hitler, it could not be a part of the EU’s structure. As a result, bureaucrats who suffer no consequences for their failures and care little for the fate of the citizenry run the EU. Ursula van der Leyen is no less of an autocrat than Xi. Deep rifts have emerged as democratically elected governments have resisted the orders of the bureaucrats. These rifts are between rich north and poor south as well as conservative east and “progressive” west. It is only a matter of time before a second country leaves the EU, and that will spark a rush for the exits.

The coming winter is going to be hard, as the bureaucrats’ energy policy has been disastrous. Immigration policies have resulted in shocking increases in crime, with many countries reporting zones where the police dare not go in fear for their lives. Mario Draghi’s “whatever it takes” has left a legacy of irresponsible debt, as in the USA. As  interest rates increase, this is going to be a huge problem

Russia and Ukraine

Russia’s invasion of Ukraine has no winners. Regardless of the outcome, the invasion is an economic disaster for both of them. Their economies depend heavily on the export of commodities, such as food, energy and metals. The volumes of these commodities are large, and their absence are also a problem for the countries that have come to depend on them.

Conclusion

I could go on, but it is time to recognize that the future is not bright. Economies will get worse. Much worse. Be careful out there. Don’t focus on the narrative of the “Fed pivot.” The Fed is irrelevant.

The Cash Economy

Large-scale money printing was launched by Alan Greenspan, who believed that additional liquidity would be needed to cushion the shock of the millennium rollover. The shock never happened, but the easy money continued as the dot-com bubble popped, eventually leading to the housing bubble and its culmination with the failure of Lehman and the 2008 financial crisis. The Fed’s response was to turn on the afterburners. The December 2007 monetary base was 0.84 trillion dollars. By December 2019, it had risen four-fold to 3.4 trillion. And the the Fed lit the JATO bottles as well and we got real liftoff, as by December 2021 the monetary base had risen to 6.4 trillion dollars.

This matters because it means the economy is awash in cash. Monetary velocity has fallen from a pre-2009 low of 1.65, set in Q4 of 1964, to 1.15 as of Q2 of 2022. That means that much of the cash is idle, not being spent. All that cash is buying power in the hands of people and institutions. This means that interest rates and availability of credit are less important, and the Fed’s mission to reduce inflation by reducing demand faces an uphill battle. The Fed has begun reducing the monetary base by selling its pile of Treasuries and MBS. This is far more important than raising rates, but it will be a long time before its effects start to be felt because the current position is so extreme.

The poster child of the 2008 crisis was the NINJA (No Income, No Job or Assets) home buyer. The NINJA borrower has been replaced by the US government. Federal debt has nearly quadrupled since 2008.

fredgraph

fredgraph

This is why we have inflation. It is not going away until the deficit spending is reined in. Every dollar of new federal debt becomes a dollar in savings – and potential spending – for the private sector.

Where The Fugawi?

The flightless Fugawi bird lives in the tall grass of the African savannahs. Unfortunately, this bird is not as tall as the grass that surrounds it, hence its mournful call. The mavens of Wall Street seem to share the bird’s frustration as they focus on fractional changes in economic data, in the hope that they will foreshadow a return to the peaceful, sunlit uplands of free and flowing money.

Alas, it is not to be. We are fated to do battle with the multi-headed Scylla of inflation and, if we win, it is only to be sucked into Charybdis’ whirlpool of depression. Massive increases in government debt have, inevitably, increased private sector savings and pulled consumption forward in time. If these increases continue, Scylla will dine well as hyperinflation ruins the dollar. If they do not, consumption will, of necessity, fall as the credit impulse reverses. Charybdis’ whirlpool is a fine metaphor for the negative feedback cycle that will result from bankruptcies and defaults. If I do say so myself.

Jeff Gundlach Interview

Jeffrey Gundlach is the billionaire founder and CEO of DoubleLine, a Los Angeles based investment boutique mainly specializing in bonds, ranks among America’s highest-profile investors. His bold calls and correct prediction of the 2007 housing crash have earned him a solid reputation. A recent interview is most interesting in that he clearly, if intuitively, understands the instability inherent in the Fed’s attempts to control the economy by hindsight.

The next shock is that we’re having to put in a big overreaction to the inflation problem which we created from our initial reaction of excess stimulus. My guess is that we will end up creating momentum that’s more deflationary than a lot of people believe is even possible.

Of course he is very probably correct. A deflationary economic collapse is very likely to follow the inflationary phase. So long as the Fed is willing to make massive interventions in the economy without understanding the dynamics of control, we are utterly screwed. There comes to mind a well-known class of control systems known as bang-bang control.

Dummies?

When seeming professionals propose ideas that are internally contradictory I really start to question professionalism in the financial services industry.

The idea proposed was that since inflation was caused by limited supply, which the Fed cannot control, the Fed would simply raise its inflation target and resume easy money to resume growth, driving stocks to infinity and beyond.

Excuse me, but doesn’t limited supply itself limit growth?

Since when has the Fed ever been able to control supply? The money printers go b-r-r-r but there are no gas wells or potash mines at the Fed building. The Fed’s manipulations are intended to control demand.

And by the way, how is the economy to grow when businesses wanting to expand cannot hire the employees that they need?

The bubble is still with us.

China

China sports the second largest economy in the world and its hyper-stimulated growth over the last decade has boosted growth in the rest of the world, including the US. Right now, however, the Chinese economy is foundering. Its struggle to stamp out Covid continues, with two major cities, Shenzen and Chengdu entirely or mostly in lockdown. Chinese investors have chosen to speculate in residential housing rather than the stock market, leading to a giant property market bubble with hundreds of thousands of empty or unfinished apartments overhanging the market. August sales of new units were down 33% y-o-y. Both drought and flooding have plagued the country this summer, leading to the same difficulties with agriculture and transport seen in Europe.

The Chinese government has responded with yet more stimulus, widely seen as inadequate given the magnitude of the economic problems. These problems will have a negative effect on the rest of the world.

Yet Another “You Can’t Make This Stuff Up”

Promptly after California issued its electric car mandate, the grid operator is asking people to avoid charging electric vehicles over the coming Labor Day Weekend, in order to avoid blackouts.

“The power grid operator expects to call on Californians for voluntary energy conservation via Flex alerts over the long weekend.

During a Flex Alert, consumers are urged to reduce energy use from 4-9 p.m. when the system is most stressed because demand for electricity remains high and there is less solar energy available. The top three conservation actions are to set thermostats to 78 degrees or higher, avoid using large appliances and charging electric vehicles, and turn off unnecessary lights. Lowering electricity use during that time will ease strain on the system, and prevent more drastic measures, including rotating power outages.”

My Volt gets most of its charging at night, when it is not in use. The electricity to charge electric cars has to come from somewhere. Looking at the weight of these vehicles, my guess is that the total energy consumption of these vehicles is higher than the IC vehicles.

If we want to get off fossil fuels, it is necessary to replace them as the base load source. And that means nuclear.

Affordable Housing

From Sfgate:

In San Francisco, the minimum income required to purchase a median-priced home leapt from $350,400 to $450,800 from the second quarter of 2021 to the second quarter of 2022. It was even worse in San Mateo — the minimum income jumped from $390,400 to $512,000.