Mania Musings & Bubble Bits

Greenspan (Greenscum) says global economy faces asset price fall

2006-04-13T07:21:00.000-07:00

This is the same guy who doesn't know a bubble when he sees one, until after it has burst. Now he's out there flapping his lips about how everything is grossly overvalued. But of course he doesn't talk about the role he and his central banker buddies have played in creating the mess we are in.

Global economy faces asset price fall-Greenspan
Tue Apr 11, 2006 11:41 PM ET

SEOUL, April 12 (Reuters) - Former Federal Reserve Chairman Alan Greenspan warned on Wednesday a global glut in liquidity would result in a fall in asset prices.

Greenspan, speaking to a financial conference in Seoul via satellite, also said separately that a U.S. law on corporate governance may have influenced some foreign companies to seek initial public offerings outside the United States.

He said the market value of assets worldwide had been rising faster than nominal gross domestic product globally due to a decline in real long-term interest rates over the years and a significant fall in real equity premiums.

"A good part of this expansion is a direct function of the decline in real equity premiums," Greenspan said. "That cannot go on indefinitely."

He said asset prices would begin to fall, but did not predict when that would happen.

"I am reasonably certain that what we are looking at today is an abnormal situation," he said.

Greenspan also said the Sarbanes-Oxley corporate governance act in the United States was a definite advance in terms of corporate governance, but some sections created too many burdens for corporations.

"The Sarbanes-Oxley act has created significant problems for foreign investors with its regulatory structure," he said.

"I am nevertheless acutely aware and disturbed by the fact that initial public offerings have moved away from the U.S. -- and to a large extent have moved to London," he added.

South Korean retailer Lotte Shopping Co. (023530.KS: Quote, Profile, Research) listed in Seoul and London early this year in the world's largest retail IPO, partly because of heavy reporting requirements for U.S. listings.

The former Fed chairman, who stepped down earlier this year, said his impression was that there would be changes in the act.

The Sarbanes-Oxley law was passed by Congress amid accounting schemes that resulted in the collapse of energy trader Enron and telecommunications giant WorldCom.

Asked whether he thought there was "irrational exuberance" in markets today, Greenspan said: "I would hesitate to use it in today's context. Irrational exuberance, I think would be a stretch at this point."

He had previously used the term to suggest signs of a bubble emerging in financial markets in the late 1990s.

The Housing Market has reached a plateau

2006-04-12T19:18:00.000-07:00

4/12/2006

Home sales should generally level out and remain at historically high levels, according to the National Association of Realtors.

David Lereah, the NAR's chief economist, says mortgage interest rates are trending up but will remain favorable. "Economic growth and job creation are providing a favorable backdrop for the housing market, but rising interest rates have an offsetting effect," Lereah said.

"Home sales will move up and down somewhat over the remainder of the year but stay at a high plateau, meaning this will be the third strongest year on record." He expects the 30-year fixed-rate mortgage to rise to 6.9 percent by the end of the year.

Growth in the U.S. gross domestic product is forecast at 3.7 percent in 2006, while the unemployment rate should average 4.8 percent.

Existing-home sales are projected to drop 6.0 percent to 6.65 million this year from a record 7.08 million in 2005. New-home sales are likely fall 10.9 percent to 1.14 million from the record 1.28 million last year - both sectors would see the third best year following 2005 and 2004. Housing starts are forecast at 2.00 million in 2006, which is 3.2 percent below the 2.07 million in total starts last year.

NAR President Thomas M. Stevens from Vienna, Va., says home prices are expected to cool, but not as much as in earlier projections. "Although housing inventories have been improving, the balance is still a bit more favorable for sellers and annual appreciation remains in double-digit territory," said Stevens, senior vice president of NRT Inc. "Even so, the market is in a process of normalization - appreciation will return to normal single-digit patterns, providing solid investment returns into the future."

Remember that statement about reaching the plateau. It's a dead ringer for another statement about a stock plateau in 1929.

Dollar is Now a Faith-Based Currency

2006-04-12T19:15:00.000-07:00

Gee, doesn't that make you feel so much better about the fate of the US dollar?

DALLAS, April 11 (Reuters) - The Federal Reserve will do what it takes to maintain its credibility, which is central to preserving the integrity of the U.S. dollar, Dallas Federal Reserve Bank President Richard Fisher said on Tuesday.

Alluding to the Fed's dual role of ensuring inflation doesn't "raise its ugly head" while still promoting the fastest possible noninflationary growth, Fisher said, "We seek to get it right. And the answer to your question is we will do what gets it right."

Answering audience questions after a speech to the Dallas Friday Group, Fisher said the U.S. dollar is a "faith-based currency" dependent on the credibility of a central bank.

"In addition to a faith-based currency, we are the currency of the world and we must maintain its integrity. As far as my involvement is concerned, I will spend every ounce of energy doing that. I have no doubt that my colleagues will do exactly the same," Fisher said.

Fed sees nothing but blue skies.

2006-04-05T06:50:00.000-07:00

According to Fed Jeffrey Lacker, president of the Richmond Federal Reserve Bank, April 4, 2006:

"It has now become uncontroversial to say that the outlook for overall economic activity is quite healthy," Lacker said. Although there will be some moderation in the housing sector this year, this "will not pose a problem for overall activity this year or next...Both survey data and the market prices of inflation-protected Treasury securities tell us that the public expects inflation to continue to be contained. I am confident that we at the Fed have the knowledge and the will to validate those expectations."

I was blue, just as blue as I could be
Ev’ry day was a cloudy day for me
Then good luck came a-knocking at my door
Skies were gray but they’re not gray anymore

Blue skies
Smiling at me
Nothing but blue skies
Do I see

Bluebirds
Singing a song
Nothing but bluebirds
All day long

Never saw the sun shining so bright
Never saw things going so right
Noticing the days hurrying by
When you’re in love, my how they fly

Blue days
All of them gone
Nothing but blue skies
From now on

[2]
I should care if the wind blows east or west
I should fret if the worst looks like the best
I should mind if they say it can’t be true
I should smile, that’s exactly what I do

Irving Berlin

Global Credit Ocean Dries Up

2006-03-17T05:09:00.000-08:00

The UK Telegraph published this timely piece by Ambrose Evans-Pritchard on February 24, 2006. It's not just the United States that's been on a huge housing bubble binge, the whole world is!

And gradually, the industrial nations are clamping down and tightening.

I'll bet you didn't hear on the news how Icelandic krone crashed 8% in two days, setting off a wave of little crashes in other currencies as in New Zealand, Australia, and Brasil.

Global Credit Ocean Dries Up

The cash machine that sustained a world boom is about to close, and it's going to get ugly, says Ambrose Evans-Pritchard

One by one, the eurozone, the Swedes, the Swiss and now even the Japanese, are turning off the tap of ultra-cheap credit that has flushed the global system for the past year, keeping the ageing asset boom alive.

The "carry trade" - as it is known - is a near limitless cash machine for banks and hedge funds. They can borrow at near zero interest rates in Japan, or 1pc in Switzerland, to re-lend anywhere in the world that offers higher yields, whether Argentine notes or US mortgage securities.

Arguably, it has prolonged asset bubbles everywhere, blunting the efforts of the US and other central banks to restrain over-heating in their own countries.

The Bank of International Settlements last year estimated the turnover in exchange and interest rates derivatives markets at $2,400bn a day.

"The carry trade has pervaded every single instrument imaginable, credit spreads, bond spreads: everything is poisoned," said David Bloom, currency analyst at HSBC.

"It's going to come to an end later this year and it's going to be ugly, even if we haven't reached the shake-out just yet," he said.

"People have a Panglossian belief in the march of global capitalism but that will change as soon as attention switches back to US financial imbalances," he said.

There were early signs of panic this week when the Icelandic krone crashed 8pc in two days, setting off dominoes in high-yielding currencies of New Zealand, Australia, South Africa, Hungary and Brazil.

The debacle was triggered when the rating agency Fitch downgraded Iceland's sovereign debt, a move that would not normally rattle markets.

The new skittishness comes against a backdrop of ever more hawkish moves by Japan and Europe.

"There are several hundred billion dollars of positions in the carry trade that will be unwound as soon as they become unprofitable," said Stephen Lewis, an economist at Monument Securities. "When the Bank of Japan starts tightening we may see some spectacular effects. The world has never been through this before, so there is a high risk of mistakes."

Toshihiko Fukui, the Japanese central bank governor, gave a fresh warning yesterday that this day is near, saying the country was pulling out of seven years of deflation. The economy grew at a 5.5pc rate in the fourth quarter of 2005.

In his strongest words yet, he said the bank would act "immediately" to curtail its extra injections of liquidity, preparing the way for rate rises above zero in coming months.

"The moment of truth is approaching,'' said Kenichiro Ikezawa of Daiwa SB. In Europe, Sweden raised rates to 2pc this week in the face of an overheated Stockholm property market, while Germany's IFO business climate index soared yesterday to its highest level in 14 years.

The European Central Bank will almost certainly raise eurozone rates to 2.5pc in March, with likely moves to 3pc by the end of the year.

Most of the world is now tightening, with no sign of a fresh credit window opening to keep the game going. This is new. Japan has had the tap on continuously as the trade exploded over the past five years, while America itself became the source of funds after it slashed rates to 1pc at the end of the dotcom bubble, and held them there until June 2004.

The US Federal Reserve has since raised rates 14 times to 4.5pc in a belated effort to restore monetary discipline, with at least two more rises priced into the markets.

It is an open question whether the yen, euro, Swiss franc and Swedish krona carry trades have occurred on such a scale that they have led to over-investment in Latin America and beyond, and compressed US yields, fuelling the American housing boom in 2005 despite Fed tightening.

There are other big forces at work: huge purchases of US Treasuries by Asian central banks, and petrodollar surpluses coming back to the US credit markets. Stephen Roach, chief economist at Morgan Stanley, warns that the carry trade is itself, in all its forms, a major cause of dangerous speculative excess. "The lure of the carry trade is so compelling, it creates artificial demand for 'carryable' assets that has the potential to turn normal asset price appreciation into bubble-like proportions," he said.

"History tells us that carry trades end when central bank tightening cycles begin," he said. Ominously, almost every bank other than the Bank of England is now tightening in unison.

Safe Money Report Reader Roundup, February 2006

2006-02-12T20:19:00.000-08:00

In the February 2006 issue of Safe Money Report, Martin Weiss identifies five key risks to the economy going forward:

1) The Middle East and Oil
Hamas has one a free election; Iran has been making threats; Iraq elections have not stopped violence; Syria is rebelling against UN murder investigations; Yemen and Saudi Arabia are battling terrorists, and so forth. Weiss believes these factors could propel oil higher.

2) Inflation Spike
The price of oil is infiltrating the rest of the economy, whether it is in mining copper, or delivering a pizza. The Federal Reserve's core personal consumption expenditures index Q4 was 2.2%, above the Fed's target of 2%. Bonds could be at risk.

3) The Housing Bubble
What we've been hearing from the housing bulls has gradually shifted from:
"We have a tight supply." "The baby boomers are trading up." "Foreign money investing."

to

"It's a soft landing." "It's a healthy cooling."

Housing starts declined more than two times as much as analysts expected in December. New building permits hit a seven month low.

Existing home sales fell 5.7% between November and December. The supply of unsold condominiums increased by over 66%.

The National Association of Realtors reported that in 2005, 43% of first-time home buyers put no money down on their homes.

4) Overreaching for Yield
Treasury and CD yields are still very low. In an effort to stretch for greater yield, investors are piling into securities backed by shaky mortgages.

5) Fed Screwup
The Federal Reserve typically underreacts to risks as they develop then overreacts when things blow up. Weiss believes the Fed is underreacting to inflation risk.

Creative Selling in real estate

2006-02-08T21:11:00.000-08:00

Two stories have caught my eye over the last few days about new creative ways to sell homes.

Brubaker-Culton Real Estate is offering a free pet with the sale of a house. They are giving vouchers good for an animal of choice at a local shelter.

I hope it works out, I really do. Having a pet can make a home "complete".

But it's bad enough that humans do stupid things and buy houses they can't afford and end up out on the street. Being an animal lover I worry about animals who often end up as victims of our thoughtlessness and stupidity. I guess being in a loving home, even if the worst happens and the animal has to go back to the shelter, is better than the animal living its entire life in an animal shelter.

The other story is from the Minneapolis Star Tribune about homeowners making a leap of faith. Sellers are burying statues of St. Joseph by their For Sale signs in the hopes that he will bring their asking price, apparently.

Ah, the real estate market must have shifted, can you feel it?

Having it both ways

2006-02-03T17:07:00.000-08:00

When the economic numbers come out favorable, the political talking heads trumpet how their policies are "working". When the numbers come out bad, it must be some error, some "anomaly".

From a Reuters story on January 28, 2006:

Slower-than-expected U.S. growth data at the end of 2005 do not accurately reflect the continued strength of the world's biggest economy, U.S. Deputy Treasury Secretary Robert Kimmitt said on Saturday.

"We think those figures are anomalous and out of step with the other figures showing the strength of the economy both now and in the future," he told Reuters on the sidelines of the World Economic Forum in Davos.

Technical definition of a mania

2006-01-30T21:01:00.000-08:00

Here are some interesting quotes from View from the Top of the Grand Supercycle, by Robert Prechter (1996-2001), in an essay called "Calling Too Many Tops".

"A market is in a mania when it (1) ignores its historical range of valuation; (2) decelerates without reversing, then re-accelerates, continually; (3) surpasses long-standing resistance lines; (4) creates no reactions, only pauses; and (5) continues relentlessly in a direction fully anticipated by the majority, in a blowoff."

Does this definition apply to the housing market? We saw some dips in sales late in 2004, but the market generally picked up steam again in 2005. The lifestyles of some homeowners hang on the expectation of annual double-digit gains in the values of their homes, instead of a more plod-along gain of 2-4% annually, keeping pace with inflation. If there have been any pauses in the housing market, perhaps they were to digest the latest wiggle in interest rates, but these pauses have been quite brief. I don't think support and resistance lines apply to housing data, so I'll skip that characteristic.

In this essay Bob Prechter goes on to describe how commodity markets behave differently from stock markets, namely, that stock market manias are often driven by ebullience, and tend to deccelerate and produce some rounding in the top of its chart pattern, whereas commodity bull markets are driven by fear (of shortage, of inflation), and often end at extreme points. He argues that recent (late 90's stock markets) came to be driven partly by fear, the emotion that drives commodity markets. Fear of our financial future, which certainly doesn't look healthy in the US, with a huge deficit, pensions vaporizing, social security bankrupt, can cause people to feel desperate in the stock market.

Has the housing market become commoditized? Are people really buying homes to experience the joy of owning a home? Or are they buying a home because they desperately fear being priced out? Are we going to see a gradual decceleration more characteristic of an ebullient market, or are we going to see a sharp reversal more characteristic of a fear-driven market?

Major job cuts not a trend

2006-01-25T11:42:00.000-08:00

In an article in the Boston Globe, Secretary of Labor Elaine Chao said this at the World Economic Forum in Davos, Switzerland:

Job creation is dynamic. When some companies terminate or decrease their payrolls it is not an indication nor a reflection of the general economic times but rather it is an indication of their own company specific challenges and problems.

Reminds me of Abby Joseph Cohen's statement in July of 2000 that "...credit-risk problems were company-specific..."

Uh oh - "Fundamentals are sound" alert!

2006-01-25T06:48:00.000-08:00

The National Association of Realtors calls silly people like me who blog about economic and housing bubbles Chicken Littles. In the January 2006 Insights article by Kevin Thorpe and Wannasiri Chompoopet called Taking Inventory, the same reasoning errors are made that are made by virtually all economists and forecasters - they extrapolate the past trend, which nationally has been fine, up to now and say the future will be the same - maybe a little more moderate, perhaps, but fine. And in listing reasons why housing prices won't crash,

One of them is demand. Demand for homes is double what it was in 1986. Another reason: fundamentals. The U.S. economy is fundamentally sound – jobs are being created, interest rates are still low (and will remain under 7 percent, mortgage credit is readily available, and homeownership has proven itself as a viable investment alternative to stocks and bonds.

Like just about every other economist, the authors have not shown they have any tools at hand for anticipating trend changes. Soon-to-be retired Fed Chairman Alan Greenspan is on the record as saying that is impossible to know an asset price bubble has developed until it has burst. According to an April 2005 commentary by John M. Berry at Bloomberg.com, Burton G. Malkiel has said, "My very strong view is that one cannot identify a bubble or its size until after it has burst."

These guys don't ring bells at the top and alert you to changes. It's up to you to protect yourselves. We had lots of "fundamentals are sound"-bites back in 1999 and 2000, right through the Nasdaq crash, which didn't prevent massive losses.

Into the Fire?

2006-01-20T17:23:00.000-08:00

I don't think we're all the way back yet in stocks, but I believe there's some good bargains out there...Real estate's been good, and I don't think you're going to see that bubble completely burst, but I think it's time to look at stocks again.

Former dot-com executive, quoted in an article by Michael J. Martinez of Associated Press, published January 14, 2006 in the Springfield News-Leader.

Pass the Rose Colored Glasses Please!

2006-01-13T21:42:00.000-08:00

Remember back in the late '90s when all we heard was that there was never a bad time to buy stocks? That you ought to just buy and hold for the long term, that stocks wouldn't go down? That the worst that would happen was that stocks could stay flat for a while, but they wouldn't go down? That it was practically guaranteed you'd make at least 5% a year? Anybody who held cash was laughed at? We're almost starting to hear this again.

Realtors are close cousins of stockbrokers. Not only is there never a bad time to buy a house, but prices never go down. Maybe home prices will stay flat for a while, but they would never never decline, oh no, they'd never do that!?!

Why do people have such short memories and fall for this?

I think [affordability] is going to deteriorate further. I know we're going to get higher rates, and even though we're seeing slower price appreciation, prices aren't going to drop, at least in my view.

- Leslie Appleton-Young, Chief Economist CAR

Realtors only talk out loud about the minimal pain scenario. Do they really think this is going to happen? That everyone in the crowd will remain calm while passing around the stick of dynamite with the lit fuse? That the worst that could happen is that a few little sparks might fly off and you might get a few microscopic burns before you pass the dynamite to the next sucker? That people will calmly sell each other real estate, singing "Give Peace a Chance", serenely taking small losses over the next few years as prices gently decline? Everybody cheerfully but passively sharing the pain, teaching the world to sing? The realtor min pain scenario reminds me of the stockbrokers in 2000 who said that a stock market decline would be OK if it was "orderly".

Just what do these guys (and gals) smoke?!?!?

I don't know about you, oh reader of the Mania Musings, but I don't think people behave that way. I think people are capable of panicking in a big way and there is a well-documented history of bubbles bursting revealing the psychological nature of the crowd.

So when the hucksters admit there could be a problem, their #1 strategy is to tell you that nobody will get hurt.

The #2 strategy is to admit, well yes, there is a problem, and somebody may get hurt, but it won't be you. For example, Abby Joseph Cohen of Goldman-Sachs said in July 2000, that "...credit-risk problems were company-specific...", implying that such problems were not a system-wide problem so the chances of you being negatively affected financially by such a bad company was minimal. Fed Chairman Alan Greenspan resorted to similar verbal deception when he testified before Congress June 9, 2005 and said,

Although a "bubble" in home prices for the nation as a whole does not appear likely, there do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels.

The herd is gullible to this tactic, because each buffalo in the herd has a case of NIMBY - not in my backyard. Congress is a problem, but my Congressman is OK, it's your Congressman who is the problem, voting for all those spending bills. Yeah, housing prices are stupid in Long Island, but they can't possibly be a problem here in Phoenix. You've got the problem, not me. I think there is a close resemblance between this psychological trait in the herd and the psychological traits exhibited by the herd in the classic short story The Lottery, by Shirley Jackson. As long as I am not Mrs. Hutchinson and nobody in my family drew the ticket, who gets stoned is not my problem.

I guess the answer to my earlier question, what do brokers and realtors smoke, is - that they may not necessarily be smoking anything, but they are geniuses at saying what people want to hear.

If you are reading this and have some insight into other verbal tactics used by those who want us to stay dumb, post your comments.

It's Different This Time

2006-01-13T10:31:00.000-08:00

From a Reuter's article on Chicago Fed comments:

Moskow said the current flat U.S. Treasury yield curve does not suggest a recession is on the way, as many have claimed.

The two-year/10-year Treasury yield spread briefly inverted in late December, when short-term yields traded higher than those of longer-dated government debt.

That shift has often been linked to a pending economic slowdown. "I don't see this as forecasting any kind of recession," Moskow said, adding that stubbornly low long-term yields remain a puzzle with several possible explanations.

You can read the original speech at the Chicago Federal Reserve website.

Financial Planning in a Bubble

2006-01-10T21:50:00.000-08:00

Remember back in July 1999 when a disgruntled speculator named Mark Barton shot up his brokerage, then went and turned his rage on his family?

No disgruntled worker can justifiably shoot up his former place of employment, and no disgruntled speculator can justifiably shoot up his brokerage. But it would not surprise me at all if in the future, financial planners, realtors, and brokers were in danger from mentally unbalanced clients who suffer huge losses from acting on advice from these purported professionals.

To tell somebody that since they have so much equity in their house they ought to take out a home equity loan and put the cash in the stock market is plain irresponsible. My my, how short memories are.

A Walk Down Memory Lane

2006-01-10T20:17:00.000-08:00

Let's travel in our wayback machine for a few minutes to 2002 and 2003 and see what the economic powers-that-be were saying. We're going to hold them to their words in case they decide to reinvent themselves as experts on managing our economy. Of course, there is the sticky problem that they are already considered experts, some of them have practically had their ring kissed by members of Congress and been knighted.
The Fed Chairman who can't recognize bubbles until after they burst apparently was not worried about the use of derivatives.

...judging from the data on the use of derivatives, the potential for financial innovation to have a broader impact and thereby to continue contributing to globalization appears considerable...
-Fed Chairman Alan Greenspan, March 7, 2003

But one of the most brilliant investors that ever lived sure was (and still is). He is one of the few people in the financial world I have respect for:

We view them as time bombs...financial weapons of mass destruction...The range of derivatives contracts is limited only by the imagination of man or sometimes, so it seems, madmen.
- Warren Buffett, in annual letter to shareholders, March, 2003

OK, we'll remember this Mr. Greenscam!

The United States is nowhere close to sliding into a pernicious deflation..
- Fed Chairman Alan Greenspan, December 2002

How about this quote, which just shows that we who blog about bubbles are just very negative people:

...Because we had a bubble in the stock market, people are thinking about bubbles nowadays and wondering, where could we have another bubble...Intellectually once people decide to be negative they start to look at things in the worst possible way...
- Maury Harris, UBS Warburg Chief Economist, October 2002

Beyond the current tummy ache, in the long run we have a very healthy, very vibrant future...
- Newt Gingrich, September 2002

The time has come to put this issue to rest...the nation’s home builders have said it, the Realtors have said it, and now Alan Greenspan has said it once again, in no uncertain terms: there is no such thing as a current or impending house price bubble.
- David Seiders, Chief Economist of the National Association of Home Builders, July 2002

And here was the mindset of Joe Consumer:

I want to go to the Caribbean... I don't care if it's on plastic for a year...
- US consumer overheard by a bubble watcher, May 2002