Musings Report #41 10-13-12 Has the Status Quo Succeeded in "Saving" Itself?
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Has the Status Quo Succeeded in "Saving" Itself?
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After four years of unprecedented Federal borrowing, deficit spending, Federal Reserve "easing," subsidies of housing and backstopping of the financial /mortgage sectors, many are asking if the Status Quo has succeeed in "saving" itself from any real change.
Kathy K. forwarded me a thread from the discussion board of Dr. Housing Bubble's site, and this comment expresses what many of us feel:
"It is beginning to seem like the government will successfully keep housing prices artificially inflated throughout the relevant portions of our lifetimes – it’s been 10 years already and here in the Bay Area, prices did not fall all that much and are now going back up. You get tired of getting kicked out of rentals so the landlord can move back in. You want your kids to be able to go to the same schools and keep their friends rather than get moved around. So you think about just giving up and buying anyway – trying to fight a government action plan that is devaluing the currency and converting the banks’ bad debt to taxpayer debt in order to avoid allowing housing prices to revert to market levels seems like a losing plan after waiting 10 years for sanity to return with nothing to show for it."
You probably know that banks have squeezed the inventory of houses available for sale by radically reducing the number of homes in the foreclosure pipeline. Combine that artificial restriction of supply with demand fueled by Federally guaranteed 3% down-payment mortgages and 3.6% 30-year mortgage rates, and you get demand that exceeds supply, driving prices up as much as 18% in markets such as Phoenix, AZ.
A similar dynamic is visible in the stock market, as longtime critics of the Status Quo's "new normal" such as David Rosenberg (Navigating the New Normal, a 57-page report) are openly mocked in the comments as being wrong since 2008.
The entire Status Quo plan can be summarized thusly: if we extend-and-pretend, keeping assets from being marked-to-market and keeping the credit spigots wide open, the system will magically re-stabilize.
That's the whole plan. So the question boils down to: has the system restabilized/fixed itself, or is instability building behind a facade of credit and propaganda-based "recovery"?
As I have often noted, much of the Status Quo "fix" relies on perception management: if people believe everything is fixed, then they will feel confident enough to buy a house, borrow and spend money, etc.
I suspect the key metric in all the statistical mumbo-jumbo and perception management is household income. The top 10% earn 50% of the income, so they are the consumers of last resort. Every income bracket has experienced declines in real terms since 2000, a drop of 8% since 2007 according to the Census Bureau. Since inflation is probably under-reported, let's round that up to 10%--not insignificant.
The Status Quo may have "saved" the stock market and manipulated the housing market into a facade of "healthy price appreciation," but extend-and-pretend via subsidies and lowering the cost of money isn't increasing household income.
In my view, that places a firm limit on future borrowing and spending in an economy that is 70% consumption. Let's see what happens in 2013 before declaring the Status Quo "saved."
Market Musings
This week I present an example of the sort of charts I scan for extremes. This is the CPC, the Put/Call ratio of options. This is of interest because options are often used to hedge portfolios against the unexpected. As a result, put option volume surges when traders/managers get fearful that a major decline could sink their portfolio. It's not perfect, but it does tend to catch short-term extremes. When this spikes above 1.00, it tends to mark market bottoms. Spikes down tend to mark market tops.
Of interest is the change in trend in mid-September. It appears that was the top in complacency, as the put/call ratio fell below its late-April low that marked the previous market top. Now the ratio is working higher as more puts are bought as "protection" and as speculative bets on a market downturn.
The current market weakness is not unexpected, but a number of indicators are suggesting the market is stretched and due for at least a "dead cat" bounce. Regardless of who wins the election, the market may respond with euphoria as political "uncertainty" will diminish. How long the euphoria will last is unknown; some feel until the end of November, others feel the usual year-end rally will carry markets higher into early January 2013. As always, nobody "knows" the future, everyone is guessing.
From Left Field
China admits that shadow banking is out of control and destabilizing: Regulating shadow banking: wealth management products, or WMPs (via Maoxian)
Thanks for reading--
charles
