Asset Inflation Nation

[Macrobius]

Sung to the tune of a cheesy 70s song by Paul Revere and the Raiders....

http://financialsense.com/Market/daily/friday.htm (as usual, link good for a week)

-- Household debt is now 100% of GDP (if we all worked a year, we could pay it off)
-- That equals the asset inflation in housing

In other words, it's leveraged.

So to put it in playground terms -- Americans are on the high end of the teeter-totter and the other kid just jumped off.

Nice discussion in the article, but notice he ignores the big run-up post WW II as well. That episode is relevant as well. Getting into debt, nothing magic happens at '100% of one year's income'. You can go in hock forever, and household debt is just the tip of the iceberg, compared to promised entitlements and implied taxation, which amounts to 'future household debt planning'. If only it were just one year....

[Macrobius]

Nice quote from the article:



We're an asset inflation dependent nation that has been brought here on the horse called leverage. And over the recent past, leveraging household real estate assets has been the ticket to continued net worth acceleration and GDP growth dependent household consumption patterns. So far, it’s been delightful. So far, it’s been delovely. But up to now, let's face it, it has really been driven primarily by deleverage. So as we look ahead, it's the character of the macro credit cycle that is THE most important area to monitor. If households balk at further levering their own balance sheets ahead, what happens to real estate prices? What happens to consumption? Although these sound cliché at this point, with the change now occurring in the US mortgage credit markets, it's of central focus. Willingness to lever has been a key aspect of the household asset inflation phenomenon for decades now, and the ripple effects of this phenomenon in terms of shaping and driving the broad US consumption based economy have been more than quite meaningful. No arguments. But the important corollary to this willingness has been the availability of credit at ever lower prices for really over two decades now. Anything acting to upset this symbiotic willingness and availability relationship changes the game. And although it's more than obvious at the moment, a credit contraction in the land of widespread mortgage credit availability would do the trick in about five seconds in terms of being a marker of important change.

Overextension of credit in the mortgage markets has now come home to roost. Deterioration in sub prime is self-obvious. The spillover is already being seen on the edges of the Alt-A paper world. And although so many talking heads have put forth the premise recently that the "worst is already behind us" or that "sub prime credit deterioration is contained," events in the mortgage credit markets as of late are EXACTLY how broad credit contractions begin. They always begin at the margin. Initial problems are always contained, until they spill into other areas, of course. Moreover, in our current circumstances, what absolutely lies ahead are credit rating downgrades for CDO vehicles (credit default optons). With so many sub prime blow-ups and with surely more to come, the downgrades in CDO ratings may indeed come fast and furious in the months ahead. Expect this to commence after 1Q period end. Moody's already has a black eye for its recent ratings changes involving the large global banks. Many investors have already commented that their credibility has been seriously wounded as of late. To maintain some semblance of integrity, they are going to have to hustle to get ahead of the credit erosion in the CDO markets. And, as you know, many an institutional investor is precluded from holding below investment grade paper. So to suggest that the worst is already behind us in sub prime and other questionable mortgage credits is lunacy.

And during the current cycle, the thought that the Fed will ride to the rescue is a good bit misplaced (although they will surely try). Why? Because in the current cycle so much credit creation has taken place outside of the banking system. The Fed is no longer large and in charge when it comes to the total credit cycle, and especially mortgage credit in our current circumstances. Private credit markets have absolutely no incentive whatsoever to "accommodate" or "provide liquidity" to ease the pain once a credit cycle turns dark. And it is private credit markets that have largely funded mortgage credit creation for years now, not the Fed or the US banking system. For a direct example of this characterization, just think back to how quickly funding was pulled from New Century Financial. Does blink of an eye sum it up? Asset Inflation Nation, you are on notice, sir!


This is an interesting idea -- are the credit suppliers in fact independent of the Government de jure or, like the Fed, which is Government de facto?

[Walter Yannis]

The Fed needs to raise rates and it knows it, but it's scared sh*tless to touch them.

Sustained high energy prices are driving up inflation across the board now and my impression is that the Fed just can't ignore it anymore by fudging the CPI. But bumping up interest rates even a quarter point could prove to be the tipping point in the mortgage market (I get the feeling the Fed suspects this) which would mean the balloon would burst, consumer confidence would go to hell, and we could have a nasty recession.

Caught between a rock and a hard place.

My guess: the Fed will be forced to raise interest rates next meeting by a quarter point, and the blood will start to gush.:D

I freely admit that there's an element of wishful thinking in that, but still, I think it's the odds on favorite.

[Macrobius]

A factor no one seems to be mentioning -- Spring is when real people buy real houses (and when realtors who fail to sell them get laid off...). The cat is out of the bag after May or June, so time is running out for Mr B and the Fedlings, as you say.