GOT ME THINKING

I was watching the early stock market commentary this morning and things weren't looking so good (it wound up OK up about 30 points).  Anyway, one of the talking heads mentioned that the two bright spots recently had been real estate and health care.  Now that got me thinking.  "Hang on," I said, "the latest in the news has been all about how much trouble Obamacare is facing and in particular, the insurance 'co-ops,' half of which seem to be in the tank.  The other thing dominating the news is the Fed about to be raising rates.  So Self, how come these are the two bright spots?"  Self thought about it for a while and didn't have an answer.

Self still doesn't.  I'm going to leave health/Obama Care to the political pundits but unless things have changed a hell of a lot since I have been getting older and I missed the change, real estate is dependent on one thing--leverage--and that's true for either the personal sector or the commercial sector.  So if the cost of leverage is going up, how come the sector is looking so good?  Almost right on cue, He Who Knows All Things sent me a couple of posts that came out today on the twin subjects of financing and real estate that are at the same time interesting but scary.

You have watched me babble on about the amount of liquidity floating around out there as a result of the Fed's unprecedented actions and the search for yield in investments that has come from the Fed's largess.  What I didn't realize at this point was that the building boom in commercial real estate has been unprecedented and as from time immemorial it has been financed almost entirely by debt at unprecedented levels and at unprecedented prices.  Did you know that construction and long term financing has been completed at fixed rates as low as 4.00%?  Neither did I and this is not for my house in the fly-over zone (Jumbos are around 4.00% out here).  Nah, this is for BIG stuff on both coasts and in places like Chicago.  So far so good, but if the outlook for the global economy is as weak as folks like the OECD claim, it doesn't take long for office buildings built with expected tenants in mind or condos in Miami and New York sold to Chinese buyers who don't live there except for a couple of weeks a year  to become permanently empty if things don't pick up because, what the heck, I'd walk away from the joint if my financing is 95% of the purchase price.  Come chase me in Beijing.  The industry term is "see-throughs."  The cause is called a "bubble."  Gee, where have we seen this before?

Now that in itself might be troublesome but the guy who just cottoned on to this  is none other than Eric Rosengren the president of the Boston Fed, who announced in a speech that he was struck by the number of construction cranes while walking along the streets of Boston one day, and said something to the effect. "Gee, that's a lot of cranes.  Could this be the start of a bubble?"  That's scary.  What is even more scary is that he would admit in a speech that he really had no idea what was going on in his own back yard.  Funny, neither did Alan; neither did Ben  These bubble thingies seem to sneak up on these guys.  Problem is it's never a bubble until it bursts.  History doesn't always repeat but when you don't learn from it...I have to think about this a bit more.

PROCEDURES

I'm having procedures.  That's what the medical profession calls them these days.  Tests.  Puncturing, picturing and positioning.  There is one great thing about living in the fly-over zone within a moderately populated area with a legal and ingrained distaste for malpractice suits and jackpot justice.  The health care is wonderful; oh, not Cleveland Clinic or Mayo wonderful but really good doctors, sans egos (they'll send you somewhere if they don't feel comfortable), on time service and friendly folks.  I have a spine that looks like a train wreck so in I went today for some drug therapy to see how that would work out.  I had a neuro-surgeon look at it but he recoiled in horror and said go get stuck.  Now it's an every-day thing these days but the thought of some guy you have had drinks with sticking a needle into your spine can be a bit off-putting but in I went at 2:15 and out I came at 3:22 including a 20 minute "let's make sure he's OK" rest after the procedure.  Remarkable, and if it works really remarkable.  I had another "procedure" last Friday which is why there was not a post.  Two weeks before the next one.  Nice to be active when you get old.

I was reading a few papers from Over There over the weekend and while the Ukraine was by far the biggest story, there was a really interesting report from Germany by some minister--frankly, I forget who, speaking of the future of the EU in terms of the dormant economy of Japan which has lasted for years.  Unless, he argued, the EU was prepared to engage in a massive government-sponsored bond buying campaign in order to flood the continent with liquidity, it would be next stop Japan.  OK, that's been said before and practically every day by some the likes of Little Paulie Krugman, but by a German minister?  Statements such as that coming from the source are never heard..  But reading it I thought to myself that with a balance sheet of over $4 Trillion at the Fed, Japan printing money like it's going out of style and now this broadside, if adopted, just how much debt is going to be out there investing in what?  Answer: a hell of a lot.

OK, so what.  Well, Alan Greenspan--you remember him--gave a most interesting interview the other day that for some reason got very little play at all which is all the more remarkable because among a number of interesting things on which he commented was bubbles.  According to Mr. Greenspan, bubbles are inevitable and there is very little central banks can do to avoid them.  Well, thought I, that's a hell of a deal and I wonder if today's Fed agrees with that because if they do, here we go again with no real effort to be expected in the tapering that has begun because there are God knows how many other ways there are to pump liquidity and if What Is To Be Is To Be, who the hell cares anyway.  And I mean, what's wrong with a company that makes a car that sells for around 90 Large and can pretty much get around the block before you have to plug it in again, with a stock price that is, well, let's just say priced for perfection if not deification.  And I'm thinking that this 10 year is hanging around 2.70% with all this gearing going on and shouldn't the bond boys one day look up and say, "Hold on, is all this priced right," and then what happens?  And I know I've said it before and I was wrong but there's a lot of municipal debt out there, some of it in the tank, and in every case the bond holders took it in the neck as opposed to the employees and how long are the former going to keep hitting themselves on the head because it feels good to stop?  And of course the big question is if this thing does behave in the manner in which Mr. Greenspan thinks it's going to behave, who are they going to blame this time?  Hey, not me.  I was having procedures when all this went down.

RIGHT AGAIN, CARTER!

You hit it right on the head: what I want the Fed to do is keep inflation control...which is another way of saying I don't think the Fed has any damn business trying to maintain full employment in this country or anywhere else.  For two reasons.  First what the hell is full employment?  Thank you, I don't know either.  Second the job of creating an atmosphere in which job creation, production and the creation of wealth can thrive is that of the executive and legislative branches.  Third the stupid "dual mandate" allow the above mentioned to hide behind the Fed when they refuse to do their jobs...which is precisely the scenario in which we find ourselves today. Waiting for the Fed to clean up the mess left by the past administration and the abject incompetence of The Leader and his band of culture warriors is dangerous, unrewarding and simply plain stupid.  GET RID OF THE DUAL MANDATE, RESTORE AN INDEPENDENT CENTRAL BANK AND DEMAND THE ELECTED MORONS DO THEIR JOB!  Whew!


Oh good buddy, five years ago out here in the fly-over zone the price of rib-eye steak was $5.99 a pound.  Today it's $12.99.  Now I know the geniuses who live by the great oceans don't conside the price of food to be a proper measure of inflation but if the Fed wasn't so damn busy trying to set right what the pols cocked up perhaps we could get a re-think of what really counts to Mr. & Mrs. Jones who live in the middle?  At least we could try.

Anyway, Mr. & Mrs. North and all the ships at sea, if we go back about 20-odd years we will encounter the great genius of that time, Alan Greenspan, who reversed the tight money policy of Mr. Volker and the fun really began.  The Clinton years were terrific; hell, I never made so much money in my life.  We are constantly reminded even today as to how good things were.  The Leader tells us if we just raise taxes on the "rich" we'll have it all again.  Of course while raising income taxes, the good ol' boy from Hope slashed capital gain taxes from which all the growth in revenue came...that's right ALL.  Anybody remember the Dot Com. era?  Put DotCom. after a company name and the funds available were almost unlimited.  And from where did these funds come.  Not from under the mattress gang, it was all borrowed money, but hey, while the music was playing you had to dance.

Now, can we spell B U B B L E?  'Cause that's what it was and in 1989 it all started to come apart.  Then came 9/11 and things really got bad.  The Fed to the rescue.  Not content with the results of their first effort the Fed doubled down and promoted even easier money and off we went again.  Just like water finding it's own level, capital searches for investment--the higher yielding the better--and when there is a lot of capital looking for a home the guy who can create investment opportunities can make a hell of a lot of money.  Enter real estate and collateralized mortgage obligations.  Have we learned how to spell B U B B L E?  The rest is history.

But while all of this was going on in palin sight what was not so easily seen was the effect the Fed policy was having among friends an foes alike.  The effect excess liquidity has on the value of a currency is clearly linked.  In both eras the effect was a steady devaluation of the dollar against all currencies and if you rely heavily on exports as practically every nation in the world does (EXCEPT the United States) this is not a good thing.  Your exports become more expensive and you must embark on a program to keep your currency in line and of course the way to do that is buy dollars and create your own liquidity through monetary creation.  That of course reduces interest rates all over the place and mkes it difficult for investors to obtain decent returns on funds to be invested.  So, if you are Brazil for example, you catch a double whammy: you must devalue quickly an appreciating REAL and at the same time you must fight domestic inflation that is a result of of your currency manipulations.  American Central Bankers and Treasury Secretaries are not on the top of a Brazilian hit parade...or any one elses for that matter.  But, hey, the dollar is your problem not ours.

Non-American investment managers are no different from their American counter parts; their job is obtain the highest returns for their clients and they are judged--and paid--on how well they perform.  They are yield whores just like us.  But life gets really hard when interest rates and returns continue to decline and having a pretty firm idea as to who is numero uno, these guys, and gals, increasingly seek out higher yield and by definition, higher risk.  It matters little that the investment may consist of a bond backed by 200,000 homes in palces of which they have never heard; Moody's (who have been paid to do so) rates it AAA.  And guess what?  It pays T+350!  BUY IT!  Best of all, your central bank has all these dollars that they don't want so borrow them or buy the damned things.  The thought that there might be a reason that the yield is so much different never enters their minds.  By this time I think we all know how to spell B U B B L E.

One can take issue with all parts of this post but may I suggest that if the Fed did not see themselves as the guardian of truth, justice and the American way some of this stuff might never have happened.  I guess I'm kinda wierd in thinking that I really don't care what Barclays or 16 other banks did with Libor. I DO care when people like the NYT try to explain Libor as being a creation of the banks in the 1980ies:  I'm getting old but I remember making Libor-based loans back in the early 70ies.  I do care when fools or liars (or both) try to influence public opinion with neither knowledge nor facts.  Just me I guess.

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Many thanks for the kind words from Ewen Watt at Wordpress.  Inside the Beltway but a smart young guy from his writings.  Look him up