Jul272015
REO-to-rental companies helped many former owners stay in their homes
REO-to-rental companies enabled many foreclosed former owners to remain in their homes with lower monthly payments, a genuinely positive outcome.
When I went out to Las Vegas to buy houses, the banks were feverishly foreclosing and selling properties for whatever they could get. The discounts from peak values approached 80% on some properties, and every house in town was cashflow positive. This was not a good time and place to be a homeowner, but it was a fantastic time to be an investor.
When REO-to-rental companies hit the scene, they were vilified by the political left despite the good they were doing for individual families. Since these families were having their names removed from the title, and most of them were forcibly removed from the house, everyone focused on the worst outcomes and ignored the circumstances where families benefited from the arrangement.
Two of the houses I purchased are still occupied by the former owners. In both cases the former owner’s payments cut in half, and now someone else takes care of major repairs around the house. And since prices are still 40% off the peak in Las Vegas, they are certainly better off now that if they were still making huge payments on a deeply underwater property.
Most REO-to-rental companies ask the former owner to stay on when they buy a house. The landlord gets immediate rental income, and often the landlord doesn’t have to spend any money to bring the property up to a rentable condition. Plus, former owners take better care of the house because despite being removed from title, they still feel a sense of pride in their home.
Every former owner who got to stay in their house and enjoy a significantly lower payment came out way ahead. This positive outcome is often ignored by those who want to demonize REO-to-rental landlords.
Cartel Crusher (from 2010)
The banking cartel has tied up most of the inventory in California. A third to half of homeowners are now underwater and unable to sell without lender approval. Lenders withheld inventory and keep much of the air in the real estate bubble.
I think this is shameful. I want to see the lending cartel crushed. Californian’s have too much of their incomes going to debt service so Goldman Sachs’ investors can make a few more pennies.
I have a better idea.
Short Sellers are reviled
Many people have a negative view of short sellers. They feel that short-selling is profiting at the expense of others. The people who really hate short sellers are owners of overpriced assets.
Short sellers borrow assets and sell them only to buy them back later at a lower price and profit from the difference. Short selling has a very valuable place in financial markets. Without the activity of short-sellers, assets become hopelessly inflated in price, and money that should be freed up for more productive uses is tied up in unproductive assets. For money to be released, the assets must be sold. Short sellers actively sell when no other sellers are motivated, and in selling, they re-balance market prices.
Real estate markets are very inefficient, and part of the reason is a lack of short sellers. Nobody, including the banking cartel, is anxious to sell real estate right now. That simply maintains an overly inflated valuation in the market. The activity of owners buying and renting has not been significant, and that only puts people in a “flat” financial position. What the market needs is short sellers — true short sellers. Until now, nobody has known how to be short real estate. Today, I am going to explain how it can be done.
Hedge Fund Basics
Hedge funds are investment pools formed as a company and managed with a specific investment plan. Hedge funds are generally private capital limited to sophisticated investors. Joe Six Pack is not permitted to invest in hedge funds. There are as many hedge funds as their are investment strategies capable of raising money. Some are very successful, most are not.
Since hedge funds are private investment pools made up of sophisticated investors, they are free to invest in whatever they want within the constraints of law. Many hedge funds invest in real estate, and many are forming now to clean up the debris from the Great Housing Bubble.
Real Estate Hedge Fund Investments
Today we are going to discuss the investment strategy of a mythical company, Cartel Crusher, LLC. Limited Liability Companies are a favored form of many hedge funds 
because they provide limited risk and all gains or losses are passed through to the individual investors.
Cartel Crusher LLC is real estate investment fund that buys rental properties at auction and keeps them in portfolio to obtain the cashflow from rentals.
In areas where the subprime foreclosures are common, pricing is 50% or more below the peak, and cap rates range from 6% to 8%. For an investment company like Cartel Crusher LLC, this return is sufficient to bring in outside capital to buy foreclosures.
From Cartel Crusher LLC’s perspective, it doesn’t matter who the renter is as long as they pay the rent reliably and don’t trash the place. The landlord’s dream is to find a renter that cares for the place as if it were their own and doesn’t want to move out. That is difficult to find, but in the aftermath of the housing crash, a special opportunity exists to find that special renter — the former owner.
Making owners a better deal
Cartel Crusher LLC would very much like to keep the former owner in the property. Note some of the key numbers from page 2 above that are improved by this arrangement:
- Real Estate Improvements.
- Tenant move-out allowance.
- Gross Rent
- Vacancy and Collection loss
All four of those numbers improve by keeping the owner in place. There are no real estate improvements, and no tenant move out allowance when the owner stays in place. Vacancy and collection loss is also eliminated because the owner will stay for the duration (more on that later). Gross rents are also higher and more predictable. These benefits to Cartel Crusher LLC are great if the owner can be persuaded to stay in the property.
Why would an owner do this? Why not get a loan modification?
In the short term, if the owner were to obtain a loan modification, they may be able to lower the payment enough to be competitive with a rental for a while; however, loan modifications are a temporary fix, and the debt on the property is still double what it should be. The only way an owner is going to see a principal reduction is through a foreclosure. There is less opportunity for most owners in a loan modification to have equity because their loan balance is simply too high.
The deal being offered to an owner by Cartel Crusher LLC will give them peace-of-mind on their cost of housing, and if they buy the property back later, the debt will be reduced significantly. Basically, Cartel Crusher LLC is offering owners a much better deal.
Owner stays on as a renter
After the foreclosure, no lender will give the newly foreclosed a loan. There is a mandatory waiting period — recently reduced to two years — when former owners must be renters. When most face foreclosure and walk through this valley of death, they have no idea when, where, or if they will be owners again. Very scary.
Cartel Crusher LLC makes these worries go away. Cartel Crusher LLC will go to auction to acquire the property and rent it back to them, and it will give them an option to buy the property back at a later date at a pre-negotiated price.
For this feeling of ownership continuity, the renting former owner will pay a 5% premium on area rents, plus they will agree to an automatic 2% yearly rental increase. Since this rental payment will be much less than the mortgage payment, the lower cost of housing will be a major financial benefit. If they can’t afford the rent, then they are hopeless and need to move on.
Owner gets right to repurchase
Cartel Crusher LLC will establish a baseline value from comparable resales on the date of the sale. The price increases 4% per year. After 10 years, if an owner still has not purchased, the deal expires.
There is one very important condition, the price actually paid for the property is the greater of the number in the chart below and appraised value at the time of sale. If California inflates another housing bubble, this right-to-repurchase can’t be exercised like an option to a third party to profit from the difference. If the borrower is unable to get their act together to qualify for a loan and resale values are higher than the numbers above, the benefit of the irrational market exuberance comes back to Cartel Crusher LLC. If values never come back, the owner is certainly no worse off by renting.
Consider the resale value chart above compared to the deal the owner gets from the government or their lender if they get a loan modification. In the Corona property, the debt today is $704,000. If it were an owner-occupied property, the owner would not be above water until 2023. Cartel Crusher LLC would sell it to him for less than his current debt for the next 13 years. And in doing so, Cartel Crusher LLC would make a great return on its investment through rent and appreciation while keeping an owner in their home.
The government can’t do that.
The lenders won’t do that.
Cartel Crusher LLC will do that.
Busting the cartel through strategic default
The private sector hedge funds have the answer. Any fund operating like Cartel Crusher LLC will be able to keep owners in their properties until they can own again. Since this offer is so enticing to underwater homeowners whose payments exceed rent, waves of strategic default will inundate the land. Owners who strategically default and rent from Cartel Crusher LLC will be short real estate. They will be ditching their mortgage and their higher tax basis and buying the same house back later for a lower price. By selling short, stategic defaulters will rebalance pricing at cashflow levels.
The only thing the owner has to do is stop paying their mortgage. The lender cannot evict an owner from a property for being in default. The only option available to a lender to compel payment is foreclosure, and as we have all seen, they are choosing not to foreclose and allowing squatters to live all over the nation. That’s fine. The owner is still living in the property, and they are never going to give the bank another dime. From the owner’s perspective, this state of affairs can go on forever.
When the lender finally gets around to foreclosing, Cartel Crusher LLC will be at the auction to buy the property. And since Cartel Crusher LLC has established a higher rental rate and knows there will be no improvement costs, holding costs, cash-for-keys and the like, Cartel Crusher LLC will be able to bid higher than others who will be facing those costs.
There are no guarantees at auction, and Cartel Crusher LLC may not be the high bidder, and the property owner may still have to move out, but with the lower cost structure, Cartel Crusher LLC will bid higher than the rational professionals, and most often that will be a successful acquisition.
The banks could defeat this fund by failing to drop bids. If the bank bought every property at auction, the bank could go out of its way to boot the strategic defaulters out. If lenders go that route, there will be millions and millions of REO properties.
Everyone benefits except the banks
The only party who suffers in this process is the lender, and perhaps the US taxpayer who is paying their losses. The aggrieved party in this instance is the one most deserving of pain, the irresponsible lenders who ruined the housing market and the economy. Screw them. Crush them.
What is best in life?
To crush the banks, see them driven into oblivion, and to hear the lamentation of their bondholders.
https://www.youtube.com/watch?v=6PQ6335puOc
Will owners really strategically default in large numbers?
The picture above is taken near Canyon View Elementary School in Irvine. There are two closely-spaced signs that say “no parking any time.” They are conspicuous and obvious. Whenever I drive by this location, cars are parked in the street, sometimes two or three of them because this parking spot is adjacent to a daycare center. The illegal parking place is 40 feet from the door. The proper alternative is to drive up the street, turn right, and enter a parking lot about 200 feet away.
Here is what happens: A few parents reason that they are not going to be very long, and it is inconvenient to park in the proper location, so they brazenly park between the two signs. Other parents driving by to get their own children see the lawbreakers obtaining the advantage of their disobedience, so they too decide to park on the street in the no parking area.
After enough parents do this, there is a critical mass where everyone ignores the law and does what is convenient for them, park on the street. At that point, nobody really cares about the law. In fact, those that do the right thing (like stupid me) are playing the fool. Those who follow the law are missing out on the benefit obtained by all those breaking the law.
This is the phenomenon lenders fear most. Once people start to strategically default, and others in the same circumstances see how much the defaulters benefit for their actions, many others will join them. After a time, the stigma disappears, and the final holdouts realize they are foolish not to join the default party and obtain the benefits for themselves.
Once strategic default clears out the debt in one community, the substitution effect will lower prices in nearby communities putting more homeowners in position to benefit from strategic default. Like small outbreaks of lender virus, the spread of strategic default will cleanse the land of its excess debt and put prices at cashflow levels everywhere. Houses will be affordable, borrowers will have manageable debt-service payments, and the California economy will benefit from a citizenry with more disposable income — the real kind, not borrowed money.
Driving the message home
Cartel Crusher LLC will extol the benefits to every underwater homeowner facing foreclosure with high payments. It’s a simple message:
Are you facing foreclosure? Do you owe more on your home that it is currently worth? Can you rent a similar home for much less? Do you want to stay in your home, reduce your monthly payments, and cut your debt in half? Cartel Crusher LLC is here to help.
Cartel Crusher LLC will send that message to every house in neighborhoods like the one in Corona where a Notice of Default has been filed. It will get a response. After a few of these deals go through, the floodgates will open up and the inflated property debt will be washed away through strategic default. I will feel good about it.
The Lending Cartel is on notice
This is coming, and there isn’t much the lending cartel can do about it. Cartel Crusher LLC has arrived, and it’s hungry.
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Get Ready people … fireworks are about to start up again … the Chinese stock market collapsed overnight, despite their govt’s attempt to prop it up. Further proof that subsides, central bank intervention and phony interest rates (commie/socialist policies) create bubbles that inevitably POP.
Free Markets are our only answer to sustainable growth!
“Free markets” – whatever that means…
America was at one time, the most free legit market on the planet. We also built the greatest economy known to man. The 1% decided that wasn’t good enough for them … they wanted MORE. So we abolished Glass Steagall and allowed bankers and insurance co’s to run wild. Now what we have is a ponzi economy that is 100% completely dependent on cheap interest rates and perpetual crony capitalism.
Galss Steagall is a regulation. By eliminating it, the market was more free.
Indeed, a “truly free market” – whatever that means – is an unstable equilibrium. Before long it will devolve into an oligarchy. Few people really believe in that mythical unicorn of free markets, they just disagree on what level and kinds of regulation they want or approve of.
Agreed. That’s why when anyone suggests, especially from the Right, that “free markets” are the answer to all of our problems, I question it.
AnalogGuy nailed it. Any game needs rules, and a totally free market has no rules that can be enforced, which is why the drug trade is a truly free market. However, a game with no rules quickly devolves into anarchy followed by the emergence of “strong men” who ascend into oligarchy, or is one oligarch gets really powerful, a monarchy. Once a system become an oigarchy, the people in power make rules, usually to strengthen their own position. At each step, markets get less free.
In our modern Democracy, the current paradigm in managing markets is to provide a “level playing field,” which ostensibly means removing the advantages of the oligarchs and allow unfettered competition within a framework of rules. Without these rules and regulations, the oligarchs would quickly regain power. IMO, most of the calls for deregulation are really the whining of those who don’t want to play by the rules. If people weren’t breaking the rules and abusing people, we wouldn’t need the regulations they chafe against.
Yes. If one reads even the first “Free market” writings of people like Adam Smith, there are pre-requisites for workable economic freedom: ethical behavior, law and order. These were outlined from day one.
People who say that any laws being present negate the thesis of free market economics are engaging in the epitome of straw man argument; not to be taken seriously.
Glass-Steagall was part of the law and order pre-requisite. It was removed, so the free market did not function properly. Insult to injury was unleashed with the subsequent bailouts.
For all you politicos, both parties were willing participants.
It’s not a straw man argument to suggest that a “free” market isn’t the answer to every problem, and that “rree” is a very subjective term in this context, as your qualification of Glass Steagall illustrates.
Hold on a moment … “Free Market” my ass. By removing Glass Steagall it allowed Goldman Sachs to play in Ponzi finance, go bankrupt, then get bailed out!
So let’s see here, Goldman Sachs was insolvent, and now 6 years later, their CEO is a billionaire. <— THAT AIN'T NO FREE MARKET
Glass Steagall was the rules, and we did just fine while it was in force.
So, when you like the rules, those contribute to the free market. When you don’t like the rules, those violate free market principals.
The Chinese market is up 150% since last year
Context please
I think this is what concerns him:
Chinese Stocks Suffer Second Biggest Crash In History, 1,500 Companies Halted Limit Down
This was not supposed to happen.
After pledging, investing and otherwise guaranteeing the Chinese stock market to the tune of 10% of GDP, and intervening on at least 40 different occasions in the past month ever since China’s stock bubble burst in late June, with the subsequent crash nearly taking the Shanghai Composite red for the year, overnight China officially lost control for the second time, when after a weak start to the Monday trading session, things turned very ugly in the last hour, when the Shanghai Composite plunged by 8.48%, closing nearly at the lows, and tumbling some 345 points for its biggest one-day drop since February 2007 and its second biggest crash in history!
http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/07-overflow/20150726_china6.jpg
The selling was steady throughout the day, but spiked in the last hour on concerns China would rein in its market-supporting programs following IMF demands to normalize its relentless market intervention. According to Bloomberg’s Richard Breslow: “fear that the extraordinary support measures employed to hold up the market may be scaled back caused heavy afternoon selling resulting in a down 8.5% day.” Of course, one can come up with any number of theories to explain the plunge: for example the PBOC did not buy enough to offset the relentless selling.
http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/07-overflow/20150726_china5.jpg
The last thing the communist party and the PBOC wanted was another massive sell off after having not only fired the “bazooka” but come up with a different bazooka to halt “malicious sellers” virtually every day, including threats of arrest.
Nobody was spared in the selloff and of the 1,114 stocks in the Shanghai Composite, 13 closed higher on Monday.
Here, courtesy of the WSJ, are some of the more amazing numbers of today’s selloff:
* The Shanghai Composite Index ended down 8.5% at 3725.56, its second-straight day of losses and worst daily percentage fall since February 27, 2007. The smaller Shenzhen Composite fell 7% to 2160.09 and the ChiNext, composed of small-cap stocks and sometimes known as China’s Nasdaq, closed 7.4% lower at 2683.45.
* More than two-thirds of the stocks in the Shanghai Composite, or about 765 companies, hit their down limit on Monday. Those limits prevented hundreds of stocks from logging sharper declines, though they can also make it harder for investors to exit positions.
* Since the Shanghai Composite peaked in June, it has lost 28% of its value. Massive intervention by authorities in Beijing engineered a rebound for the country’s stock markets earlier this month, but Monday’s selloff eroded much of that recovery.
* Although hundreds of stocks have resumed trading since the market bottomed earlier this month, 126 stocks on the Shanghai Composite are still halted.
* International investors have been ditching Chinese stocks for the past few weeks, spooked by widespread share suspensions that locked up capital. Investors sold stocks during 13 of the past 16 trading sessions via the Shanghai-Hong Kong Stock Connect, a trading link connecting the two cities that launched in November. Cumulative outflows now total 39.9 billion yuan, or U.S. $6.43 billion.
According to Reuters, there was little to explain the scale of the sell-off. Some analysts said fears that China may hold off from further loosening of monetary policy had contributed to souring investor sentiment.
What has soured investor sentiment is the fact the government has locked up large sections of the stock market and might increase it in the future. What is the value of something you cannot sell?
I think the most recent selloff occurred because investors were dubious of the Chinese government’s real desire or ability to support stock market prices. Better to sell to a fool willing to overpay (the government) rather than waiting until the government fails then selling for much, much less.
Nonsense!
The Chinese market is only up 71% since last year.
Jul 28 ’14 2177
Jul 27 ’15 3725
Reality please
Absolutely excellent analogy from the good people at ZeroHedge:
Let’s start by recalling that prices are set on the margin, i.e. the last view shares, bonds or homes bought/sold. In a neighborhood of 100 houses, the price of each home is based on the last few sales which become the comparables appraisers use to establish the fair market value of all the nearby properties.
As the risk-on investment mindset switches to risk-off, house prices start declining. If the last home sold for $400,000, the next seller will expect at least $400,000. But since the mood has changed and risk has re-emerged, buyers are suddenly scarce. Homes listed for $400,000 don’t sell. Eventually a house sells for $350,000 because the seller just needed to get out.
Suddenly, the value of the other 99 homes is in question. Home prices are sticky, meaning sellers refuse to believe the value of their home has declined. So listings of homes asking $399,000 pile up while potential buyers are wondering if $350,000 is a bit rich and perhaps $340,000 is the “real value.”
Then two houses sell for $325,000. Maybe it was a divorce, or a transfer to another state. For whatever reason, the sellers needed out.
As few as 5 home sales revalues the entire neighborhood. Price is set on the margin.
As prices plummet, authorities decide to prop up valuations by directly buying homes. The next five homes are bought by authorities at full asking price.
The authorities expect new private buyers to come in and buy the next batch of homes, but the bubble-mindset of prices are only going up has switched to the fear-mindset of let’s wait, prices are falling–and one of us might lose our jobs.
Now the authorities are trapped by their policy of central planning distortion of price discovery: since sellers sense prices are being manipulated (or the news that authorities are buying houses to prop up the market leaked out), they don’t trust the price accurately reflects market valuations.
Pretty soon, authorities own 20 houses. Private buyers have vanished, and sellers are realizing it might be their last best chance to sell for $325,000, because if authorities stop buying homes, the price could revert to pre-bubble valuations–at $250,000 or even less.
At $325,000, the homes are poor investments for investors. With property taxes and junk fees soaring while rents are stagnating as layoffs increase, there is no way to make money buying a house for $325,000 once appreciation is no longer a sure thing.
The moment authorities stop buying, the price of the next house sold will be substantially lower as prices re-set to historical norms. This repricing to $250,000 saddles the authorities with immense losses, as they now own 25% of all the homes bought at $325,000 each.
By propping up the price, the authorities have injected false information into the market, and as a result, nobody can trust that current prices are real. If the price of the home might drop $50,000 next year when authorities finally stop buying, why buy now?
With prices distorted and trust lost, where can private investors put their money? Certainly not into houses that might drop in value once authorities cease being buyers of last resort.
In effect, central planning asset purchases aimed at propping up prices destroy the essential price discovery needed by private investors. With authorities buying assets, investors have no place to put their money that isn’t exposed to sudden policy changes by authorities.
With investment information and feedback now distorted, private investment dries up, leaving productivity and growth stagnant.
In system language, the markets are now tightly bound to central planning policies: any change in policy has an immediate and potentially disastrous effect on the values of assets.
This is why buying assets to prop up prices is a one-way street: once you distort markets to prop up prices, you destroy information, independent price discovery and trust– all the essentials of a market.
What authorities have created is a facsimile of a market. It looks like a market on the surface, but only gamblers and fools risk capital in markets based on false information.
http://www.zerohedge.com/news/2015-07-27/when-authorities-own-market-system-breaks-down-heres-why
Markers have been manipulated via fiat currency policies since the dawn of time
Glad “ZeroHedge” was in the first line so I didn’t waste any time reading it.
ZeroHedge has the “boy who cried wolf” problem. Since they decided to be all things bearish, everything they write get’s painted by the same brush. Occasionally, when they are right, the message is ignored because they sacrificed their credibility to sustain their readership.
I don’t see how ZeroHedge is much different than CNBC, it’s just that one viewpoint is acceptable to gov/media/public (hyper-bullish) and one is not (hyper-bearish).
While is there some wacko stuff on there, I think the financial world is better off with it than without. I’ll bet most, if not all of the posters on here that mock ZH read it on a daily basis.
Well said. I read ZeroHedge. But then again, I used to read Housing Panic back in the day too. ZeroHedge has an edgy humor I enjoy. It’s far more interesting than merely reading the news.
The debt trap
The developed world has not found an answer to its debt problem
Jul 11th 2015 | From the print edition
http://www.economist.com/node/21657414/print 2/3
ALMOST eight years have elapsed since the financial crisis took hold in August 2007 and still
the same issues are being fought over. Who should suffer the most pain—creditors or debtors? Is the best way to achieve growth shortterm fiscal stimulus or longterm structural reform? And, in Europe in particular, how does one reconcile local democracy with international obligations?
Debt is a claim on future wealth: lenders expect to be paid back. The stock of debt accordingly tends to expand at moments of economic optimism. Borrowers hope that their incomes are set to rise, or that the assets they are buying with borrowed money will increase in price; lenders share that enthusiasm.
But if wealth does not rise sufficiently to justify the optimism, lenders will be disappointed. Debtors will default. This causes creditors to cut back on further lending, creating a liquidity problem even for solvent borrowers. Governments then step in, as they did in 2008 and 2009.
The best way of coping with too much debt is to spur growth. But developed countries, even America, have struggled to reproduce their precrisis growth rates. So the choice has come down to three options: inflate, default or stagnate.
The inflation option means that nominal GDP rises rapidly, reducing the ratio of debt to GDP. The main constraint on this strategy is the speed with which creditors react by forcing up interest rates on newlyissued debt. The longer the maturity of their existing debt, the easier it is for governments to use this option.
In practice, there has been very little inflation in the developed world. (Countries in the euro zone do not control their own currencies so have no power to inflate the debt away in any case.) The debt burden has been controlled by “financial repression”: holding real rates at very low, or negative, levels. By making it easier for borrowers to service their debts, this has staved off a repayment crisis in many countries, but it has not made much of a dent in the overall debt burden.
The Greeks did manage to default on privatesector debt in 2012, but this wasn’t enough help given the collapse in their GDP in recent years. And the problem with default, when debt is so widespread, is that it simply shifts the liability somewhere else. If a country’s banks hold a large amount of government debt, and the government defaults, then the banks will need to be
rescued by the government, making the problem circular. Countries have been defaulting to foreign creditors for centuries, of course, and they tend to be forgiven by investors after a few years. But economic conditions get pretty scary in the interim, as the Greeks may find out.
So if inflation has been hard to achieve and default looks like a risky option, then stagnation (or nearstagnation) ends up being the outcome. That has been the case in Japan, where sluggish economic growth has been the norm since its asset bubble burst in the early 1990s. But
stagnation only postpones the problem. Japan has faced less pressure than most, since it owes
money mainly to its own citizens—it does not have to worry about foreign creditors. Yet even Japan has tired of the situation: Abenomics was designed to get the country out of the trap by generating more growth and inflation.
The EU has been heading down the Japanese route. Both places face demographic problems that will sap their growth indefinitely. That increases the need for offsetting improvements in productivity, but reforms to that end face fierce political resistance. Like Japan, the euro zone has an internal, not an external, debt problem. However, the current crisis has shown that there is not enough political solidarity to support outright burdensharing.
IntraEuropean transfers are seen as a zerosum game, in which any aid to Greece is a loss to other nations in the bloc.
This has been a flaw in the euro project from the start. The only answer is political union with a central fiscal authority. But that would require voters in the 19 eurozone member states to give up sovereignty—something the Greeks are not alone in resisting. And the EU’s sluggish growth is adding to the disillusionment with Brussels among European electorates.
So what does all this mean? At the very least, an endless series of crises and European summits. It also means that Syriza will not be the last insurgent party to gain power, that central banks will have to keep interest rates low in order to keep the system going and that, given current high valuations, portfolio returns for investors are going to be mediocre for the foreseeable future.
When given these options, I still think we will end up choosing inflation. Even the illusion of growth is preferable to the alternatives.
However, debt burden is very deflationary. Easier said than done.
I do agree though that the FED should be less worried about inflation than it is. It would be good if the FED took a reactionary policy towards inflation instead of preemptive for a few years.
“The longer the maturity of their existing debt, the easier it is for governments to use this option.”
The real goal behind Operation Twist was to roll over Fed debts to longer terms and hold them to maturity. This lays the groundwork for growth and inflation while protecting the Fed from having to roll over maturing short-term debts as rates rise. The debt from WWII would be in the $70T range in today’s dollars, if adjusted with inflation. Long-term low-rate debt doesn’t just help homeowners, it helps all borrowers during periods of growth.
The best solution for excessive debt is default. It is the only solution which will work. Keeping zombie debt on the books only leads to stagnation. It’s why foreclosure is the cure not the disease.
I agree with you, but I at this point, I don’t think debt default is even on the table. Once lenders stopped foreclosing and allowing short sales, they went all-in on preserving zombie debt with full support of the government and federal reserve. I advocated for strategic default because I believe excessive debt is the problem, but if debt destruction is off the table, then inflation is the only reasonable alternative.
Debt used to be the means to an end (financing the expansion of a business or the acquisition of a home, building a new factory, buying a car, etc.). Now it IS the end in and of itself. It used to be the tail…now it’s increasingly the dog. It’s gone from a factor in production to the production.
And the people who create debt actually believe they create something of value. They’ve completely lost perspective on the basic fact that lenders merely enable value creators, lenders create no value on their own.
New Home Sales Tank in June
New single-family home sales in June 2015 were at a seasonally adjusted annual rate of 482,000, 6.8 percent below the revised May rate of 517,000.
As a sign that builders are now shifting to release more affordable units on the market, the median sales price for new homes is below the recent peak in 2014,” Hepp noted. “In fact, about 4 percent of the newly-built homes sold were under $150,000 in June, which is down from 7 percent last month, but there was a strong jump in the share of homes sold at $200,000-$300,000–jumping 10 percentage points from 30 percent to 40 percent of all sales. While the share of affordable homes this is markedly down from the early 2000s, the share continues to slowly increase.”
“Overall, it’s encouraging to see more homes being sold in the lower-price segments indicating that builders may be increasingly accommodating first-time buyers and affordability-constrained buyers,” Hepp concluded.
We may be nearing a bottom in gold. When all the headlines turn negative, market participants finally capitulate, and the last flush of selling clears the way for the next bull market.
Gold is doomed
A little less than four years ago, the world looked like it was about to end and gold hit an all-time high of $1,895 an ounce.
The United States had manufactured a debt crisis, and Europe hadn’t been able to manufacture a solution to its actual debt crisis, so panicky investors sought safety in the same place they had for 5,000 years: a shiny rock. The only problem, as you might have noticed, is that the world did not, in fact, end. It’s still here, so gold prices aren’t. The yellow metal has fallen 42 percent from its peak—and 8 percent in just the last month — despite the fact that the Federal Reserve has printed more than $1.5 trillion in this time. That, after all, is what gold aficionados said would make its price go to the moon, if not infinity and beyond. So what’s happened? Well, exactly what economists said would happen.
When you think about it, a bet on gold is really a bet that the people in charge don’t know what they’re doing. Policymakers missed yesterday’s financial crisis, so maybe they’re missing tomorrow’s inflation, too. That, at least, is what a cavalcade of charlatans, cranks, and armchair economists have been shouting for years now, from the penny ads that run on the bottom of websites — did you know that the $5 bill proves the stock market is on the cusp of crashing? — to Glenn Beck infomercials and even hedge fund conferences. Indeed, John Paulson, who made more fortunes than you can count betting against subprime, has been piling into gold for six years now, because he thinks “the consequences of printing money over time will be inflation.” They all do. Goldbugs act like the Federal Reserve’s public balance sheet is a secret only they have discovered, and that it’s only a matter of time until prices explode like they did in the 1970s United States, if not 1920s Germany.
But economists do, for the most part, know what they’re doing. Sure, they missed the crash coming in 2008, but that wasn’t because they didn’t understand how bank runs work. It was because they didn’t understand that unregulated lenders had become vulnerable to runs. And the economists who haven’t forgotten their history knew that this inflation fear mongering was all wrong too. Specifically, there’s a difference between the central bank buying bonds, a.k.a. printing money, when interest rates are zero and when they’re not. In the first case, money and short-term bonds both pay the same amount of interest — none — so, as Paul Krugman has explained over and over again, printing one to buy the other won’t change anything. Banks won’t lend out any new money, and will just sit on it as a store of value instead. That’s what happened when interest rates fell to zero in 2000s Japan, and it’s what is happening now in the U.S., U.K., Japan, and Europe.
That didn’t mean, though, that gold wasn’t a good short-term investment. It was. Just not for the reason goldbugs thought. Now, the problem with gold is it doesn’t pay any interest or dividends, but it does cost money to store. So you have to pay up in the hope that it will pay off by going up in price. That usually makes it a pretty lousy investment. That calculus changes, though, when you’re being paid to borrow—that is, when you’re paying a negative real interest rate. But when does that happen? Well, when inflation is high but interest rates aren’t quite as high, like in the 1970s, or when inflation is low but interest rates are lower still, like today. And that, as Paul Krugman and Larry Summers argued, is why gold prices were going up so much even though inflation wasn’t.
It almost makes you feel bad for the goldbugs, until you remember that some substantial number of them are just trying to scare seniors out of their money. But the ones who aren’t really thought the 1970s showed that gold went up when inflation did, so the fact that gold was going up now meant inflation couldn’t be far behind. They didn’t understand that the price of gold doesn’t depend on how much inflation there is, but rather on how much inflation there is relative to interest rates. So now that rates are rising, gold, as you can see below, is falling. Wait a minute, rates are rising? Well, yes. The Federal Reserve hasn’t actually raised rates yet, but it has talked about it enough that markets have reacted as if it already did. That’s been enough to make real rates positive again.
That sound you hear is goldbugs insisting that this is just a flesh wound. Sure, gold is down a lot, but that makes this is a buying opportunity! Just wait until China starts snatching up gold as an alternative to the dollar. Then prices will shoot back up. That, at least, was the story they told themselves until earlier this week, when China revealed that it hasn’t been purchasing nearly as much gold as people had assumed. Not only that, but a big fund dumped its gold in the middle of the night, driving the price down to a 5-year low. That’s left the goldbugs most impervious to empirical reality with nothing to say other than that “gold hasn’t lost any value, the dollar has just strengthened.” Right, and my stocks aren’t worth any less, I’d just get less money for them if I sold them.
But don’t feel too bad for the goldbugs. The best thing about predicting the apocalypse is you get to try again and again and again.
“It almost makes you feel bad for the goldbugs, until you remember that some substantial number of them are just trying to scare seniors out of their money.”
When that commercial runs with Richard Petty it makes me sick. Gold is a commodity with little industrial use not an investment. Not to mention the mark up over spot price ensures the elderly will lose their wealth investing in a volatile commodities.
If senior want a commodity with an inflation hedge AND cash flow then rental properties are far superior.
Gold is still being treated as a commodity so we are seeing big drops in gold on the days $CRB drops big.
In the future, gold will decouple from other commodities, but not until worldwide deflation is recognized. The signatures of deflation will be:
1. Rise in treasury bonds,
2. Collapse of all other peripheral and junk bonds,
3. Restrictions on getting access to physical cash,
4. Locked up bank accounts and pension accounts,
5. Crash of commodity markets, stock markets, real estate markets.
Once wealthy people realize that money is being destroyed in electronic and ‘asset’ forms, they will start to choose gold. That is because gold is the most concentrated form of ‘asset’.
Gold is “currency insurance”…nothing more, nothing less. It’s like home insurance. You hope you don’t need it, but when you do…you really do.
It’s interesting to watch the “experts” bask in the gold decline yet somehow forgot the stock market has been wiped out twice in the past 15 years and the housing market almost blew up the entire planet.
Currency insurance with a 30% taxation rate on any gains inflation generated or not.
I am not sure if anyone else commented on this, but the Chinese market dropped 8.5% overnight. This may have been a lot more if there wasnt a limit to losses capped at 10% for each stock.