# Bottom line: The Fed, during Obama, did everything in its power to surge all asset prices, stocks, bonds, real estate, collectables, et al, with no regard for its own guidance, as to when it would take its lead-foot off the accelerator. Now, under Trump, they are doing the exact opposite; looking “through” all the obvious coincident and near/mid term, economic weakening trends in an effort to raise rates as quickly as possible. If, the past 8-years of a Fed in Armageddon-mode created the “everything bubble” (hat-tip Wolf Richter), what will shifting monetary policy into reverse do to said asset price levels?
*) Back in Bubble 1.0, the helium came out of house prices when the “unorthodox credit and liquidity” was forced out of the markets all at once precipitated by the mortgage credit market implosion. Quickly, house prices “reattached” to end-user, shelter-buyer employment, income, and credit fundamentals…or, to what end-user, shelter-buyers could really buy using a traditional, 30-year fixed rate mortgage, and a truthful loan application, which was about 30% less. What’s really the difference between the “unorthodox credit and liquidity” coming out back then and coming out now from a Fed in reverse? House prices didn’t surpass their 2007 peaks because everybody is working, making more money (with the exception of those in the footprint of tech bubble 2.0). They have been goosed for years by unorthodox demand using unorthodox credit and liquidity (investors, speculators, flippers, floppers, foreigners, money launderers, options, etc etc) just like in Bubble 1.0. One thing is for sure…house prices are as diverged, or more, from end-user, shelter-buyer employment and income fundamentals as they were back in 2006. Just because there are no NINJA loans that turned every ma and pa into a millionaire for the purposes of qualifying for a mortgage to buy a house, which pushed prices through the roof, doesn’t mean the housing market hasn’t been similarly, artificially goosed over the past five-years beginning when millions of legacy mortgage were “modified”.
# “Loan Mods” (used to fight the very de-leveraging that would have once and for all “fixed” the excesses in the housing market) were so exotic (DTI’s of 70%+, credit scores below 600, LTV of 150%+, payments of 2% interest only) they made Angelo Mozillo blush. Loan mods made WaMu’s 2005 vintage Pay Option ARMs look safe and sane! As Bubble 2.0 was forming and unorthodox demand increased, pushing house prices beyond the reach of most end-user, shelter-buyers in any given region, volume remained relatively weak…sales volume has never been a feature of Housing Bubble 2.0. In fact, after 7-years of ZIRP, $10 Trillion in new .Gov debt, and $5 Trillion in Fed money printing, builder new home sales are sitting at around 60% of the volume of the past Bubble. Resales are about 20% lower (resales rose more because that’s where the unorthodox demand lives…it doesn’t go to Pulte developments for flips and rentals). Most blame a “lack of supply”. As if house supply doubled, so would sales. But, the problem has always been about true, fundamental demand, which is a key feature missing from this housing “faux-covery”.
# Remember, a “house-price recovery” and “housing market recovery” are two vastly different things. In closing, this housing Bubble always needs constantly lower mortgage rates; stable to increased flows of unorthodox demand, credit and liquidity; and/or increased leverage-in-finance vis-a’-vis easing of mortgage credit to keep house prices detached from end-user, shelter-buyer fundamentals. All three of these engines of house price inflation have been running at max RPM’s for years. But, if a Fed in reverse takes shuts down two of the three engines, there simply isn’t a way for the GSE’s, who do 90% of all mortgages, and the banks to ease mortgage credit quickly, or dramatically, enough to prevent house prices from once again re-attaching to end-user, shelter-buyer fundamentals, which could be 30% less than where they stand today. AND, if during this de-leveraging cycle the economy dramatically weakens, then end-uer, shelter-buyer fundamentals weaken and house prices could even fall further. A quick post-Fed follow-up to my email on Monday and the publication of “Tell My Horse”. I’ll jump right into what I’ve got to say, without the usual 20 pages of movie quotes and the like. Well, I’ve got one quote above, because I can’t help myself. They’re the lyrics to the best break-up song ever, and they’re what Janet Yellen was singing to the market on Wednesday.
# Let’s review.Last fall, the Fed floated the trial balloon that they were thinking about ways to shrink their balance sheet. All very preliminary, of course, maybe years in the future. Then they started talking about doing this in 2018. Then they started talking about doing this maybe at the end of 2017. Two days ago Yellen announced exactly how they intended to roll off trillions of dollars from the portfolio, and said that they would be starting “relatively soon”, which the market is taking to be September but could be as early as July. Now what has happened in the real world to accelerate the Fed’s tightening agenda, and more to the point, a specific form of tightening that impacts markets more directly than any sort of interest rate hike? Did some sort of inflationary or stimulative fiscal policy emerge from the Trump-cleared DC swamp