By Editor, Fabius Maximus, a multi-author website with a focus on geopolitics. This article originally appeared here.
Expectations run high for the US economy to experience an acceleration from the paltry 2% per year GDP growth we’ve had since the crash. Surveys record optimism among purchasing managers, builders, and consumers. Manufacturing remains strong, and there are even hints of the long-awaited capital expenditures boom.
But dark spots muck up the picture of the engines that have been driving this slow growth of the US economy. Among them:
The unsustainable nature of auto sales. They have been powered by mad long-maturity loans with sky-high loan-to-value ratios to sub-prime borrowers — a boom that is already causing regulators to fret and is almost certain to end badly. Any decline in sales will hit auto production.
Weakening exports. As the US dollar rises, it decreases competitiveness of US goods overseas, even as the Japanese and European economies slow.
And the big one, a rollover of the recent housing boom, both new and existing home sales. Top real estate analyst Mark Hanson has been warning since late last year that the housing markets were rolling over — as described in this post, and at his website. Now a second voice speaks up.
Joshua Pollard was Goldman’s lead US housing analyst from February 2009 to March 2013. He has written a forecast for the US housing market in the form of a letter to the President. It can be downloaded from his website. He has some disturbing conclusions. It’s a deeper and more complex analysis than Hanson’s, but comes to similar conclusions.
House prices are 12% overvalued today. They have already started to decline. Today’s misvaluation matches the excess of 2006-07, just before the Great Recession. Since World War II home prices have been tightly correlated to income and mortgage rates (R2 = 96%). Investors/cash purchasers, which make up 50% of home sales, have driven real estate volatility to unrivaled levels in trackable history. As public policy makers debate seminal decisions on “forward guidance” and unconventional monetary stimulus we note that each 1% increase in rates drops home valuations by another 4%; at a 2% fed funds rate, where fed officials and investors expect to be by the end of 2016, the overvaluation equals 20%.
Respectfully, the United States cannot afford another housing driven recession. The facts and correlations – the tenets of probabilities – suggest it is more likely than not that home prices fall 15% in the next three years.
It’s a top-down view, unlike Hanson’s ground-level perspective. If Hanson and Pollard are correct, then America might start a downturn from a position of weakness unique since the Second World War – with the Fed funds rate and short-term interest rates already at near zero!
Now for the bad news…
After five years of slow growth, most economists expect accelerated growth, as they do each year, only to see their hopes dashed. In January 2011, the Federal Reserve estimated the long-term growth rate of the US economy at 2.5 – 2.8%. This week the Fed’s estimate had fallen to 2.0 – 2.3% — barely above the 2% “stall speed.” Also their forecasts for 2014 – 2016 have steadily dropped.
Why these low and dropping growth rates?
There may be structural forces at work. Years of low investment by the private and public sector, a decaying education system, rising debt levels, and the demographic headwinds of an aging society — all these factors reduce America’s ability to grow. By Editor, Fabius Maximus
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LOL at Pollard. He paints such a gloomy picture and then concludes that housing prices will drop a mere 15% in the next three years? I mean, a 15% decline may be a correction but it’s not exactly what most would consider a bear market.
All of these people calling for a crash in the housing market or a crash in the stock market are still living with a pre-2008 world. That world is gone. The new world in which we live is one in which it is safer to ease than to tighten, and where central bankers have an itchy trigger finger to lower rates and print money to keep asset prices from falling, even if it means lowering rates into negative territory. It is much more likely, under this new paradigm, that stock prices continue to rise far beyond what is fundamentally justified until inflation begins to manifest itself with a vengeance. Then we will see stock prices stagnate, and commodities will catch up to the stock market in terms of their nominal prices. Hyperinflation is not out of the question, but this party that the Fed has been throwing for the past few years could continue for a few more before public perception changes. Or, it could change tomorrow. We will see. I just don’t see why so many are looking for asset price deflation with people like Yellen running world monetary policy. She is doctrinally more dovish that Bernanke was.
This is a good analysis/comment. The one point of contention I have with you is about high inflation. It’s here now, and not being reported. I have done an analysis of the costs for my family for the past several years and I see much more than a 2% CPI increase on a yearly basis. Here is a thought experiement to consider;
What were the prices for food in the 1970’s.
What was the make-up, size and ingredient list of the items in a shopping cart in the 1970’s.
What are the prices for the “same” food today.
Waht is the make-up, size and ingredient list of the items in a shopping cart today
You can NOT do this analysis. Period, full stop. It is an Apples to Oranges comparison and the costs can not be compared. Simply because the food in the two shopping carts is not the same. A loaf of bread from 1970 is not the same size or of the same composition as today’s loaf. All products are fundamentally different.
How can you do a valid comparison/analysis? Purchase Organic/Non-GMO food at today’s prices and compare it to 1970’s prices. The food in 1970 was Oragnic and non-GMO, we didn’t have any of that yet. It also didn’t have HFCS, artificial sweateners, etc. It came, generaly, in larger portions. Buy the same food today and the prices will shock you. It shocked the heck out of us.
The products today are “cheaper” becuase they are different from products of yesterday. If we used a true Apples to Apples comparison for products where that comparison can be made, the CPI would be much higher than published. And that is before looking at how the CPI is manipulated.
So, I believe we do have high inflation today. And hyper-inflation in certain market segments that are being ignored and non-reported. It’s only a matter of time before this spreads to other market segments and the rest of the economy. For instance, what would happen if a verified, peer reviewed study reported that HFCS or artificial sweateners caused diabetes? What would happen to food prices if people stopped buying pretty much everything they normally buy today and tried to go Organic?
The most common refrain of “this is the new normal” narrative is that the Fed can “print” endlessly until CPI inflation compels it to stop. This is plausible, but it presupposes that the Fed will, as long as dollar-debasement only accrues to asset values (like stocks, or to a lesser extent, real estate), keep buying debt and larding its balance sheet.
This is a static viewpoint. In the real world, the quality of the debt taken onto its balance sheet degrades. Even when the central government is the issuer of the debt, marginal increases in issuance paradoxically 1) have less impact on economic activity and 2) degrade the trustworthiness of all prior issues.
Case in point: Can anyone honestly believe that holders of JGB’s aren’t going to be stiffed, when the BOJ and Japanese central government have become what amounts to a closed loop regarding debt monetization? Has math education sunken so far?
The FOMC does not exist in a vacuum. Rising CPI is not the only force that its members confront, and while believing their own PR may stoke inertia, a glance at the Dow Transportation Average for the last 5 years should inform the most volitionally blind Fed governor that they have not a tiger, but a tyrannosaur, by the tail.
The idea of a slow correction in any thing when there are so many bubbles is magical thinking.
When interest rates are low to the few at the top and there isn’t any real ROI where there isn’t any real growth in the economy, they speculate. They chase what ever is going up. We all know this. Margin buying is very high as are stock buy backs. So are the hedging thru derivatives.. All held and traded among the big players.. Guaranteeing each others bets.
What seems to be totally over looked by most is that speculate means gamble. Gambling means taking risk. When the only way to get ahead is to take risk, there is NO real investments made. No real investment means no new real jobs either.
When all the biggest players are gambling, it is not logical that all of them will be winners. In fact, when there are NO good investments, ONLY risks it is only time before another Lehman happens.
Does anyone have an idea of what the consequences will be: i.e. are we looking at mere “market correction” that is relatively small in scope, or could we be looking another major crash that spreads throughout the economy?
Anyone who claims to know is either a fool or trying to get you to buy something they’re selling.
My guess is that, in order to experience a truly huge collapse, one that exceeds the financial pain of the Great Depression, people have to be conditioned to NEVER sell. Bottoms occur amidst capitulation, and in order to get all the uncollectable IOU’s (debt) now in existence reconciled, people have to be induced to NOT capitulate no matter how impossible is the mathematics of it all.
The best way to insure this is for recent experience to teach everyone that only fools sell out. Twice now in VERY recent history stock values have been halved, only to come roaring back (albeit amidst massive dollar devaluation.) People largely now are conditioned to “ride out” the declines because (fill in the blank) will fix things and stocks will return to all time highs in no time.
The stage has thus been set. Whether the tragedy actually opens is yet to be seen.
The stage is set and the players are playing. So your answer to Louis is that anyone who thinks they know if there will be another crash is either a fool or trying to sell something.
I guess I am a fool because I can not see how a crash can not happen. We have all the components in place. Denial high, margin debt high, extremes in derivatives, sub prime auto loans, and a $trillion a year in new US government debt. Speculating as a means of growth vs. borrowing to actually invest is like throwing your seed in the toilet.
The FED can’t even lower interest rates with any new event. All it can do is purchase more paper assets.
Even the FED’s Fisher is talking about a hard down turn because every thing is in bubble territory. . http://www.zerohedge.com/news/2014-09-19/feds-fisher-admits-fed-has-levitated-markets-warns-signs-excess
There are few real new profits coming in and everyone needs money to live on, not counting paying the payments on all this debt with. So there is lots of risk YET there is no value set on risk! This is all pretty much insanity.
No, it will happen, what I don’t know is what is going to set it off.. I know and you should know that this event is coming.. I just have no idea as to the timing.
There’s a line from the movie “Apocalypse Now” (as I recall the source), where Martin Sheen’s character surveys the lunacy that surrounds the Vietnam War and says, “The four-star clowns were in charge and they were giving away the circus.”
Energy costs + credit costs (not interest rates) are breaking. American real estate development has shifted from being an asset to becoming a liability. This is a consequence of costs + petroleum depletion.
A systemic 10% drop in real estate prices will render real estate- dependent banks insolvent, this is due to leverage. As noted, there are few tools to protect unsecured lenders to the banks, (depositors). The outcome is the strong possibility of bank runs. indeed, there are worse things than slow growth.
A 1930’s style depression is one.
While everybody speculates about the color of mascara on the pig, the true lifeblood of the economy rests on a chimera of energy independence. And that particular delusion depends upon a Ponzi scheme of very capital intensive exponential increases in the rate of drilling new wells which deplete 50-80% in their first year of production.
Anything else you need to know about the future?
inflation, deflation, bla bla bla….all i know is my income hasn’t grown for years and years now and i don’t see it going up……well forever and that my friends is the problem. 40% of Americans make less than $25,000 a year so how can we have an “economy” when most can’t afford to live in the USA?
ultimately the corporations “thought” they were growing by shipping jobs offshore for more profits for the next quarter so now the American economy has been completely gutted of wealth producing jobs. IMHO the economy will never be able to “grow” until get get well paying jobs for Americans. And yet most people just blather on and on about debt and inflation and deflation but not much is said about they fact that the net worth of ordinary Americans has been falling for years…deflation??
i have kids that just turned 20 and they say the same thing that I’ve been saying for years, there are no well paying jobs so most of their friends had no choice but to join the military….when you think about it what better way to make sure you have a long list of able bodied cannon fodder than to eliminate all the jobs for 20-something males.