The End of Liquidity

Daily Reconing ^ | 6/6/2006 | Bill Bonner

[ex-Texan]

..The golden age of liquidity is drying up...Our guess is that we will see the results of this fundamental shift towards tighter money over the next decade or two...

We don’t know what this portends, but yesterday Ben Bernanke slouched over to Congress. He must have worn lifts. For somehow he managed to remind the world of old Paul Volcker. We remember when the giant Paul walked the earth over at the Fed. It was a different world back then, with consumer prices rising at double-digit rates, and interest rates over 15%. But Volcker stood up and did what a Fed chief is supposed to do; he stopped inflation.

Even recently, speaking to an audience that included an intrepid reporter for the Daily Reckoning, Volcker said he was surprised the country had gotten away with such a long period of credit expansion, without setting off a new round of consumer price inflation. He wondered out loud how it came about and when it might end. But he, like the rest of us, had no sure answer.

And now cometh his successor, Ben. Speaking in public yesterday, the former head of Princeton’s economics department sounded if not like an inflation fighter, like an inflation taunter. Inflation, he said, was "unwelcome." Not exactly inflation-fighting words, but it was enough to lead investors to fear another .25% rate increase was coming. Stocks sold off, taking the Dow down by nearly 200 points.

Meanwhile, the European Central Bank seems to have found a touch of Volckerismo, too. "ECB rate hike done deal," says AFP.

"Golden age of liquidity is drying up," adds the International Herald Tribune. "Cash, credit, related financial instruments; liquidity surged in the past decade, fuelled by relaxed monetary policies of central banks, globalization, new technologies and such exotic financial instruments as derivatives. They in turn drove down interest rates and bond yields and encouraged investors to pump more money into riskier assets, propelling stock markets."

But now...

"The era of under-priced capital in constant supply is ending," adds David Roche, a financial strategist in London.

Our guess is that we will see the results of this fundamental shift towards tighter money over the next decade or two. We also guess that trying to fight this trend by selecting stocks carefully will be like flossing your teeth before the battle of the Little Big Horn. If we are right, asset prices are going down no matter how much financial hygiene you practice. And it will mean, among other things, fewer Fed chiefs on the cover of TIME magazine and fewer Treasury secretaries from Goldman Sachs. Speculation will cease to pay. In fact, maybe our next Treasury secretary will come from the legal profession, where he will have made his reputation in Chapters 7 and 11.

It was cheap money as well that fuelled America’s property bubble. Now, that bubble seems to be losing gas.

From Las Vegas comes news that takes our breath away. There were 2,992 houses for resale in the city in 2004. The following year there were 10,493. This year there are 17,121 – far more than 5 times as many as there were 2 years ago. Including new houses, there are some 20,000 dwellings for sale in Las Vegas right now. And they are still putting them up, with hundreds of new projects still being built out and more than 500 sales offices open for business.

Meanwhile, over to the right, on the Florida coast, comes news from our own family sources that real estate is getting hard to sell.

We recall a realtor quoted in the NY TIMES only a year ago:

"South Florida," he said, "is working off of a totally new economic model than any of us have ever experienced in the past." Explaining how limited supply and unlimited demand would create a situation in which prices rose forever.

Many people thought so. But now it looks as though this economic model was not so different after all.

"Yes, we missed the top," reported our source yesterday. "Now, we’re definitely on the downhill slope. We reduced the price twice already. We’re getting plenty of lookers but no takers. Basically, we’ll sell for whatever we can get at this point, even less than we paid two years ago."

And thus we see, dear reader, something interesting. Inflation may be ‘unwelcome’ in the dewy eyes of the economics professor who now rules the Fed, but the lack of it is terrifying to the wide open peepers of Speculation Nation.

"In a nutshell," explained Joseph Quinlan, chief market strategist at Banc of America Capital Management, "the era of easy and abundant global liquidity is coming to an end – a change in the global monetary backdrop that usually inflicts pain on those asset classes highly dependent on easy money."

But all of America is now highly dependent on easy money. The US government relies upon it to pay for its bread and circuses. Wall Street needs it to keep stock and bond prices elevated. The lumpen need it too – their house prices will fall without it. And when housing falls, the whole kit and kaboodle comes down with it. The US economy will be in recession within 6 months.

We suspect that is it Hank Paulson’s job to let the Fed chief know.

[RSmithOpt]

" Just because the progressives co-opted liberal for themselves as a guise, doesn't mean that the Founders were not liberals, they of course were real classical liberals who eschewed the oppressive state, and instead wrote our constitution of liberty of limited Govt with few enumerated powers."

Thanks for the suggestion on the tag line change.

You are 99% correct on a lot of the founding fathers' viewpoints upon the concept of Liberty, and I agree.

However, as a matter of disagreement, (with a good slathering of political correctness) I'll keep my personal current definition on Liberalism.

I do equate Liberalism, to some degree, to those who lean heavily upon Socialism, Communism, Marxism, Elitist Totalitarian Oligarchies, and always preach tolerance but never practice it or truly understand it.

[steve-b]

I believe the Moderators can tell who posted the keywords.

Not that they are going to give a flip, since most of them (except the "EXTEXANSUCKS" one) are clearly in the vein of commentary for which FR exists in the first place.

[Jim Verdolini]

"You are behind the times. The bubble has already burst. Prices in New Jersey have fallen between 12.5 to 28% since May 19th. Prices in about fifteen counties in N. California have fallen about 10% - 12%. Now watch closely as real estate prices fall all across the country."

I am closing on a sale next wednesday...all I need is for the world not to end before then...

[DB]

Hey, I've been here a long time and I didn't even know posters could add keywords...

[Marxbites]

Thanks & OK. Heck I'm a nobody, but how about "new liberalism"?

If you are interested in American Banking history and the dupers behind it all, I just found this and from the first few pages, it is dynomite! I search out for posting here those things never mentioned and rarely seen in the MSM and the Academy of new left "intellectuals" financed to "think right" by the Rockefeller interests thru "philanthropies" for the last 100 years.

Give it a try and let me know what you think.

"The Separation of Commercial and Investment Banking: The Morgans vs. the Rockefellers"
http://www.mises.org/journals/qjae/pdf/qjae1_1_1.pdf

[KingofZion]

blame Bush.

Seriously, I am not happy about rates going up but none of us want to see a replay of the Nixon-Ford-Carter years when adjustable mortgages were at 12% and inflation was out of control.

Maybe it's time to convert to cash. Gold is tempting, but most commodities are also overpriced these days.

[shrinkermd]

Bonner used to live in France. In France if you make your money in US it is free of taxes. He used to subtly tell others how to do the same thing--beat the US out of taxes.

I don't know if he still lives in France and has established residence there. Apparently, selling a newsletter in the US does not require much familiarity with day to day living in the US.

[ex-Texan]

Actually, the DOJ knows more about what happened that they are willing to say. They are hard at work investigating. Mortgage lenders made major money. Local mortgage brokers controlled by the mob made lots of money. Real estate is a great way to launder illegal profits and drug money. Nobody even looks twice at real estate loans. Appraisers were getting rich through bribes. Fannie Mae and Freddie Mac had much to do with it. Mortgage bonds sold on Wall Street had everything to do with it. Derivatives sold through the Big Boys that control the flow of capital into and out of the U.S. The Big Boys make money on every transaction. Buying and selling in up and down markets.

One of these days, people will start to wise up. But not in my life time. "Greed is good," Gordon Gecko. It was not Bush's fault.

[bert]

I don't believe it either.

There is going to be tremendous growth in Asis....India and China. We as Americans are preferred because we work hard and have stuff they want and need.

This means growth. Demand will fuel the markets.

[Philistone]

The word "pipe" in French is slang for "penis".

That piece of art was not as absurd as it might look to someone who didn't know that.

[Solson]

In Capitalism, greed is good. But it will, and always is, counterbalanced. You remind me of my father who's been trying to time the gold market for years.

For someone trying to time a market or predict what the market will do, you tend to listen to everything in an echo chamber. As long as it says what you are predicting, you'll shout it to the rooftops. If it contradicts you, you'll keep it quiet or work to defeat the opinion.

EVENTUALLY, the housing "bubble", as you call it, will pop. EVENTUALLY, gold will be over $1000/oz. But, trying to hazard a guess on "when and where" and betting in that direction is a foolish move at best.

Moderation is the key and making sound decisions. Timing markets is not. Scare tactics is not...unless you want to sell yourself as a prophet or a newsletter.

Housing is not going to crash because too many people depend on it. However, it will cool off in many places in the United States which will, in turn, create a buyers market, which will in turn, bring down the number of houses for sales, which will in turn, increase the demand and limit the supply and ROUND AND ROUND WE GO!

Be prudent, be smart and most of all...do you're own damn research from objective sources without a motive.

[gogeo]

The only people making money off the "End of the World" schemes are those selling the schemes.

[gogeo]

Actually, the DOJ knows more about what happened that they are willing to say. They are hard at work investigating. Mortgage lenders made major money. Local mortgage brokers controlled by the mob made lots of money. Real estate is a great way to launder illegal profits and drug money. Nobody even looks twice at real estate loans. Appraisers were getting rich through bribes. Fannie Mae and Freddie Mac had much to do with it. Mortgage bonds sold on Wall Street had everything to do with it. Derivatives sold through the Big Boys that control the flow of capital into and out of the U.S. The Big Boys make money on every transaction. Buying and selling in up and down markets.

Does the phrase "barking moonbat" have any meaning for you?

[RobRoy]

What the heck is with the keywords? I've been a member here since 1998 and this is the first I heard about their relevance. What gives? I never need them to do searches. Why does anybody care?

[RobRoy]

Just wait'll fall. Worse, wait 'till next Spring. It's just gettin' started I'm afraid. We are only seeing the very beginning and really do not know how bad this thing will get.

[VegasCowboy]

No, we don't know how bad it will get, or even if it will get bad at all. That doesn't stop some from predicting (reveling in?) a total economic meltdown, though.

[RobRoy]

Or preparing for and warning against.

Funny thing is, to me it is pretty obvious things are going to get bad. The real question is, how bad, and for how long. It doesn't take a rocket scientist to figure that out, especially if one just looks at the way things went down the last five years or so.

[ex-Texan]

"If ye love wealth greater than liberty -- the tranquility of servitude greater than the animating contest for freedom -- go home from us in peace. * * * Crouch down and lick the hand that feeds you. * * *" -- Samuel Adams

[B4Ranch]

Freepers rarely appreciate any advice on what to do with their own money. Free advice is considered to be rude speech on this forum. Cautionary advice is viwed as chiding. Mentioning your successes is always seen as bragging.

My advice, which is widely thought to be of little value, is to allow them to hit their own bumps on the way down, get the scars you and I already have and let them fight their way back up to the top.

[VegasCowboy]

Advice is one thing. Predictions of economic meltdowns, worldwide depressions and utter doomsday scenarios are often met with derision. Do you really think it is mere "advice" that gets people so fired up?