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.

[ex-Texan]

Don't worry about it. The taxpayers will pay for it all. Nobody else is doing anything either.

Within the S&P 500, 295 companies offer [pension benefits] with the aggregate under funding for 2005 being $320.9 billion, which is 129% greater than that of the 2005 S&P 500 pension under funding. * * * Combined, pension and OPEB assets set aside for issues in the S&P 500 amounted to $1,409.2 billion in 2005 to cover $1,870.5 billion in obligations, with the resulting under funding of $461.4 billion being a record deficit.

"The light at the end of the OPEB tunnel is clearly another train * * *"

Lets see: That is a record deficit of only $ 462.4 billion for last year alone. Nobody is going to do anything about the problem this year. Again. So add another $ 500 billion. Congress is lazy. So they will not do anything about it next year. In the meantime, baby boomers are retiring. Which means each year the problem will get worse, not better. Any suggestions?

Trillons of Dollars Lost in Federal Pension Meltdown

[sarasmom]

Well I appreciate both of you, and your advice.
;^)
As a "housing renter" I am always negatively affected by the real estate "speculators".
I am constantly amazed that they don't see any similarities between themselves and the dot.com idiots.
Steady and safe investments generally have a lower return, because they are at low risk of losing money.
To get a high rate of return, a very high risk of losing your entire investment is generally involved.
When "everyone" jumped with whatever they had left from dot.coms, and those who stayed one step ahead of the speculative market invested in real estate, they thought they had government backing, Uncle Sugar in the form of cousins Fannie and Freddy.
LOL!
There are lots of "new homes" available to rent in the local area.
That means they are not selling, and the "owners" are going to take a bath.
Me?
I am not going to pay a $1250.00 month rent payment to a land speculator, primarily, again, due to retirement funds groups.
Half of them have already dropped to $1050.00, and still get no takers.
The new housing market is flooded, and I am not without temporary options.
Of course, I can defer gratification...
How long can all those investment "homeowners" remain upside down?
And how much longer can the "property management" companies claim the "prevailing housing market rental rates" are based on anything other than a desperate grasping at thin air?
Not much longer, IMHO.

[RipSawyer]

ping

[expat_panama]

... liquidity surged in the past decade...  ... in turn drove down interest rates...  ...shift towards tighter money over the next decade or two.

They're saying that over the past 10 years we had low interest rates but there's something very different now that means "a change in the global monetary backdrop that usually inflicts pain on those asset classes highly dependent on easy money."    

This is supposed to be hardest on the US because "all of America is now highly dependent on easy money."  Leave it to the doomer-freepers to join a bunch of Europeans in their latest America bashing fest.  

Interest rates are not soaring now.  It's an up tick.  If this is bad now, then someone is going to have to explain why it's worse than all the temporary up ticks we've been having every few years since the malaise daze.

We're hearing that America's private debt is way out of control.  True, in the past four years it did increase by more than $3trillion.  Time to get a grip.  Our private holdings increased by $14trillion over this same period.  $14 trillion is a lot more than $3 trillion.  See for yourself. We're better off now.

My take is that if this is the best that America-bashers can come up with then we must be doing pretty darn good.

[gogeo]

Free advice is considered to be rude speech on this forum.

Actually, free advice is usually worth what was paid for it.

[ex-Texan]

Very well thought-out post, sarasmom! Kudos to you!

expat_panama also made some good points! Kudos to you as well! But you forgot to add the real estate price graph.

The single most important bit of information contained in expat_panama's post was inferred in the charts. Charts are helpful and deceptive at the same time. [E]xpat_panama has no control over the charts. In 1997 -- before property speculators drove up housing costs -- interest rates were much higher. Price for house were much lower. More recently, interest rates were at historic lows. Prices for houses were much higher. What the hell is going on here?

Is it a mere coincidence that between 1997 and 2005 housing prices exploded over ten times in value? (E.g. Long Beach, California home was bought for $ 90,000 in 1997. Today it is selling for $ 890,000!).

Something is very weird here. Something stinks to high heaven. But I am not going to give it a name. I will not even attempt to dig into that. My message is just to quietly think about what has happened. Cogitate very carefully.

Hint: Lenders were playing speculator games. 'Nuff said.

[hinckley buzzard]

Bill Bonner is a perennial dollar bear but he is also a very smart guy, and I pay attention to what he says. The timing is the thing, of course, as always--but it does appear to him and me that the bull market in equities, tied to real estate, is over-- or at best, a dead man walking.

[hinckley buzzard]

things are not as bad as it seems

Right. "So far, so good," eh, Cowboy?

[Huck]

I sort of just ignore all this crap. K.I.S.S. My wife and I bought when prices were still low but rates had gone down. I recall seeing the same set of circumstances in the early 90s. Rates are lowered to stimulate the economy, and one sector that seems to respond to that is real estate. Home buying and home building feeds economic growth, etc etc. Anyway, we bought a nice little place that we can afford. End of story. The rest of the world can go to hell.

[expat_panama]

More recently, interest rates were at historic lows. Prices for houses were much higher. What the hell is going on here?

You're right, it really shouldn't be that way because homebuilding requires money.  Other things being equal, if money is cheaper then homes should be cheaper. 

My take is that other things haven't been equal.  Not all American home prices have been like that one in Long Beach you mentioned.  In fact, most of the increase in the price of homes is caused by inflation.   The reason why the cost of home building has more than doubled in 25 years is because the cost of everything else has too.

The next biggest reason home prices have gone up is the fact that people are richer and they want bigger homes.  The Census Bur. says that this same 25 years has seen the average home size increase by 40%.   Something else that the they say is that there's been a big increase in the quality of homes.  Back then homes didn't have central air and built-in's.  Now they do.

[RSmithOpt]

Pretty much explains what really drives politics in general.

I remember the S&L scandal a few years ago and how conveniently the FDIC, or whichever government entity, closed the doors to keep the public from making 'runs'.

In the meantime, seems as in a few cases, the commercial investors and the wealthy with those certain institutions, somehow were able to complete their 'runs' before the info was leaked and, therefore, leaving the public (taxpayers) holding the bag as the Feds bailed out the numerous institutions with the taxpayers monies.

IMHO, it was a simple political maneuver by large investors to take advantage of existing regulations, and once the general public found out about the commercial abuses of these institutions, the jig was up, the managers and the rich business associates involved with 'their investments' were the ones that made off the loot, courtesy of Joe & Josephine Taxpayer.

With the House of Morgan financing the merger deal of US Steel at S1.4 billion in 1901, with a total US GDP of only $20 billion, well, that's a hell of a lot of 'political influence' and power, notwithstanding many global scenarios today with only the total dollars being greater.

I find it interesting the hammering out of the deal of US Steel merger(s), the 'Aldrich Plan' at a secret meeting of Rockefeller, Morgan, Aldrich, Kuhn, and Loeb, and was held in secret on Jekyll Is., GA. Some similarity to the Bilderberg Society and its biannual or annual 'exclusive meetings'.

I do not doubt that for one moment that the current (unexplainable) cost of a barrel of crude and resulting gasoline is a conspiracy to 'gather' cash for the next round of 'investments' in a predetermined sector of the global economy and a undisclosed continent. Lately, that's been China and India. It also goes hand in hand with a repayment of political favor to the oil industry from which 'W' and his family and various associates are tied heavily with that industry.

I always find it amusing that some folk tell me I'm a paranoid conspiracy theorist. I ask the "Really?" Then I ask them to equivocate the overall global (US too) increase in population, global & national increase of oil demand, the existing inflation rates before Katrina, increase in per capita incomes, and OPEC's current level of production. Basically, just look at those percentage increases, that's all. Then I ask them to explain the 54% increase in the price of a barrel of oil compared to those other numbers over a 6 years.

Guess what? They can't. Even oil industry spokesmen have tip part of their hand in that they say 30% of the current cost of the barrel has been driven by market speculators.

Well, then whose doing the speculating you reckon? I'd say the very wealthy, in particular, OPEC members with the profits they've made from the consumers, not to mention China. Pretty neat to ensure capital growth, capital apreservation, macro economic control and manipulation, and cudly political influence like the old days in banking in a way except the info and monies moves a whole lot faster today.

I am still amazed at the concept of 'hedge' funds and their derivatives. I always viewed a hedge as a means to keep your neighbor separate from yourself?

[stephenjohnbanker]

"For the naysayers, I reiterate your mantras: "Nothing to see here. Not in my neighborhood. Prices are sill going up. No foreclosures near me today. Time to move on""

ROTF! I noticed that this past year you and I have been "pounded" by other FReepers when we calmly speak the truth : )

[stephenjohnbanker]

""I am constantly amazed that they don't see any similarities between themselves and the dot.com idiots.""

gambling is gambling. Dice and cards are not required : )

[B4Ranch]

Especially when it comes from someone who isn't enamored with Bush and doesn't believe he is the Saviour of America.

[Marxbites]

The GD problem is that the info has been shoved into a dark corner by academe for 100 years, but it is there by golly.
Just like the Venona stuff vindicates McCarthy, Hollywierd cLooney acts like his "GN & GL" movie is based on any reality at all. AND they confuse Mac with HUAC to boot. One's the Senate - the other the house.

I also believe the same big foreign banking elites were behind the 1st and 2nd banks of the US who were behind the Fed. They never gave up.

Read that Jackson veto, it pegs it cold.

For me "Old Hickory", THE 1800's hero, clocks that statist Hamilton. Even if he did savage the natives, when the word hero was mentioned, they meant Jackson and it was understood by all that way in his time.

Every time I post something that even has a twinge of conspiracy the know-nothings break out the tinfoil for me - but I relent never the less, but even more!

[nopardons]

Don't you EVER get tired of beating the dust motes of that poor dead horse, you keep flogging?

[ex-Texan]

Have you seen the hit movie, "Fun with Dick and Jane?" Very funny flick. It's about corporate corruption, McMansions and people working too hard to support their over extended life styles. You seem a bit wound up. Sounds like you need to take a break. What's a matter, boobie? Something bugging you a bit? You must be in the real estate biz . . .

[nopardons]

"Hit movie"? Ye gods and little fishes, the one with George Segal? That movie is what....30 years old, or so? There was no such things as "McMansions" ( which is a really name, used by the envious ) back then. Or, did they remake that movie and somehow ruin an already not very good film?

Nope, unlike YOU, I am not now, nor have I ever been in the real estate business. But then, also unlike YOU, I never got thrown out of it either. :-)

It is YOU, who need to TAKE A BREAK; since all you ever do, is post threads/post to threads that are not only specious, but nothing but doom&gloom.You've spent years, here, trying to spread your THE SKY IS FALLING, THE SKY IS FALLING!!!!!!!!!!!!!! junk. And if you keep at it, long enough, perhaps, eventually, you'll get your wish and something bad will happen somewhere, to someone/s.

[ex-Texan]

You are wound toooo tight, man. You are losing it big time.
What a doofus !

[nopardons]

ROTFLMAOPIMP

You really are quite beyond any help.