You are picking part of what Doug Noland says and saying it is incorrect. In this article he is talking about the cost of housing investment. In other articles, DougNoland also says the return on investment - ie house price depreciation can also result in correcting the imbalance. He talks about both sides of the equation but in different articles.
In this article, Doug Noland says, the carry trade is possible ONLY through the CurrentAccount Deficit. This is because, just because BoJ printfs copious amounts of Yen, does NOT mean it can be given to Americans to buy UST. Americans care shit about Yen - they only care about USD. So, the mechanism of carry trade is the CurrentDeficit. As current deficit grows, the US is able to give more USD to japanese investors and these guys plunge it into carry trade!!! Thus carry trade across country can happen ONLY if there are currentaccount deficit!!!! Until maybe year ago, the carry trade was happening with US rate differential. Now it has become global rate differential.
Now, the helicopter Ben said, Investments in US are in huge surplus than saving - and that is why they are borrowing humongous money (calling it as savings) from abroad. And ofcourse, this investment is in asset appreciation of bonds - which represents house price appreciation. Currently, the cost of housing investment is less than the return on investment. Hence housing investment is continuing with vigor. Your argument is the return will fall on its own, irrespective of the cost of the housing. Even Doug Noland acknowledges this. His Argument I believe is that, the cost side is not going to fall on its own anytime soon and is not going to cause recession.
Finally, DougNoland also says the credit bubble has started to adapt and mutate!!! What this means is that, if housing were to slow in any meaningful way, the bubble WILL find a way to perpetuate it!! This is probably through the carry trade. Imagine the huge profits all these carry traders are making.
But what happens if carry trade grows quite large - and hence brings the cost of investment lower? Doug Noland is also suggesting this possibility. You are seeing this in refinance activity not diminishing in a menaingful way, you are seeing house price starting to appreciate in UK, New Zealand etc...
There is still lot of equity to be extracted from the housing sector. And you are still seeing service industry growing (may be most of the increase is real estate related), consumer spending growing, incomes growing...How do you explain that if housing is falling? So, in short, there are anectodes of housing falling - but we are not there. As a matter of fact, compared to last year house price are still lot higher!!! Where is the slowing on the return on investment?
Also, most of the people are missing one BIG point that Doug says (in last week's article) on the return on investment. People who do NOT want to sell their home, go to the bank and extract equity upto 125% even today!!! Thus, even if house prices are not appreciating OR even if neighbors are selling at 1-5% less price, Even if the homeowner does NOT want to sell his house, the perception by the credit bubble is that - it is OK to give 25% more loan than it is worth today!!! That is, the credit bubble is WILLING to believe that house prices are appreciating even though it is not in the main street!! So, you have to see the glaringly obvious mistake being ignored and perpetuated by the credit bubble. In other words, EVEN if the ACTUAL return on investment is NOT appreciating (and may be falling), the Credit Bubble is NOT willing to accept this fact!!! It is willing to give 125% loan!!! So, your argument that return on investment is turning negative "holds no water" because, the people who should care and worry about it are not accepting this fact!!! The carry traders are willing and probably dreaming that, once recession starts, Fed will lower rate and so, the cost of housing will fall and hence the homeowners can bid their house price higher!!! This is what DougNoland argued in the last week article where he said, all these asset derivatives are hedged against the US Treasuries!!! i.e the 125% loan given is hedged against the UST - assuming that, the UST will appreciate (interest rate falls) if there is a problem with the 125% loan!!! You can only see the main street return on investment falling - but not in the wall street!! They will continue to give 125% loan assuming that in future house will appreciate because fed will lower rate (just as UK lowering rate caused UK house price to appreciate in september!). So, the credit bubble is blinding your eyes - You are only seeing main street - look at the Wall street (carry trade) is what Doug says. |
