This article posted Monday to the NY Post from my favourite financial columnist, Chris Byron. I wonder what will happen to the 30-year bond when mortgage holders finally start defaulting on their loan payments.. In Japan, the problem was bad bank debt. In America, it'll probably be bad consumer debt. Either way, debt is debt. Solve it with low interest rates, inflation, and even easier money. 1% 10-year yields anybody?
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BEDEVILED BY A BUBBLE
By CHRISTOPHER BYRON
June 23, 2003 -- BETWEEN now and mid-afternoon on Wednesday, pretty much nothing will matter on Wall Street except how big a rate cut gets announced by the folks who decide these things at the U.S. Federal Reserve.
The betting right now is that rates will be lowered again, by half a percentage point, lowering the annualized rental cost of overnight money to 0.75 percent - which is almost free.
To which I say: Aren't we sick of this financial equivalent of Groundhog Day by now? We've been down the rate-cutting road to Punxsutawney 12 times in the last three years, and each time the result is the same: nothing - or at least, let us say, nothing good.
Instead of giving the overall economy a sustainable boost, the Fed's increasingly cheap money keeps pouring into just two sectors - the housing and home mortgage refinance markets - and it is creating what is shaping up as one of the most spectacular sector bubbles in memory.
Now there's usually a way to pick up some easy money from just about any bubble if your timing is right, and we'll get into the details on what to do in this one in a minute, with a short-list of housing-linked stocks that are riding for a fall as this bubble keeps getting bigger and bigger.
But first a thought or two on the Washington official whose endless supply of hot air has created not only this bubble but the dot-com mess before it, and who long ago deserved to be fired from his job: Federal Reserve chairman Alan Greenspan.
NO serious student of the economy any longer doubts that Mr. Greenspan's cheap-money policy of the 1990s led directly to the stock market bubble that popped in the spring of 2000, pushing stocks and the economy into the downturn from which they have yet to recover.
Even Greenspan has said as much, coining the phrase "irrational exuberance" in December 1996 to describe the speculative nuttiness that by then had pushed the Dow industrials to 6,300.
Yet having correctly diagnosed the disease, he proceeded to do nothing during the following two years but make the problem worse, force-feeding cheaper and cheaper money into the market as if he were stuffing corn down the gullet of a goose.
Not until the summer of 1999, with the Dow industrials having topped 11,000 and the Nasdaq threatening to break free into hyperinflation, did the Fed begin raising rates in an effort to bring about a "soft landing."
By that time, a soft landing had become nothing but a fantasy, and an outright collapse was inevitable. Yet no sooner did the market implode than Mr. Behind-the-Curve began cutting the cost of money again, driving it down to the lowest levels in 55 years.
In so doing, King Bloviator has created the greatest decade of volatility and uncertainty the stock market has known since the boom era of the 1920s developed into the Depression of the 1930s. For that he now wears the crown as America's Worst Federal Reserve Chairman Ever - worse even than Arthur Burns.
Yet there he stands again, Washington's light heavyweight champ of financial doubletalk, bereft of any ideas for what to do next except to power-spray still more gasoline on the pyre he has set ablaze.
Meanwhile, his rhetorical waltzing has become utterly shameless, as he intones, in that ponderous way he has perfected, that the housing market has not swelled into a bubble - because, when it pops, the result won't be a "negative" for the economy but the disappearance of a "positive." Oh, puhleeze, Mr. Greenspan, do you take the whole world for fools?
It is the speculative bubble in the housing market, fueled by lower and lower mortgage rates, that is alone propping up the economy, and everyone knows it. In this summer of 2003, the national pastime is no longer baseball or going to the beach - it's going to the bank to refinance the mortgage.
The amount of money being leeched from the national balance sheet and poured into consumption by this process is simply staggering.
Remember how worked up Republicans got earlier this year about the need to pass the President's tax cut plan? Well that plan, finally signed into law in late May, will add an average of just $35 billion in stimulus to the economy annually over the life of the bill. It is a sum that is utterly dwarfed by the money being pumped into the economy via the housing bubble.
The Federal Reserve's own numbers show that home mortgage refinancing last year pushed more than $700 billion into the economy, in the form of money cashed out by homeowners from a combination of the appreciated value in their homes plus the lowered monthly payments on their mortgages.
This entire racket is being driven by Greenspan's rate cuts.
Instead of stimulating a surge in new construction, the rate cuts have enabled homebuilders to keep raising their prices on new construction, month after month and year after year, creating dramatically expanding profit margins for the companies themselves - even as prices for existing homes have likewise soared.
Data released last week by the Mortgage Bankers Association shows what this really means: Nearly all the growth in the U.S. mortgage market, the backbone of the entire banking industry, is now coming from cash-out refinancings.
The MBA data show that although the mortgage market as a whole is expected to grow by 32 percent this year, to $3.3 trillion in mortgage loans, more than two-thirds of those loans will be made to homeowners seeking to refinance their existing mortgages. Less than one-third of the loans will go to people who are actually buying a new home with the money - a market that is in fact growing at barely 5 percent annually.
Nonetheless, the stock prices of both homebuilders and mortgage finance companies have soared into orbit on Wall Street, driven by an unsustainable cheap-money policy that is reaching the end of the road as rates for short-term money approach absolute zero.
This is the very definition of a bubble, and for Greenspan to deny it is preposterous, and even insulting.
Consider a homebuilder such as Hovanian Enterprises, which is up nearly 70 percent in the last year to a closing price last Friday of $63 per share. The company's revenues are rising at a 21 percent annual clip and, in all but two of its markets (Texas and California) revenues are growing faster than unit sales.
SOME of the most unsustainable gains of all have been racked up in the so-called sub-prime lending market, where companies charge over-the-moon interest rates on mortgage loans to the economy's least creditworthy homebuyers.
Since March, shares of California-based New Century Financial have nearly doubled, to a recent price of $50. United PanAm Financial, another California-based sub-prime lender, has climbed by nearly 150 percent since the start of the year, to current price of $14.36. Similarly, Accredited Home Lenders Holding Co., yet another California sub-prime lender, went public at $7 per share just this last February, and now stands at nearly $26.
Or consider Pennsylvania-based American Business Financial Services, Inc., a sub-prime lender that was the subject of some critical coverage in this space in March 2002, when the stock was selling for a split-adjusted $10.50. Since then, the stock has slipped to $8.61, and last month the company was served with a civil subpoena from the Justice Department seeking documents and other information regarding its lending practices.
All these stocks, and many more like them - from the S&L and commercial banking sectors to mortgage banking, finance, and homebuilding - have been pumped up with hype, hope and hot air from Greenspan's failed policy of trying to manage the economy by playing catch-up with interest rates.
When the bubble will pop is hard to say, just as it is hard to guess the moment when the nation's patience will at last be exhausted with Washington's czar of financialoney. But one senses that time is starting to run out for both. |
