The cult of bonds is dead. The cult of equity is dying. Buy real assets…gold…a house?
PIMCO boss Bill Gross said in his September Investment Outlook,:
“The age of credit expansion, which led to double-digit portfolio returns is over. The age of inflation is upon us, which typically provides a headwind, not a tailwind, to securities price – both stocks and bonds.” On Friday, Gross tweeted, “#Fed to buy mortgages ‘til the cows come home. Think 7% unemployment, 2.5% inflation targets.
Buy real assets…gold…a house!” In an interview with Bloomberg TV on September 5, Gross said, “Gold can’t be reproduced. It can certainly be taken out of the ground at an increasing rate, but there’s a limited amount of gold and there has been an unlimited amount of paper money over the past 20 years to 30 years and now…central banks are at their leisure in terms of basically printing money…You know, I am not a gold bug. I am just suggesting that gold is a real asset and will be advantaged if the Federal Reserve or the ECB central banks start to write checks in the trillions. So what my objective is, I am not sure. I just think it [gold] will be higher than it is today and certainly a better investment than a bond or stock, which will probably return only 3% to 4% over the next 5 to 10 years.”
High unemployment and inflation below the Fed’s 2 percent target “would argue for additional accommodation now,” Williams said today in an interview on Bloomberg Television from Jackson Hole, Wyoming. “I would like to see something that has a measurable effect on job growth. That would be arguing for a pretty large program” that’s “at least as large as QE2,” or the second round of quantitative easing, he said.
Federal Reserve Bank of San Francisco President John Williams called for additional bond purchases by the Fed to spur economic growth that would be open- ended and total at least $600 billion.
High unemployment and inflation below the Fed’s 2 percent target “would argue for additional accommodation now,” Williams said today in an interview on Bloomberg Television from Jackson Hole, Wyoming. “I would like to see something that has a measurable effect on job growth. That would be arguing for a pretty large program” that’s “at least as large as QE2,” or the second round of quantitative easing, he said.
Jonh Mauldin comments:
“No very deep knowledge of economics is usually needed for grasping the immediate effects of a measure; but the task of economics is to foretell the remoter effects, and so to allow us to avoid such acts as attempt to remedy a present ill by sowing the seeds of a much greater ill for the future.”
– Ludwig von Mises
We heard from Bernanke today with his Jackson Hole speech. Not quite the fireworks of his speech ten years ago, but it does offer us a chance to contrast his thinking with that of another Federal Reserve official who just published a paper on the Dallas Federal Reserve website. Bernanke laid out the rationalization for his policy of ever more quantitative easing. But how effective is it? And are there unintended consequences we should be aware of? Why is it that the markets seem to positively salivate over the prospect of additional QE?
I missed the part where Congress gave the Fed a third mandate, to target the stock market. But Bernanke not only takes credit for the stock market, he points out that the rebound in the housing market is also due to Fed policy, because it fostered lower mortgage rates. Which it did. But let’s also remember that it was Fed policy that helped create the housing bubble to begin with. Which I don’t remember Bernanke taking credit for, even though he was on the Fed then and up to his eyeballs in supporting that policy.
Joan McCullough, in her own irreverent style, gave us a few must-read paragraphs this afternoon:
“And then [Bernanke] has the sand to make a public comment that stocks go up when he prints money because discount rates have gone down and the economic outlook has improved on account of it? This is what makes the hot dogs run stocks up the flagpole when The Bernank saddles up? Better economic outlook? Amazing.
Olli Rehn, EU Economic and Monetary Affairs Commissioner (Photo credit: Wikipedia)
August 14
Spain’s government is considering a request for a sovereign bailout, European Economic and Monetary Affairs Commissioner Olli Rehn signalled.
Spain has an “open mind,” Rehn said Tuesday in a Bloomberg Television interview in New York. No decision has yet been taken by Prime Minister Mariano Rajoy’s government, he said.
“We stand ready to act if there is a request,” Rehn said.
We stand ready to act if there is a request
Rehn’s remarks follow comments by Rajoy that he would ask the European Central Bank to buy Spanish bonds “if it seems reasonable,” as he moved to extend unemployment subsidies for some of the nation’s 5.7 million jobless.
Rajoy’s only criterion will be “defending the general interests of Spaniards,” the premier told reporters today in Palma de Mallorca after meeting King Juan Carlos. The day before an extraordinary jobless subsidy was set to expire, Rajoy also said the government will extend payments for another six months amid a jobless rate of 25%.
Spanish 10-year bond yields rose to a euro-era high of 7.62% on July 24, exceeding the threshold that prompted full sovereign bailouts in Greece, Portugal and Ireland. Yields have fallen since ECB President Mario Draghi said on Aug. 2 the bank would buy sovereign bonds if countries applied for similar support from Europe’s rescue fund and accepted strict conditions in return.
The yield on Spain’s 10-year notes fell 11 basis points today to 6.73%.
English: Representatives to the Conference on Unemployment The meeting was called by U.S. President Warren G. Harding in response to the 1921 recession. (Photo credit: Wikipedia)
More than two years before the housing bubble burst in 2006, economist Gary Shilling warned that subprime loans were probably “the greatest financial problem” for the future U.S. economy. In 2007 he said “housing would sink the economy,” and a year after that he warned of a “serious recession” that would consume most of 2008. He was right every single time.
Now Shilling says a new recession has begun in the U.S. — in the second quarter — following on the heels of the recession in Europe. He says the current recession is different from previous ones because it wasn’t caused by rising rates or another housing downturn but rather a drop in consumer spending due to a weak job market.
“We’ve had three consecutive months of declines in retail sales,” says Shilling, president of A. Shilling & Co., an economic research and forecasting firm. “That’s happened 29 times since they started collecting the data in 1947, and in 27 of the 29 we were either in a recession or within three months of it.”
Shilling expects this recession will last about a year and shave about 3.5% from growth from peak to trough.
This time is different, says Shilling “because a lot of things that normally go down in a recession are already there, like housing.” And policies that normally help revive the economy are absent. The Fed can’t cut interest rates because they’re already near zero and the housing market won’t be a catalyst for growth, Shilling says.
One thing that hasn’t changed, says Shilling, is the economy as the number one issue in the presidential election. Before the last presidential election Shilling said that whoever got elected then wouldn’t get re-elected because the economy would still be weak with high unemployment.
Now Shilling says he’d like to see one party in control in Washington because it increases the odds of cuts for entitlements and could help “restore confidence in Washington.” But even then he says it will take five to seven years to complete the deleveraging that’s already underway before the economy recovers.
Flood of Foreclosures Could Cause Home Prices to Drop 20%
But Gary Shilling of A. Gary Shilling is not convinced home prices have turned to the upside for good.
“The fundamental reason is there is a huge excess of inventory out there,” he tells The Daily Ticker’s Henry Blodget. “Some of it is listed but a lot of it is a so-called shadow inventory.”
Shadow inventory refers to homes in foreclosure and waiting to be sold or properties that homeowners have delayed selling, likely to get a better price.
In his latest Insights investment note, Shilling writes “excess housing inventories, the mortal enemy of prices, measure about 2 million over and above normal working levels. That‘s huge considering that housing completions averaged about 1.5 million in earlier balmy years.”
He also cites the backlog of delinquencies and foreclosures that were put on hold during the robo-signing investigation and settlement process.
A CoreLogic report in June showed shadow inventory fell almost 15 percent from 2011 levels to 1.5 million properties. More than half of those 2.8 million homes were “seriously delinquent, in foreclosure or REO.”
“Since peaking at 2.1 million units in January 2010, the shadow inventory has fallen by 28 percent. The decline in the shadow inventory is a positive development because it removes some of the downward pressure on house prices,” said CoreLogic chief economist Mark Fleming. “This is one of the reasons why some markets that were formerly identified as deeply distressed, like Arizona, California and Nevada, are now experiencing price increases.”
As Shilling sees it, the banks have three options to get the bad mortgages off their books:
Flood them onto the market
Institute a mortgage modification plan
Try to convert the properties into rentals
He says the second and third options are a lot less likely because mortgage modifications rarely work and rental properties are very difficult to maintain on a large scale, which may detract institutional inventors.
As a result, he believes the more likely scenario could very well end up being option number one, which would have a negative impact on home prices. The latest National Association of Realtors survey showsforeclosed properties tend to sell at a 19 percent discount to the market.
Too many foreclosures flooding the market at the same time could drive down prices of the surrounding homes.
“It would take a 22% house price drop to return to the long-run trend going back to 1890,” he writes in his research note. “Since corrections of bubbles often overshoot on the downside, our forecast of a further 20% decline may be conservative.”
In an interview with Bloomberg Television, Warren Buffett said that Wells Fargo’s dominance of the U.S. mortgage market should pay off as the housing market rebounds. Buffett said, “They’ve got a sensational mortgage operation. The total mortgage market was at the $3-trillion level not that long ago. If it goes back up to $3 trillion, I hope Wells is doing a third of those.”
In the first quarter of 2012, Wells Fargo created one of every three mortgages in the U.S., and is looking to boost its market share to 40%. Additionally, the company said that the number of applications set a new quarterly high during the most recent three months. Buffett believes Wells Fargo is outpacing its competitors because it managed to successfully navigate the housing crisis. “Wells did the best job of the big players in the mortgage market and therefore they’ve garnered a share as the other fellows have fallen by the wayside.”
Buffett’s Berkshire Hathaway has built its stake in Wells Fargo to over 7%, according to Bloomberg, adding to its position earlier this year. In addition to the Wells Fargo investment, Buffett’s other bets on the housing market include the purchase of a brickmaker, the expansion of Berkshire’s real estate brokerage and the purchase of commercial property through a company jointly owned with Lecadia National Corp.
Apprentice Millionaire Portfolio 