Data released Tuesday show that the U.S. housing market is not at all out of its difficulties, at least as far as pricing is concerned. "The S&P/Case-Shiller index of property values fell 0.8 percent from October 2009, the biggest year-over-year decline since December 2009," according to Bloomberg. On the one hand, few people seem to expect a turnaround in the housing sector soon, but on the other, housing is expected not to become a drag on the economy as the foreclosure stock is eliminated gradually, helped by falling prices and increased affordability. So if we continue to have such negative readings on housing, the Fed may be tempted to act once again to prevent these attitudes becoming too entrenched. In general, we think that the Federal Reserve`s current operational strategy involves a long-term, Japanese style commitment to easing, which would imply that the programs, plans, names and presentation that come with the packages are for cosmetics purposes only, with more surprises always in store in Mr. Bernanke`s Santa hat in case that the spoiled children in the markets cry too loud about neglect and lack of support.
The numbers are not surprising, because the de facto freeze on the sale of foreclosed property understood to have been effected by some banks has intensified the expectation that prices will fall quite a bit further from their present levels, apparently compelling some sellers to accept discounts as the final months approach, in return for the opportunity to dispose of risk. Other background issues, like unemployment numbers, depressed consumer sentiment and spending, rising savings rates, trade and protectionism issues that could suppress growth and investment for many years may have contributed to the fall, but given the optimism inspired by the QE2 plans, we think that most of this fall in prices must be related to the rise in foreclosure stock that has been an issue for a while.
Has the housing market found a bottom? Probably not, because house prices are notoriously slow to shift trends, and the 30% fall from the peak, while significant, does not in any way imply a rapid rise from the bottom of similar proportion in the coming years. After the delusional price action of the first half of this decade, we believe that house prices will remain dormant for a long time to come.
The Fed can inflate stock prices, but it cannot excite and stimulate consumers to spend unless its workmap is being supplemented by actions of the legislature that aim at giving some bargaining power to workers, and thereby improving the effectiveness of the transmission of the stimulus from the government to the people. The main cause for the lack of a strong relationship between falling mortgage rates and stagnant housing market trends originates from this cut-off between the two mentalities, in our opinion Political concerns aside, there is the practical and obvious fact that the Federal Reserve cannot be stopped from doing what it wants to do, given its independence. But as long as the average person doesn`t want to take risk because he can`t see his future, while the shrewd speculator is very much willing to take his dollars and dump them into some bubble somewhere in Asia without scruple, all that will happen is that the stimuli, packages, and plans will at most contribute to a worsening of the imbalances around the world, without having a perceptible impact on the housing market, or any other market where the actors are not speculators (because of past burns), as today`s news show.
Ben Bernanke is an academic and he is essentially experimenting with the world, putting his ideas about the Great Depression, and the Japanese Bust into test by using us as guinea pigs in his mental laboratory. Whether one blames him for that or not, is a matter of taste and philosophy, so doesn`t have a lot to do with practical issues like profit and trading. It is clear that if one wants to emerge as a winner from this difficult experimental phase for the world economy, what the Fed Chairman is trying to do to our lives must be understood and analyzed well. Blind blames, and excited rhetorical flourishes may entertain us, and perhaps help discharge some of the frustration felt over being helpless and clueless as the powerful play with the lives of others. But since the game has its rules, and getting outside of those rules is both costly and risky, it is for now a good idea to do away with the discussion about who is right or wrong, while focusing on whose opinion will count for the foreseeable future. The Case-Shiller survey results only show that the Fed must do more if it wants to get concrete results from its experiment, but it doesn`t say much about whether the Fed`s preferred course of action is justified or not. Fortunately, for us traders information of this kind and amount is highly fruitful, as we may conjecture plausibly that the Federal Resevre will continue to do what it has been doing for years, with all the predictable and exploitable outcomes that come to mind with that understanding.
No comments:
Post a Comment