A weekend topic starting with two reports from Bloomberg. “To cryptocurrency true believers, Bitcoin is the ultimate store of value, the most solid hedge against the rampant inflation manufactured by reckless central banks and their money-printing. To skeptics, the crypto world as a whole is a mirage whose massive run-up past $2 trillion was simply the speculative byproduct of the extraordinary amount of easy cash that’s been sloshing around in the global economy — in effect, a big bubble. Both of those theories are about to face their biggest test yet.”
“Another way of thinking about the tech wreck: At no other point since the bursting of the dot-com bubble have so many companies fallen like this while the index itself was so close to a peak. ‘Valuations are at historical highs, companies are raising billions based on fairy dust, and the Fed is signaling a tightening cycle,’ said Jason Goepfert, chief research officer at Sundial Capital Research. ‘All of these are scaring investors that we’re on the cusp of a repeat of 1999-2000.’”
The Boca Raton Tribune. “The frenzied housing market appears to be cooling in many Western U.S. markets, even as prices continue to rise nearly unabated in the Eastern part of the country, according to a new study. Los Angeles and Boise, Idaho are among a growing number of Western metropolitan areas developing a ‘pricing crown’ – a leveling off of home price gains that typically precedes a market slowdown. Other markets gaining pricing crowns include San Diego and San Francisco, as well as Ventura and Stockton, California.”
“‘These latest results suggest that the long-anticipated housing downturn is already beginning in the Western half of the U.S.,’ said Ken H. Johnson, Ph.D., an economist for FAU. ‘This is not totally surprising because it is in the West where the greatest separation between actual housing prices and projected housing prices has occurred to this point.’”
From Marketplace. “It’s getting a little more expensive to take out a mortgage. For those in the market for a second home, costs are going up even more, thanks to higher fees coming in a few months. Demand for second homes has gone through the roof in the last couple of years, as newly remote workers seek more space and better scenery. ‘There is a long-term trend that we’ve seen of second-home purchases increasing,’ said Daryl Fairweather, chief economist at Redfin . ‘I think part of that just goes along with wealth inequality in the rich getting richer and being able to buy more second homes.’”
“This week, the Federal Housing Finance Agency announced it’s increasing the upfront fees for second-home loans sold to Fannie Mae and Freddie Mac by as much as about 3.9% starting in April. Fairweather said regulators may be trying to get a handle on what could be an emerging bubble in the housing market. ‘If a whole lot of people are buying up second homes with the belief that it’s a great investment because the value will only go up, that can turn into bubble behavior,’ she said.”
From Bitcoin Magazine. “The Ponzi Scheme is a simple concept. ‘A Ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors. Ponzi scheme organizers often promise to invest your money and generate high returns with little or no risk. But in many Ponzi schemes, the fraudsters do not invest the money. Instead, they use it to pay those who invested earlier and may keep some for themselves.’”
“‘With little or no legitimate earnings, Ponzi schemes require a constant flow of new money to survive. When it becomes hard to recruit new investors, or when large numbers of existing investors cash out, these schemes tend to collapse.’”
“If we replace investors with lenders, we can look at a similar type of Ponzi. Let’s look at an example: Let’s say Acme Corp takes out a $1 million loan for one year against their $10 million in assets. They spend that $1 million, but they still need to pay back the bank $1 million plus 5% interest. So, Acme takes out another loan for $2 million plus, pays back the first loan, and keeps another $1 million to spend in the second year. In the third year, Acme owes that $2 million plus with interest, so they take out $3 million, plus enough to cover last year’s loan payment, with $1 million to spend in the third year.”
“As long as a lender is still willing to lend to Acme, this can technically go on as long as Acme’s interest rate is lower than the growth rate of their assets. Acme can even use borrowed money to buy more assets, further fueling this machine.”
“The longer Acme is able to run the infinite money machine, the higher the nominal value of Acme and its assets goes, and the harder they and their investors fall when a sudden drawdown triggers a margin call from creditors. For a real world example, see one of China’s biggest companies, Evergrande. From the article in the Financial Times. ‘There is no way we can repay so many creditors with our limited resources,’ said an Evergrande executive, who asked not to be identified. ‘We will let judges decide who gets paid and how much.’”
“Seems like a dangerous game to play, but Acme is just one company. In our modern economy, however, we have endowed interest rates with a divine status, allowing central bankers to set these rates instead of participants in a free market. Central banks like the Federal Reserve change rates using their monopoly on the creation and destruction of reserve money, which they use to buy and sell assets within the commercial banking system. These actions are convoluted, but their stated intent is to influence all other interest rates in the economy to move up or down.”
“Central banks and governments cannot stop taking on debt and printing money, because our currencies themselves are a key part of a massive infinite money machine Ponzi. The source of this infinite money machine is central banking. A corporation or individual needs to show a lender that they are creditworthy, but the central bank is a special type of lender. This lender bears no cost to lend their currency, so they can lend to anyone, anytime, at any rate. Governments utilize this special lender as their literal infinite money machine. And they even admit it’s an infinite money machine.”
“However, a central bank and its fiat currency have the same Achilles heel as a Ponzi Scheme: ‘With little or no legitimate earnings, Ponzi schemes require a constant flow of new money to survive. When it becomes hard to recruit new investors, or when large numbers of existing investors cash out, these schemes tend to collapse.’ If central banks and governments stop printing money, or if demand for their debt or currency falls, the entire ruse will collapse.”
From Mises.org. “Runaway house price inflation continues to characterize the U.S. market. House prices across the country rose 15.8% on average in October 2021 from the year before. U.S. house prices are far over their 2006 Bubble peak, and remain over the Bubble peak even after adjustment for consumer price inflation. Unbelievably, in this situation the Federal Reserve keeps on buying mortgages.”
“It buys a lot of them and continues to be the price-setting marginal buyer or Big Bid in the mortgage market, expanding its mortgage portfolio with one hand, and printing money with the other. It should have stopped before now, but the purchases, financed by newly created fiat money, or monetization, go on. They proceed at the rate of tens of billions of dollars a month, stoking the house price inflation, making it harder and harder for new families to afford a house.”
“The balance sheet of the Federal Reserve has grown to a size that would have amazed previous generations of Federal Reserve governors and economists. The total assets of the Federal Reserve reached $8.7 trillion in November 2021. This is just about double the $4.5 trillion of November 2016, five years before—and we thought it was really big then. Today’s Federal Reserve assets are ten times what they were in November 2006, 15 years ago, when they were $861 billion, and none were mortgages.”
“Our closing questions on the outlook are: If the Federal Reserve stops being the Big Bid for mortgages, how much higher will mortgage interest rates go from their present abnormally low level? When the mortgage rates rise, how quickly will the house price inflation end?”