Rising asset prices in the 90's were sustained because we had steady job creation and real wage increases. That picture ended in 2000 with a collapse of the dot-coms and the Naz.
In an attempt to defeat the normal business cycle, Greenspan slashed interest rates to absurdly low levels. Meanwhile Bush was adding fuel to the fire with business tax credits as well as tax cuts. The "recovery" we are currently experiencing is nothing more than a spectacular "echo bubble" created by that joint effort.
In affect we are in “A crisis of Excess Liquidity”. That liquidity fueled asset speculation, most notably in real estate on the newly restored belief that “Housing Always Goes Up”. No concern has been given to rent prices, sustainability, rising interest rates, property taxes, or anything else. People are flipping houses like they flipped stocks in 2000. Flush with confidence, consumers were all too quick to treat their house like an ATM, buying SUVs, boats, expensive vacations, or leveraging into even more real estate.
Unfortunately the "echo bubble" is not sustainable for the simple reason that it is not supported by wage growth or job creation. Housing afforability is at an all time low, and 90% of the homes purchased last year were at 10% down or less. This places the FED squarely in a box of its own making. The FED can and has provided liquidity, but it could not and did not dictate where that liquidity went. The FED’s intention was to create jobs. Greenspan created jobs all right, unfortunately not here but in China and India.
President Bush barely escaped winning the “Hoover Award” (The first president to lose jobs on his term since Hoover) only because of a huge increase in Federal jobs. Private sector jobs actually declined on Bush’s watch.
The Northern Trust offers this analysis:
Private sector nonfarm payrolls in February continue to fall short of the previous peak reading (established in December 2000) by 0.5% or 592,000. The growth in government jobs (+853,000 between February 2001 and February 2005) explains the shortfall in private sector jobs.
Unlike Greenspan I am not “in a conundrum” nor am I optimistic about job creation going forward. Tightening interest rates simply can not be good for housing or consumer spending in an environment of declining real wages. At some point speculation dies. It always does. The fact that 36% of houses sold last year were for investment purposes tells the story. What buyers are left? At any rate, WHEN not IF housing stalls, just where does Greenspan think job creation is going to come from in the second half of the year? If the biggest stimulus in history produced such anemic results what do we get for an encore?
The latest selloff in treasuries is going to put the final nail in the coffin of the refi boom. Unable to spend their houses, what are cash strapped consumers going to do to support consumption?
You could sure see that thinking in the performance of the financial sector today. CFC was down 4.8%, LEND was down 4.39%, and GM and Ford (which are financial sub-prime lender masquerading as automobile manufacturers) both hit fresh 52 week lows today.
What next?
We are in the worst possible environment for the stock market. Rising interest rates, absurd valuations, and a FED that does not see what is about to hit them square in the face: A housing bust. Without jobs and wage increases, housing is due for a brutally hard landing.
There are no more rabbits left in Greenspan’s hat. Look for falling stock prices, falling asset prices, falling home prices and in fact a global recession later this year or early 2006. This boom will end the way they all do: a credit bust, bankruptcies, and lots of pain.
It’s not different this time. Greenspan did not defeat the economic cycle as he proclaimed a year ago. All he did was postpone the agony and increased the amount of misallocated capital that will eventually be destroyed. There will be hell to pay, and perhaps it started today.
Mish
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