Sunday January 29, 2012

Business News

Bernake Banks On Housing

AMP ForecastLOW Rates will Persist Until 2014

Submitted by Jack Bass, Chilliwack

 

redictions are dour and reinforce the need for caution in our portfolio choices. Bad news is never welcome but we can profit from facing the facts.

Bernanke Doubles Down on Fed Bet Defied by Recession

Ben S. Bernanke is signaling his willingness to double down on a three-year bet that's failed to revive housing, showing the extent of the Federal Reserve chairman's effort to wrest a recovery from the deepest recession. Since the Fed started buying $1.25 trillion of mortgage bonds in January 2009, the value of U.S. housing has fallen 4.1 percent, and is down 32 percent from its 2006 peak, according to an S&P/Case-Shiller index. The central bank is poised to buy about $200 billion this year, or more than 20 percent of new loans, as it reinvests debt that's being paid off. Some Fed officials have said they may support additional purchases that Barclays Capital estimates could total as much as $750 billion.

And even Fed hawks, such as Richmond Fed President Jeffrey Lacker, have joined the parade, as reported by MarketWatch.

While much progress has been made in adjusting to the post-financial-crisis environment, the housing market still has "substantial adjustment" ahead, he said. "Given sizeable oversupply and tighter credit standards, the housing market appears to be in for a lengthy adjustment process," Lacker said.

With mortgages rates at record lows, buyers are still on the sidelines, and while the reasons vary, negative sentiment is the key driver. And how would the population have a positive outlook on life, when the quotidian necessities force an increasing number to use their savings, as reported by Reuters.

In an ominous sign for America's economic growth prospects, workers are paring back contributions to college funds and growing numbers are borrowing from their retirement accounts. Some policymakers worry that a recent spike in credit card usage could mean that people, many of whom are struggling on incomes that have lagged inflation, are taking out new debt just to meet the costs of day-to-day living.

AMP ForecastLOW Rates will Persist Until 2014

Thus, when I heard that the Fed extended its low rate pledge until the middle of 2013, I couldn't believe it, and Jeffrey Lacker was the only one to be against the defined time period.

I believe that by now the Fed is starting to understand that the one variable - consumer sentiment -- that it cannot control with its mechanical money exercises, is truly the key, and if the Fed is expecting a stock market rally to address the issue, they have it wrong. Capital resources are finite, and are shifted from asset class to asset class, and if the word on Main street is that John Doe's money should be in stocks, houses will not be purchased. Certainly a stock market rally will provide temporary sentiment relief, but the ongoing deflationary forces in the housing industry will keep the consumer fully aware that all is not well--and the market will adjust in due time.

Furthermore, the Fed is perpetuating the perception of an economy that will stay weak for the foreseeable future, which coupled with a continuing decline in home prices, removes the stimulation to jump into the real estate market. Yet, there lies the bright contradiction because that's exactly what the Fed wants.

Housing  ( AVOID)

The ongoing foreclosures and the respective unserviceable debt is not accounted for yet, and until the Fed faces the reality that debt must be written down, they can set interest rates at negative 10% and nothing will be resolved.

Yes, the institution is now more transparent, even providing an inflation target for whatever it's worth, but the exercise is designed to inflate the Fed's stature and counteract the institution's growing irrelevance, not provide guidance or address economic woes.

Thus, the Fed's "Donut Theory" is that the more donuts one eats, the fatter one gets, and it is bent on providing the delicious treats through large quantitative exercises. However, one must actually eat the donuts to put on some weight, and the Fed cannot force anyone to stuff the goodies down their throats.

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