Here are two of the distortions created by money printing courtesy of your Federal Reserve. In the first article, we learn that Bernanke’s bond bubble is deflating in response to taper talk. Pre-GFC, TBTF were willing to take on more inventory resulting in more liquid markets. In response to Basel III requirements and also to avoid be left holding the bag when the bond bubble bursts, banks have scaled down their involvement in fixed income trading. Good luck selling those high yield notes when the time comes.
In the second article, the declining fortunes of short sellers are discussed. Cheap money has made shorting the market a dangerous proposition reducing short interest. When the market enters panic mode, those short positions that were never established will not be there to cushion the fall.
The Fed has been easing for seven years now first via interest rate cuts and now through printing money to buy bonds. Only when the check arrives will people realize that this lunch was anything but free.
The mainstream media has lost track of the Greek bailout tally. As we explained yesterday, the next bailout will be the fourth, not the third:
The German politicians are handling this situation masterfully by telling German voters that there will not be a bailout while simultaneously promising the Greeks debt forgiveness if they stick to the bailout conditions.
Germany has no plans to discuss additional bailouts with Greece until next Spring, by which time it will surely need one. Despite troika and Greek assurances that everything is running smoothly, investors are skittish about something as the benchmark Greek debt yield has risen over 4% in the last two days
The market swoon is not all about the Fed’s taper talk represented by the green arrow in the chart. China began having liquidity issues almost three weeks prior, the red arrow. The biggest loser in the last six months is surprisingly not India. The Brazilian real has had a tougher half-year. However, weak currencies have stoked inflation in all four of the countries represented in the chart with two, Turkey and Brazil, undergoing political instability. India will soon join them.
The mainstream media’s housing recovery narrative works thus. Virtually every piece of data is conformed to support a story that the rise in housing prices is a result of the economic recovery and not an unsustainable bubble. In the Reuters article, the author writes:
U.S. home resales rose in July to their highest level in over three years, suggesting a sharp increase in borrowing costs is having only a limited impact on the housing market’s recovery.
There is another way to interpret the data, but since alternate analyses do not conform to the narrative, they are ignored. The chart above shows that mortgage applications and housing sales have diverged from their usual relationship because over 60% of new house purchases are cash deals by speculators, not consumers. How soon the mainstream media forgets that a housing market inflated by speculative activity is a bubble à la 2006.
This article also creates facts to support the narrative. The price gains are attributed to a job market recovery; yet, incomes have yet to recover to their pre-GFC levels for the vast majority of Americans. There is one driver to the housing market today: low interest rates. The rise in rates will surely crimp activity in the future as even the NAR’s shill economist, Lawrence Yun, implies:
Last month, home buyers appeared undeterred by a recent spike in borrowing rates. Indeed, Yun suggested some home buyers might be rushing to make purchases now to avoid further rate increases that are widely expected.
Sales brought forward to beat a rise in interest are sales that will not occur in coming months, but even this expected downturn won’t be enough to derail the narrative.