The top 5% of U.S. earners have recovered nicely since the “end” of the recession in 2009. This skews the consumer confidence numbers. If we examine the breakdown among the different income groups, startling divergences arise. The rich own most of the assets in this country, so when the Fed inflates asset prices they benefit the most. Since money printing does little to stimulate the real economy, the labor market remains in a depressed state.
Loose money conditions seem to promote the interests of the wealthy over those of the rest of the country. Unconventional monetary policy is merely a new euphemism for “trickle-down” economics, and the only thing wrong with this policy is that the wealth does not trickle down:
If you believe that these housing prices are sustainable, consult the first headline above and then examine the chart. Home prices are rising at nearly the same pace as they were when the bubble was inflating in the mid-aughts, and CNBC is calling the housing market the “new stock market.” Moreover, Robert Shiller has called the current price increases meaningless as they reflect speculative activity. Over 60% of the sales are all-cash deals.
Since the American worker is not earning enough to buy his own home, who will repurchase those speculators’ properties when they attempt to cash out? Don’t peddle fantasies about massive REITs holding thousands of rental homes. There are virtually no economies of scale associated with single-family home rentals, and state landlord-tenant laws vary widely. This is a nonstarter as a business, so the question remains: how will the speculators cash out?
Hungary joins the rest of the emerging markets adjusting interest rates in response to the Fed’s taper talk. The Eurozone’s woes suppress demand in Hungary so a rate cut seems like the proper response; however, Hungary just got its inflation rate below 5% late last year. Emerging Europe must walk the same tightrope as emerging markets throughout the world—rates cuts to stimulate the economy while keeping inflation at bay. Perhaps, the head of the Hungarian central bank should talk to his counterparts in Turkey and India before embarking on more rate cuts.
India seems to be heading for a balance of payments crisis. The rupee and the current account balance continue to deteriorate despite efforts to support them by the Reserve Bank of India. The RBI should consider pulling a Volcker and raise rates to outrageous levels to staunch the flow of capital from the subcontinent. While this would solve the problem, it would also cause a painful recession and increased civil unrest. India, like the other emerging markets, only has bad options to choose from.
The incessant money printing since Lehman has destroyed the market’s ability to relay information to participants via price discovery. Increasing risk throughout the PIIGs is being ignored by market participants. The chart above shows the decline in the perceived riskiness between German and Italian bonds. Italy’s economy continues to worsen, and its political situation is destabilizing. Yet, its bonds continue to perform well. Risk cannot be destroyed. It can only be hidden, but while it’s hiding it continues to grow. Eventually, Italy will have a bond crisis, but it appears that it won’t be today.