Scarcity, Risk And Debt...or the more new normal the better! 

No systemic risk to see here...move along.

In effect, The Fed's ZIRP (Zero Interest Rate Policy) and easy credit have leveraged up systemic risk and moral hazard. Moral hazard describes the difference between those who risk losing money in a speculation and those with no risk of loss. Those with very limited risk--for example, Too Big to Fail (TBTF) banks backstopped by the Fed or FHA home buyers putting down 3% cash on a home--will act quite differently from those who risk losing their all their capital if the bet goes bad.

Put another way: if all your losses at the casino are covered by the Fed, while any winnings are yours to keep, you will gamble big and gamble often. After all, why not? The losses are shifted to someone else while you get to keep any gains.

Abundant, easy credit incentivizes systemic speculation, leverage and risk. If you're issuing mortgages guaranteed by the U.S. government, there is no need to be too risk-averse: originate a mortgage for anyone with a pulse and skim the fat origination fee. If the borrower defaults, who cares? You skimmed your fee, and all losses are shifted to the taxpayers.

When skimming and speculation are more profitable than actually increasing the production of goods and services, the discipline and incentives of a market economy are distorted to the point of no return. That is the U.S. economy in a nutshell.

The only way to restore natural market discipline is to let the cost of credit rise to a market-discovered price, force all speculators to absorb the losses resulting from their bad bets, and let the risk of losses discipline lenders to adjust loan portfolios and interest rates to reflect the risks of rising rates and defaults.

Scarcity of credit is the source of sound risk assessment and the discipline of aligning interest rates to risk and inflation. Manipulating rates to near-zero and opening the credit floodgates has incentivized everything sound economic policy avoids: moral hazard, speculation, leverage and reliance on marginal credit expansion for profits and "growth."

"Growth" that depends on manipulated interest rates and easy credit is a sand castle awaiting the rising tide; its destruction is assured.

by Charles Hugh-Smith of OfTwoMinds blog

taper train awaiting...

Recent Fed president comments indicating that the infamous 'taper' is still waiting at the station for the economic train to build up enough thrust to leave the station without Bernanke attempting to push and force it:

New York Fed Bank President Dudley said that the economy has not improved meaningfully enough to tighten monetary policy.

“To begin to taper, I have two tests that must be passed:

     (1) evidence that the labor market has shown improvement, and

    (2) information about the economy’s forward momentum that makes me confident that labor market improvement will continue in the future,” Dudley said.

He continued, “we have yet to see any meaningful pickup in the economy's forward momentum… the economy still needs the support of a very accommodative monetary policy.” 

Meanwhile, Atlanta Bank President Lockhart said,” In the short time between now and the October meeting, I don’t think there will be an accumulation of enough evidence to dramatically change the picture.”

Is the big investor real estate unwind beginning?

Is the residential real estate investor 'opportunity window' closing quickly? 

And what impact will that have on the housing market as a whole?

With an economy that still has job creation issues, depressed income levels, a dysfunctional federal government, unheard of debt levels and spending that is out of control while the Fed continues its attempt to 'prime the pump' with its gigantic hedge fund - where do we go from here?

Stay tuned for more of the new normal.......

Housing "Recovery" Endgame Escalates

ZeroHedge

Och-Ziff were perhaps a little early but used the last 10 months to unwind their real estate and exit the landlord business as the hedge-fund sponsored echo-bubble in housing rolled over into the mainstream. "American-Homes-4-Rent"'s IPO suggested a scramble to exit. With 60% of home purchases now being cash-only (explains the ongoing and massive layoffs in the mortgage business not just due to rate-driven weakening of demand), it is therefore a concern when one of the biggest funds playing in this space - OakTree Capital - announces plan to exit the buy-to-rent trade - selling roughly 500 fully-leased homes. As Reuters notes, it is yet another indication that early investors are looking to cash-out on the "recovery" in U.S. housing prices.

Via Reuters,

Oaktree, which manages about $76 billion, and its partner Carrington Mortgage Services are entertaining bids for the portfolio of fully-leased homes as they seek to exit from the buy-to-rent trade that has become popular the past two years with hedge funds and private equity firms.

Oaktree, which specializes in distressed investing, and Carrington had initially planned on converting their portfolio into a real estate investment trust. But investors have now decided to simply exit the trade. Their asking price for the portfolio could not be learned.

Earlier this year, Reuters first reported that Oaktree, after partnering with Carrington in early 2012, was souring on the buy-to-rent trade after seeing returns on rents from single-family homes begin to compress.

There has been a transformation in the U.S. buy-to-rent trade over the past year, which initially began with a number of small hedge fund and speculators buying the wreckage of the housing bust in southern California, Florida, Arizona and Nevada.

Fueled in part by the Federal Reserve's policies, which made it easy to borrow money to buy distressed real estate, the buying spree led investors to become more aggressive in seeking higher-yielding assets.

 To date, Blackstone is the single-largest buyer of foreclosed homes, owning about 32,000 in a dozen states. Other big acquirers are: American Homes for Rent, Colony Capital and Silver Bay Realty Trust Corp.

American Homes, Silver Bay and a few other institutional buyers of foreclosed homes have tried to monetize their investment by converting their home portfolios into publicly traded real estate investment trust.

Who will be left holding the bag this time?

interesting data points 

As we continue to move through the new normal of our nation's economic malaise, here are some interesting data points to ponder upon:

1) household income levels - not positive

2) housing data - still a very wild ride

3) 10 year treasury yield chart for September - a lot of movement, a lot of volatility...FOMC trying to keep us on our toes!

2012 Household Income, August Housing Starts

• At An 18-Year Low, 2012 Real Median Household Income Was Below Levels Seen in 1968 through 1974
• 2012 Income Variance Hit Record High,Suggestive of Greater Financial and Economic Crises Ahead
• Systemic Instabilities That Led to 2008 Crisis Still Have to Be Worked Through
• Housing Starts Continued in Renewed Downturn or Stagnation 

Source: Shadow Government Statistics, American Business Analytics & Research LLC

Median Incomes Have Increased In Just Two Of The Last 11 Years

Some housing data:



Further housing gains require strong income growth from U.S. consumers, but with 11 million Americans seeking work, this growth is unlikely to materialize.

And finally, what a ride we are on.......

Chart Of The Day

life cycles....do they always repeat

This Failure Rate Will Shock You

by Simon Black of Sovereign Man blog,

On August 19th, 43 BC, 2056 years ago to the day, a twenty year old soldier born Gaius Octavius Thurinus assumed control of the most powerful civilization on the planet.

Standing in front of his Army that he had just marched into Rome, Gaius forced the Senate to ‘elect’ him to the highest political office in the land at the time.

And once in power, he never let go.

From August 19, 43 BC until his death (which coincidentally was also on August 19th) in 14 AD, Gaius deftly increased his authority until he wielded total control over Rome.

Of course, Gaius ultimately became known as Augustus, the first emperor of the Roman Empire. So one could argue this was the day the Republic ‘officially’ died and was replaced with a succession of incompetent megalomaniacs.

This includes an infamous cast of characters, from the morally depraved Caligula to the certifiably insane Nero, to the tax-mongering Vespasian, to the oppressive tyrant Domitian.

This trend continued for hundreds of years. Tyranny. Oppression. Overspending. Hyperinflation. Civil war. External war. Debilitating taxes. Punitive regulations. And a terminal decline in people’s freedom and standard of living.

This is such a familiar story. Empires throughout history have always gone through this life cycle of rise, peak, decline, and collapse. Rome. Egypt. The Habsburg Empire. The Ottoman Empire.

And the salient points are almost always the same– out of control government spending, a rapidly debased currency, costly foreign military campaigns, burdensome regulations, etc.

More importantly, in almost every instance, there’s always been a tiny elite who thinks they should control the entire system.

Yet history is very clear: societies that organize themselves in this way suffer a 100% failure rate, without exception.

Curiously, these same mistakes are repeated over and over again.

There’s always a new elite showering themselves with unchecked dictatorial powers– from control of the money supply to control of the military.

For example, four men control over 70% of the world’s money supply in our modern central banking system. They have the power to conjure unlimited quantities of currency out of thin air in their sole discretion.

Meanwhile, the “richest” countries in the world (US, Europe, Japan, etc.) are so deeply in debt that they have to borrow money just to pay interest on the money they’ve already borrowed.

This isn’t rocket science. Predicting the end of this system is not attention-seeking sensationalism; it’s just common sense.

During the housing boom just a few years ago, everyone thought that home prices would go up forever.

Then suddenly it all crashed. And afterwards, everyone said, “Duh, it doesn’t make sense to loan millions of dollars to dead people.”

This too will seem obvious in hindsight.

And even the staunchest advocates of the system (like Paul Krugman) will look back and say, “Sure, I knew that would happen. Obviously you can’t spend and print that kind of money without consequence.”

Meanwhile, the controlling elite will keep careening towards its historical destiny.

That’s because today’s system shares similar fundamentals as nearly every other case of failed empire. And it’s foolish to think that this time will be any different.

Something to think about:

• From bondage to spiritual faith;
• From spiritual faith to great courage;
• From courage to liberty;
• From liberty to abundance;
• From abundance to selfishness;
• From selfishness to complacency;
• From complacency to apathy;
• From apathy to dependence;
• From dependence back into bondage.
• Rinse and repeat throughout history

source unknown