Speaking of Shills

I just have to shake my head at this flack piece by Dana Peterson, EVP and Chief Economist for The Conference Board.  First a bit about Ms. Peterson.  She was appointed to her position a year ago after doing undergrad and grad in economics (*SNORT*), a stint at the DC Fed, and several years as an economist at Citi.  In other words she has no real-world knowledge of real estate of business and only a selective and pigeon-holed knowledge of finance.  And she's wholly owned by The Powers That Be (TPTB).  As for The Conference Board, it was founded over a century ago by leading industrialists and financiers as the National Industrial Conference Board, and its job was to block labor organization and promote open-shop laws.  In spite of the name change, nothing has really changed there.  It has been declared "a trusted source" by the usual suspects (*COUGH*Chicago Tribune*COUGH*Wall Street Journal*COUGH*) but really just cranks out "research" designed to show that everything is proceeding smoothly and to keep regulators and media from looking into what TPTB are doing at the expense of the rest of us.  Which brings us to this article.

Ms. Peterson's thesis is we're not in a real estate bubble.  First off, she gets the dates of the prior bubble wrong.  In 2005 the bubble was already late-stage, and as I noted in my prior post, it lasted until 2008 due to the machinations of the perpetrators.  Second, she says fraud isn't driving the market increases this time, basic supply and demand are.  This is true in a narrow and frankly sick sort of way.  As she states, there is a percentage of Millennials who are moving into the housing market.  She doesn't state this is a decided minority of Millennials who overwhelmingly into two groups: those who've hit the jackpot and landed stable, well-paying jobs, and those whose parents can boost them (There is of course significant overlap.).  The bulk of Millennials are either scraping by in rentals they can barely afford or are still in the folks' basements (And by the way, there are plenty of folks older than Millennials scraping by with barely affordable rentals, right up to those of us on the cusp of retirement.  But TPTB like to flog us for not having $1,000,000 saved away.  We really do live in a bottomless crock.).

So I don't agree with Ms. Peterson that there is some youth parade driving the market.  The reason is the same as it has been to some extent all the way back to the 70s: There aren't enough stable, living wage jobs to support a healthy single-family residence market.  Since so much of our economy is dependent on that market, we've invented unhealthy ways of keeping it going, such as all the mortgage fraud 15 years ago.  These methods invariably produce bubbles, and the bubbles invariably pop.

I would also note Ms. Peterson is wrong about there being a big change in the mortgage market from fifteen years ago (There is one exception I'll look at below.).  The same banks (or their successors) are at play, the same secondary market, and the same securitization model funneling into REITs.  And if you think Dodd-Frank really makes a difference, I have some oceanfront property in Yuma, Arizona to sell you.

So if the kids aren't alright and we don't have a bunch of mortgage fraud going on, what is driving the market?  The answer actually lies in Ms. Peterson's article.  Fifteen years ago there weren't enough good borrowers, so they were manufactured via fraud.  Lots of creative financing: no down payment, no documentation, high loan-to-value (even over 100%), and variable interest rates everywhere.  As Ms. Peterson notes, the mortgages this time are overwhelmingly conventional.  Now ask yourself who can get these loans?  One group is the fortunate few who have either made it or whose parents did.  The other group is the one really driving this market: corporate landlords.  And that's not good.  Corporate landlords have deep pockets for obtaining financing, and they're using it to snap up single family residences to convert to rentals and older commercial properties to tear down and redevelop into mid-rise apartments and condos.  There are entire housing subdivisions being built out there to be flipped as a package to a corporate landlord, and the entire subdivision will then be rental houses.  So the housing supply is shrinking, which in turn drives prices up, which makes TPTB and their kids the only ones who can afford to buy, causing another shift of assets from ordinary people to the top.  So everyone has to rent, and rents are sky-rocketing as a result.  Bye bye affordable housing.

So what is TPTB's game?  What happens to their investments if only the top 10% can afford to live in them?  Are they really making a sucker's bet?  I don't think so.  I think they believe we've hit End Game.  They know everyone has to live somewhere and they can always count on their pet government entities to bulldoze homeless camps as needed.  I think they believe the next crash, and it will happen, will result in neofeudalism with them as the lords and ordinary people as serfs, exchanging their freedom for some hovel to live in.

So keep putting lipstick on that pig, Ms. Peterson.  But until you have some actual evidence for what you're shoveling, I'm not buying a bit of it.

Another Post For Idiots To Ignore

As I have noted elsewhere (and many other elsewheres too), I started blowing the whistle on the real estate bubble in December 2005.  The market was too hot, there was obvious fraud, mortgage rates were going up, etc.  I didn't know when the bubble would pop because I had not yet identified the forces driving it, but I figured it had to be soon, say in the next year or so.  Frankly it should have, and I guess I'll relate that tale whilst I am at it.

Thanksgiving 2006 Wells Fargo and JP Morgan Chase froze a pile of business lines of credit and converted them to straight loans with 60-month amortizations.  When I contacted Chase, not one but two EVP/AGCs informed me Chase had done this pursuant to a clause in the LOC agreement that had been fully disclosed.  While the clause did exist, the allegation it had been in any way disclosed was patently false.  I then knew something strange was going on, but I did not yet know what.  It took me awhile to dig up the puzzle pieces and fit them together.  What was happening was that the levels of fraud in the mortgage market had become so obvious it was no longer politically feasible to continue ignoring them, and so the regulators had been awakened from their previously mandated slumbers and were now on the move.  Wells, Chase, Goldman Sachs, and all the other players needed to spread some chicken feed to keep the regulators distracted while they got on with the business of lining up a nice collection of marks (AIG, Bear Stearns, Lehman Bros., pension funds, and mortal schmucks who believed the rating agencies were playing a straight game) to take the garbage off their books.  The regulators pounced on the chicken feed in Spring 2007, which gave the players enough time to keep playing.  And then in 2008 everything conveniently hit the fan.  Wells got a seat at the big-boy table via taking over Wachovia, Chase got a new lease on life via its sandbag takeover of Washington Mutual and its sweetheart takeover of Bear (I imagine Barclays wishes it had gotten a deal like that for Lehman,), those with cash (And in spite of, or more likely because of, all the illiquidity, certain players had piles of cash.) snapped up piles of assets on the cheap (Because after all the purpose of bubbles is to pop them to allow further asset concentration in the hands of Those Who Matter.), and we hit the reset button for the next bubble.  So the evidence indicates the bubble pop was delayed by over a year to protect certain players that had created the bubble in the first place.

Anyway.  In the middle of all this, August 2006 to be precise, Peter Schiff concluded the real estate party was over and things were heading down.  In December he noted the market had peaked the prior December (Now when was it again that I called my shot?) and would crash in 2007.  It's apparent he was just looking at market fundamentals (as was I) and thought the market would behave according to those fundamentals (as did I), having no real knowledge of the market manipulation going on that would stall the inevitable for over a year (knowledge I did not have either).  But unlike me, Schiff became a major talking head and got lots of influence and money.  But I'm not bitter.  At least not much.  Because I can point to Schiff as an example of how even a broken clock is right twice a day.

Because since then he has a record of being spectacularly wrong.  He thinks Medicare should be slashed, demonstrating a fundamental ignorance of how Medicare works, how it could work if expanded, and how it would be better than our current system of no one seeking medical care and when they do they have to file bankruptcy.  He thinks we should replace the current income tax system with either a sales tax (which would be regressive and hit hardest those least able to afford it) or a flat tax (which would be little better).  And in a doozy of pretzel logic, the US went from being a creditor nation to a debtor nation in the 1970s because people stopped saving.  Yes, that must be it.  Let's ignore the October 1973 OPEC embargo that ended the US's energy price advantage that had kept its products competitive around the world.  Let's ignore the resulting recession that destroyed millions of jobs.  Let's ignore that most people had no options allowing them to adapt to this new normal because our entire society was based on urban sprawl and the automobile.  Let's ignore that productivity kept increasing, but instead of any of that gain going to wages, it was all syphoned off to pad corporate profits.  Let's ignore that in spite of the recession, expenses were still going up even though wages weren't.  Let's ignore that families had to get second, third, and fourth incomes to try and make ends meet.  Let's ignore that that didn't work any better then than it does now.  And let's ignore that people stopped saving simply because there was nothing left over to save.  Schiff's positions are designed to keep moving public and private money from all of us to the 1%.  He ought to change his name from "Schiff" to "Shill".

But he must be getting desperate, because with his latest move, he has outdone himself.  He has teamed up with none other than Jim Rickards.  I've noted the credibility, of lack of same, of Rickards's "financial advice" elsewhere.  Now they've partnered up and doubled down.  And what they're selling is no better than ever.  As I've said more times than I care to count, just because you've seen somebody on TV or YouTube doesn't mean you should listen to them.