Federal Reserve | timiacono.com - Part 55

How Fed Policy Distorts Home Prices

I’ve about had it with how giddy a large portion of the U.S. population has become about rising home prices.

Don’t get me wrong, when first thinking about this, I was about as happy as anyone else to learn that property values are now rising sharply again since, after renting for six years, my wife and I finally bought a house about two years ago. So, we stand to benefit as much as anyone else.

But, when you look at what’s driving home prices higher and how unnatural and unsustainable those factors are, suddenly the headlines sound more ominous than optimistic.

Rising Home PricesThe glee of Diane Sawyer and David Muir was nearly uncontrollable on ABC News last night as they detailed the latest findings from Corelogic showing that home prices rose by over 6 percent from a year ago.

This video is the closest that I could find at ABC News, but you get the idea.

This LA Times report detailed the findings of a UCLA Anderson Forecast study that indicated the “housing market is becoming the leading source of strength for the long-sluggish American economic recovery“.

On the surface, this sounds like a good thing, but not when you examine what’s driving home prices.

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The Many Perceptions of Ben Bernanke

I don’t know a thing about Silver Circle or the Silver Circle Movie (coming soon to theaters), but, after stumbling upon this cartoon today, it just seemed too good not to share.

What Ben Bernanke Does

Sadly, that last one in the lower right is probably going to turn out to be spot on, though it may take more than a few years to come to fruition.

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In advance of tomorrow’s report on consumer prices that has the potential to offer a few surprises given the recent surge in the cost of gasoline, clothing, and other essentials, Amity Shlaes files this report at Bloomberg about how inflation has a way of coming about suddenly and, once it does, can be very difficult to stop.

A little is all right. That’s the message Federal Reserve Chairman Ben S. Bernanke has been giving out recently when asked about the evidence of inflation in the U.S. recovery.

BloombergSometimes Bernanke doesn’t even go that far. He simply says he doesn’t see inflation. The Fed chairman recently described the prospects for price increases across the board as “subdued.”

“Sudden” is more like it. The thing about inflation is that it comes out of nowhere and hits you. Monetary policy is like sailing. You’re gliding along, passing the peninsula, and you come about. Nothing. Then the wind fills the sail so fast it knocks you into the sea. Right now, the U.S. is a sailboat that has just made open water, and has already come about. That wind is coming. The sailor just doesn’t know it.

“Sudden” has happened to us before. In World War I, an early version of what we would call the CPI-U, the consumer price index for urban areas, went from 1 percent for 1915 to 7 percent in 1916 to 17 percent in 1917. To returning vets, that felt awful sudden.

History has other examples. In 1945, all seemed well: Inflation was 2 percent, at least officially. Within two years that level hit 14 percent.

All appeared calm in 1972, too, before inflation jumped to 11 percent by 1974, and stayed high for the rest of the decade, diminishing the quality of life for whole cohorts.

The fact that financial repression is now official government/central bank policy and that it’s been more than a generation since we’ve seen high official rates of inflation in the U.S. will surely make dealing with rising prices even more difficult this time around.

Also, this ominous warning was offered:

The greater the denial before, the faster the inflation accelerates after.

Yikes! Suddenly, tomorrow’s CPI report seems a whole lot more interesting…

Dylan Grice On When To Sell Your Gold

Via this item at Business Insider and this one at BullionVault come some much needed words of reassurance for precious metals investors (it’s been another rough week) from Société Générale strategist Dylan Grice:

Some would say the time to sell gold is now… Gold just isn’t the misunderstood, widely shunned asset it was a few years ago. Isn’t the bull market now long in the tooth, with better opportunities to be found elsewhere?

The reason I own gold is because I’m worried about the long-term solvency of developed market governments.

Eventually, there will be a crisis of such magnitude that the political winds change direction, and become blustering gales forcing us onto the course of fiscal sustainability. Until it does, the temptation to inflate will remain, as will economists with spurious mathematical rationalisations as to why such inflation will make everything OK (witness the IMF’s recent recommendation that inflation targets be raised to 4%: IMF Tells Bankers to Rethink Inflation – WSJ). Until it does, the outlook will remain favorable for gold. But eventually, majority opinion will accept the painful contractionary medicine because it will have to. That will be the time to sell gold.

Grice also gets in a in a jab or two at economists:

…economists look down on disciplines which might teach them it, such as history, because they aren’t mathematical enough. True, historians don’t use maths (primarily because they don’t have physics envy) but what they do use is common sense, and an understanding that while the economic laws might hold in the long run, in the short run the political beast must be fed.

I don’t know about you, but I feel much better now…

The policy making committee of the Federal Reserve gathered today in Washington to pass judgment on the state of the economy and the stock market certainly liked what it heard, though precious metals markets surely did not.

Fed Rate Cutting CyclesAs expected, there were no changes to short-term interest rates, existing policies were unchanged, and no new policy moves were announced.

The Fed acknowledged an improving labor market and rising oil prices while also downplaying the threat of spillover effects from Europe, that is, now that the European Central Bank has finally seen fit to print up more than a trillion dollars for the greater good.

“Steady as she goes” is what equity markets were waiting to hear and they responded accordingly (Susie Gharib and Tom Hudson no doubt had twinkles in their eyes on PBS’s Nightly Business Report) while gold and silver traders were again disappointed to hear nary a mention of further central bank money printing on this side of the Atlantic and many of them exited positions as a result.

None of that should come as much of a surprise.

But, what was interesting about today’s meeting was that the policy statement released after its conclusion had a few subtle changes as annotated in the graphic below, something that has been the exception to the rule lately.

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