The incredible essay below is reproduced here with permission by Dr. Hunt for Epsilon Theory. If Dr. Hunt is even moderately accurate, which I believe he is, the housing market headwind on deck could be every bit as powerful as what hit at the end of Bubble 1.0.
Bottom line: The Fed, during Obama, did everything in its power to surge all asset prices – stocks, bonds, real estate, collectables, et al – with no regard for its own guidance, as to when it would take its lead-foot off the accelerator. Now, under Trump, they are doing the exact opposite; looking ‘through’ all the obvious coincident and near/mid term, economic weakening trends in an effort to raise rates as quickly as possible. If, the past 8-years of a Fed in Armageddon-mode created the ‘everything bubble’ (hat-tip Wolf Richter), what will shifting monetary policy into reverse do to said asset price levels?
Back in Bubble 1.0, the helium came out of house prices when the ‘unorthodox credit and liquidity’ was forced out of the markets all at once precipitated by the mortgage credit market implosion. Quickly, house prices ‘reattached’ to end-user, shelter-buyer employment, income, and credit fundamentals…or, to what end-user, shelter-buyers could really buy using a traditional, 30-year fixed rate mortgage, and a truthful loan application, which was about 30% less.
What’s really the difference between the ‘unorthodox credit and liquidity’ coming out back then and coming out now from a Fed in reverse? House prices didn’t surpass their 2007 peaks because everybody is working, making more money (with the exception of those in the footprint of tech bubble 2.0). They have been goosed for years by unorthodox demand using unorthodox credit and liquidity (i.e., investors, speculators, flippers, floppers, foreigners, money launderers, options, etc etc) just like in Bubble 1.0.
This post was published at Zero Hedge on Jun 19, 2017.