... in investing are "This time it's different". Sir John Templeton. Popular media, adverts, word-on-the-street
all seem to be in agreement that a fundamental shift has occurred in the American attitude towards work, life, investing,
etc. But what behavior has changed? State and federal government continue to spend far in advance of the taxpayer's
ability and/or willingness to pay. The subsidy for home ownership has increased substantially during the recession,
which was at least partly caused by this subsidy. As a result, homes remain overvalued in many markets. And has
the decline in the U.S. consumer's appetite for gadgets and luxuries been driven by a change in attitude, or by the crimping
of available credit? Smart-phone adoption surpassed 20% by recent estimates, and Blu-ray players were among the hottest
items for holiday spending.
So it appears plausible we are entering a new cyclical boom-bust cycle,
or more likely haven't finished the last one. The imbalanced mortgage market remains a worry, particularly the large,
new participation by the Fed. The bank has accelerated
their purchases of agency MBS in the past six weeks,
adding 17% to reach a balance of $909 billion in the 3rd week of December. Plans are to top out at $1.25 trillion, representing
about one-fourth of all outstanding agency MBS, or 1/8th of all outstanding mortgage debt. These balances are still
valued at face value, i.e. stated valued of the outstanding principal of the underlying mortgages. So the Fed's
balance sheet contains a substantial chunk of assets that will likely be written down in the next year or so. And can
the Fed stop or slow their purchases without causing a rise in mortgage rates, and sharp drop in home prices. Will they
have the willpower to do so, or resume propping up the residential market despite a recovering economy?
Mortgage
and MBS Market data from:
Fed Flow of funds, http://www.federalreserve.gov/releases/z1/Current/z1r-2.pdf
and
SIFMA
research, http://www.sifma.org/uploadedFiles/Research/Statistics/SIFMA_USBondMarketOutstanding.pdf
