all life is a stage

Stocks, Housing, Dollar Interrelated in Impact: Popping of Nation’s Bubble Economy May Make Recovery Less Certain

Economic forecaster Robert Wiedemer departs from the current analysis of the U.S. economy that it will recover after a certain time period. He describes the economy as a virtual cycle of bubbles going back three decades that built up over time. The stock market, housing sector, and the dollar are all interrelated and helped to build the other and the economy.

“When one starts to pop, it puts pressure on the others,” he told a business briefing at the National Press Club in Washington June 23. Wiedemer co-authored “America’s Bubble Economy,” a book published in 2015 that anticipated the popping of the housing and stock market bubbles.

When bubbles pop they don’t necessarily recover, he added. The economy is a current problem, not one for a future generation, which some people would prefer to believe, Wiedemer said. “It is your problem as soon as your lender gets scared about lending you money.”

Need to Focus on U.S. Economic Forces Beyond Trends

It is unclear as to what’s driving the economy forward, he thinks. In his view, little fundamental macroeconomic analysis is provided as to what’s going on or why the economy will improve. “Basically, economies have drivers and there isn’t an automatic cycle,” Wiedemer said.

For that reason, he favors a focus on fundamental economic forces, not just trends, for indicators of what is happening. He believes we have a slow economy, not simply a down economic cycle. “It’s a housing price collapse, the economy won’t rebound unless home prices rebound [and] that’s unlikely to happen.”

As to why in 2006 he saw the housing market falling when it appeared to be stable, and the stock market was zooming up to 14,000, Wiedemer looked at the macroeconomic fundamentals. The current economic situation is driven by the housing crisis, he told the business briefing.

Doubling in Housing Prices With No Income to Pay for Homes

“The fundamental issue in housing was very simple. Housing prices almost doubled while income barely grew.” That factor was behind Wiedemer’s concern over the economy. People temporarily were able to buy homes through nontraditional and subprime mortgages, making low downpayments, and interest-only or no-documentation loans.

Housing prices haven’t really popped and have been rising in many areas. In Manhattan, for instance, prices have just recently started to go down. “You’ve got a long, long ways to go back to where we started before we had the mortgage frenzy,” Wiedemer said. Unless something keeps them up, prices will fall back to where they were in 2012 or further because nothing is fundamentally driving them up, he noted. You need income or a doubling of the population to drive them up.

The Wall Street Journal’s of July 12, 2009, “US requires another stimulus package, says Warren Buffett” reported on Berkshire Hathaway Chairman Warren Buffett’s comments in a CNBC interview that the original cause of the global economic downturn “was the housing bubble and the excessive amount of homes built.” Buffett favors not encouraging a lot of new housing construction for now to get supply and demand more in line.

As part of the downward trend in home prices, Wiedemer expects to see increasingly higher downpayments over time, with jobs being even more of an issue. “If anything, the financial crisis has taken away mortgages from people who were probably pretty high credit risk anyway.”

The difficulty in the economy rebounding is the government needing to maintain the increase in housing prices, he said. This affects discretionary spending and the U.S. and world economies. It’s hard for the government to revive the housing prices without the kinds of mortgages that resulted in severe problems.

U.S. Unemployment Rate Will Prove More Enduring Problem

But the lack of jobs is what affects the lack of purchase of durable goods. “It’s really jobs that are going to cause your big problems,” Wiedemer said. Bullish economists say jobs probably won’t come back for at least a year or two.

He predicts a 10% unemployment rate by the end of this year and about a 12% rate by the end of 2010, which will start to cause problems. Higher jobless rates will occur in states like California and Michigan.

In seeking to get the private sector to help buy up some of the bad loans, institutional investors may be more reluctant to take the losses because of the risk. The assets underlying the loans have fallen. “It’s basically risky to think the economy will simply rebound,” Wiedemer said. The economy evolves as factors drive it such as new technologies, factors that don’t always repeat themselves.

As to the government’s $787 billion economic stimulus program, it’s likely to be ineffective in solving the current problems but effective in postponing bigger problems, he said. Wiedemer is not worried so much about the size of the stimulus package, though it may not be well spent, it’s that it puts a spotlight on the accumulated U.S. debt.

The stimulus will have a limited impact, except for the government’s rescue of Freddie Mac and Fannie Mae to preserve mortgage lending. Both control about 70% of the mortgage market, and the Federal Housing Administration (FHA) is about 15%. The Fed is now buying the bonds Freddie and Fannie sell as well as Treasury bonds.

It doesn’t mean a recovery, just avoiding a further deterioration for now.