Lonely Jeremiahs

Over eight years ago, when Safe Money editor Mike Larson stood on the rooftops and issued his first stark warnings of a great housing bust ahead, nearly everyone thought he was crazy.

“The American home,” they said, “is the safest, most reliable investment in the world.”

“Their value,” many insisted, “never goes down.”

“The only question any respectable analyst could possibly raise about real estate appreciation,” wrote one commentator, “is ‘how fast?'”

Today, these kinds of comments seem laughable.

But at the time, few analysts questioned this “wisdom,” and fewer still had the guts to say so.

In wasn’t until months later, after the housing bubble began to burst, that some real estate analysts began to join Mike’s bearish camp.

Was that a contrarian sign that
the worst of the bust was over?

Far from it!

Real estate bulls were still running wild.

Real estate naysayers were still a small minority of lonely Jeremiahs.

Home prices had barely begun to fall; even the worst local markets were still down less than 5 percent.

Massive damage to home values — a nationwide, average collapse of 30 percent or more — was still dead ahead.

Widespread global repercussions — including a near meltdown in the world’s biggest banks and most important financial markets — were still on the horizon.

History Repeats Itself. But …
This Time It’s Even Bigger

About one year ago, it began happening all over again.

Much like in the months before the housing bust, Mike stood on the rooftops and shouted his first warnings.

Like last time, everyone said he was crazy.

And like last time, it’s only now — after the first cracks in the market have begun to show themselves — that other prominent experts are joining his camp.

The big difference:

Eight years ago, the epicenter of the bust
was the American home market. 
Now, it’s every bond market on the planet.

And ultimately, bonds are more vital and pivotal in the global economy than homes.

Why?

Because a global bond-price collapse automatically comes with a global interest-rate surge; and sharply higher interest rates directly impact every consumer, every corporation or every government that borrows money.

How prominent are the voices now joining Larson’s once-lonely chorus? Take a look … and then judge for yourself:

Blackrock: Just last week, Blackrock CEO Laurence D. Fink said we now have “bubble-like markets again.”

He warned about the huge rise in the stock market.

He warned about the dramatic and worrisome narrowing in the spreads between what corporations and governments pay for borrowed money — a telltale sign of extremely frothy bond markets.

And he said, point blank, that the Fed is the one largely to blame, due to its unrelenting $85 billion in monthly bond purchases.

How prominent is Blackrock?

Consider this: Most money management firms are delighted when their assets under management exceed $1 billion. Blackrock has $4.1 trillion under management. That’s 4,100 times one billion.

Or look at it this way:

If, instead of buying $85 billion in bonds every month, the Fed decided — TODAY — to start making $85 billion monthly purchases of the assets Blackrock manages … it would not complete that process until year-end 2053 — over 40 years from now.

Blackrock is the single largest money management firm on the planet. When its CEO joins Mike Larson on the rooftop to shout that we have bubble-like markets again, it’s harder to write him off.

Barclays: It was also last week that Michael Gapen, senior economist at Barclays PLC, added his voice to the rising chorus.

His big concern: The giant bubble the Fed’s creating will soon be so large, the Fed itself will have no choice but to step in to puncture it.

Dissenting voices at the Fed itself: Bloomberg reporters Craig Torres and Caroline Salas Gage, summarize them succinctly:

• “Kansas City Fed President Esther George, who has dissented against every Federal Open Market Committee decision this year, has highlighted an increase in farmland prices as a concern …

• “Richard Fisher, president of the Dallas Fed, has pointed to rising home prices in Dallas and Houston as a sign of a U.S. housing bubble.

• “Fed Governors Jeremy Stein and Jerome Powell also have warned this year that some bond yields might be too low for the risk investors are taking.”

Former Fed governor: Regarding how to reign in the Federal Reserve — and all those following its lead to greater and great risk-taking — former Fed governor Laurence Meyer has this to say:

“Supervision and regulation is the first line of defense.” The second line “is to pray.”

Whether you agree or not, I suggest you stand up and listen very carefully. These warnings are not issued lightly; and the consequences to anyone who ignores them will be far from small.

Good luck and God bless!

Martin