It's happy hour so I will try to be brief. I wanted to share today's CNBC interview with Yale's Robert Shiller. Dr. Shiller in my mind is one of the strongest voices of reason when it comes to the financial markets and bubbles.
One of Dr. Shiller's consistent views on bubbles is that psychology is the key element as to how bubbles form and then burst.
He was asked about the current "rebound" in housing and his take IMO is right on the money:
So are we about to see housing bubble #2? This remains to be seen, but I am leaning the same way Dr. Shiller is which is the likelihood of this occurring is high.
I say this because this recovery has been too predictable given the horrible state of the economy. As Dr. Shilling explains, our addiction to bubbles is probably as powerful a force as the housing tax credit when it comes to explaining the powerful reversal in home prices.
The 800lb gorilla in the room when it comes to housing's future is interest rates moving forward. The risks of rates rising are extremely high IMO.
The main threat of higher rates of course is inflation. We are already seeing increasing prices as a result of a falling dollar. Oil has touched $77 in the past couple days. Gold remains firmly over the $1000 level. These are some of the "unintended consequences" when you print money in an attempt to keep the USA's debt bubble inflated.
The Fed eventually will be forced to address the falling dollar. What's the easiest way to strengthen the dollar? Why raise rates of course. Higher interest rates down the road could very well trigger another housing collapse.
Also, keep in mind that the Fed's quantitative easing fund is now down to a measly $3 billion. That's the equivelant of a penny when you have a deficit of over $10 trillion dollars like we do.
The question I have regarding the QE is this: If the Fed doesn't replenish the QE program, will the bond market sell off treasuries in an attempt to force the Fed's hand in terms of what their next plan of action is?
If the Fed does decide to extend the QE program, what will the dollar look like as a result? Something tells me a piece of toilet paper may be worth more than a greenback if this insanity continues.
The bottom line here is the Fed has no way out of this mess. If they decide to pull the liquidity from the markets, housing will once again get decimated because higher interest rates will rise and that combined with tighter lending standards will once again force prices to tumble.
If the Fed continues to QE, inflation is going to soar and $200 oil will be right around the corner.
IMO, Stay on the sidelines if you are looking to buy a house. The recovery we are witnessing in real estate is a nothing but a "housing bear market rally" and the speculators/bubble makers will once again take it on the chin.
Disclosure: Short treasuries via TBT in longer term accounts.