Epic Property Bubble Stuns ‘Man And Beast’ Alike, Albert Edwards Says

Epic Property Bubble Stuns ‘Man And Beast’ Alike, Albert Edwards Says

On Thursday morning, I set about highlighting the latest from SocGen’s Albert Edwards, but I ended up on a detour about Jerome Powell’s fraught tenure as Fed Chair.

As regular readers are well apprised, editorial detours are a fixture in these pages. Simply put: I start typing and see where it goes.

Sometimes, I’ll circle back and write the pieces I meant to write initially. Invariably, they’re shorter.

The overarching point of Edwards’s Thursday missive was to suggest not just that the Fed won’t be able to normalize policy, but that, in a more general sense, “easy money comes at a heavy price [and] central banks have become slaves to the bubbles that they blow.”

He cited housing as a particularly egregious example. I’ve obviously dedicated copious amounts of space lately to the housing market, and with good reason. Prices are at record highs and the most recent data pretty clearly suggests affordability is starting to chip away at what analysts assumed was bulletproof demand.

Read more:

Analysts Surprised Americans Can’t Afford $400,000 Homes

‘Simply Squeezed’: Surging Prices Finally Bite US Housing

Edwards pointed to a composite of OECD indicators (a price-to-income gauge and a price-to-rent index).

The figure (below) is an average of those two. Bloomberg used it in an article published last week.

For Edwards, housing is an impediment to Fed tightening and if you ask him, the bond market knows this.

“I believe the bond market just doesn’t believe the Fed can follow through on its tougher talk… because having created another huge, real-terms house price bubble, they are trapped,” he wrote, referencing the figure (below, from SocGen).

A reader asked me last week whether I believed housing prices would be lower five years from now. The truth is, I have no idea, because nobody really knows anything with any degree of certainty. This week’s Fannie and Freddie drama has obvious implications for the US market. But, I’d be inclined to believe that absent additional central bank largesse, prices will almost surely fall from post-pandemic peaks.

Edwards cited a heatmap from Bloomberg economics (you can have a look at it for yourself in the linked article above) on the way to delivering the following assessment which is hyperbolic even by Albert’s high standards for hyperbole:

But when it comes to blowing house price bubbles, Bloomberg Economics believes there isn’t even room for the Fed on the medal podium. This is now a global property bubble of epic proportions never before seen by man or beast and it has entrapped more CBs than just the Fed.

Finally, Albert returned to a favorite talking point — the discrepancy between reported profit growth for America’s largest firms and a broader gauge.

The culprit here is “huge inventory profits,” Edwards remarked, on the way to saying that while it makes sense that stock market profits “dominated as they are by the FAANGs, are doing much better” than the BEA’s nation-wide gauge, “on another level… it is extremely concerning because certainly in the past these divergences usually prove temporary and are resolved in a market collapse.”

I’m not sure “certainly” and “usually” work well together in that quoted passage, but Albert has a unique ability to make contradictions seem somehow compatible.


6 thoughts on “Epic Property Bubble Stuns ‘Man And Beast’ Alike, Albert Edwards Says

    1. Talking heads seem to think their hyperbole is a veritable “Master of the Universe”.

      I think they will learn one day they cannot manufacture a market through hyperbole.

  1. The GSE SCOTUS ruling is probably the best thing that could have happened for the Biden administration vis a vis housing. As confusing as their decision is, and I still find it hilarious how often they punt on cases that are clearly only up to them to decide, Mark Calabria was a typical Trump appointee in that he was only appointed to FHFA to destroy the very government entity he was supposed to run. (See DeJoy) However now, Biden can appoint someone to run FHFA who’s entire objective isn’t to hand the GSEs superior business model to big banks but rather figure out how to even the housing market for the minority who haven’t had a fair shake in lending. Calabria’s primary focus was raising guarantee fees and instrumenting the common securitization platform which basically gave private banks access to the GSE securitization platform without forcing them to develop a competing solution. I have zero idea how much of the current bubble is wrapped up in those notes but I highly suspect that this housing bubble, much like the last, is owed largely to the GOPs incessant drive to wipe out the GSEs in favor of private lending. Largely owing to the fact that since Fannie Mae was founded the middle class has been able to build wealth through affordable home ownership instead of big banks holding everyone hostage to unfair lending practices.

  2. A lot of talk about inflating bubbles – all very interesting. Would love to hear more about deflating them. For instance, is there any way to address the housing bubble aside from an uncontrolled bursting. It’s extremely worrying that healthy food, functional housing and preventative healthcare are harder to come by for the bottom 50%. Governments tend to ‘burst’ when they can’t provide these basics for the masses.

    1. This government has functioned from the outset with the belief that protecting the rich is all that is required to maintain power. Over the centuries the poor have been maligned, abused, and abandoned in various and sundry ways and thus far that belief has held up. When the Great Recession happened, who did the government protect? The rich who actually caused the entire thing to occur in the first place. When the current set of bubbles finally bursts they will do the same thing and the beat goes on.

      1. IMO the main cause of 2008 was greed coupled with the need to create growth at any cost. The theoretical value of any stock is given by D1/k-g, where D1 is the end of year dividend, k is the investor’s required return and g is growth. The more growth that is expected, the smaller is k-g, and the bigger the implied dividend multiple. Return based on this idea, value = (D1/P) + g, in other words, yield plus growth. The higher the growth, the bigger the return. So what is the key to riches? Growth. Growth is a tyrant and when it slows stock prices tend to fall so to keep up growth a firm will do about anything, including giving 500K mortgages to people who haven’t got a job and packaging them up in MBSs to sell offshore. This all worked really well when AIG and others created CDSs to guarantee payment on the MBSs, thus allowing credit rating agencies to give these bonds high ratings. This wasn’t the government protecting the rich, it was the rich protecting themselves. When the protection failed, then the government stepped in but they got paid back with interest so … However, without the substandard folks borrowing to up their lifestyles, this whole mess would have been less of a problem and solved in say 2006. Trouble is, low growth, bad market and no one wants that.

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