The US Fed may go for broke - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 29 August 2012
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The US Fed may go for broke A  A  A

Ouzilly, France

If everybody had an ocean
Across the U.S.A.
Then everybody'd be surfin'
Like californ-I-A
You'd see 'em wearin' their baggies
Huarachi sandals, too
A bushy bushy blonde hairdo
Surfin' U.S.A.

The Beach Boys

The summer fun continues...

Remember our report from yesterday?

Charles Evans' - the Fed's main man in Chicago, and a man who seems to have spent too much time in the sun - suggested that the Fed buy as many bonds as necessary...and keep buying them...in order to bring down unemployment.

Then, the rumors kept coming: The Fed, which meets on Friday, may initiate an 'open ended' QE program. Why? Because the US is headed off the 'fiscal cliff'...and because more limited QE programs up to now haven't done much good.

In other words, the Fed may go for broke...

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...and we have no doubt it will get there.

But now? Probably not. The US GDP figure is supposed to be revised upward to 1.8% today. Stocks are still trading at high prices. Federal debt auctions are still over-subscribed. Why panic?

Yes, the dreaded 'fiscal cliff ' wipe out is only 4 months away. But there is little evidence that the Fed's monetary policy (including QE) can be used as a substitute for fiscal policy.

Besides, you'd think the Fed would give Congress and the Administration a chance to make a mess of things before making a mess of things itself. That's what the separation of powers is all about.

But let's put this whole line of thinking on hold. Unless there's a crack in the stock market...or a collapse in China...or a break-up in Europe...we doubt the Fed will take such dramatic action. It will hold that in reserve, for later, when it is really desperate. But who knows?

In the meantime, here's the latest news: stocks down 21 (the Dow) ...gold down $5...and homeowners have been underwater so long they're growing webbed feet.

The latest news is that housing prices are on the rise. Here's Reuters:

Home prices rose for the fifth consecutive month in June, a fresh sign of improvement as the recovery in the housing market picks up steam.

But in a reminder of how fragile the broader economy remains, another measure of consumers' economic views released on Tuesday deteriorated in August to the lowest in nine months as Americans were more pessimistic about business and labor market prospects.

The housing sector has been a bright spot, with the stabilization in prices since February suggesting the long-struggling market has finally turned a corner.

Still, the recovery is expected to be slow as the sector faces several hurdles, including ongoing foreclosures and a large number of underwater homeowners.

The S&P/Case Shiller composite index of 20 metropolitan areas gained 0.9 percent on a seasonally adjusted basis for June, topping economists' forecasts for a 0.5 percent rise, according to a Reuters poll.

On a non-seasonally adjusted basis, prices were even stronger, up 2.3 percent.

Prices in the 20 cities rose 0.5 percent compared with the previous year, the first time year-over-year price changes were in positive territory since September 2010.

Atlanta fared the worst, tumbling 12.1 percent from a year ago. Hard-hit Phoenix continued to bounce back and was up nearly 14 percent.

But that doesn't seem to have cheered up households very much. The report continues:

The Conference Board, an industry group, said its index of consumer attitudes fell to 60.6 from a downwardly revised 65.4 the previous month. Economists had expected a slight increase to 66 from July's original reading of 65.9.

August's figure was the lowest level since November.

The expectations index tumbled to 70.5 from 78.4, while the present situation index edged down to 45.8 from 45.9.

The decline suggested the recent rise in gasoline prices took a toll on consumers, said Paul Dales, senior U.S. economist at Capital Economics. The raft of tax hikes and spending cuts that are set to take effect at the beginning of next year may also be weighing on sentiment, he said.

And small wonder. There are millions of people who are still sucking water into their lungs. Remarkably, nearly one out of three homeowners owes more on his mortgage than his house is worth. Here's the report:

According to the second quarter 2012 Zillow Negative Equity Report, 30.9% of homeowners are underwater, owing a combined $1.15 trillion more than their homes are worth. The extent and magnitude of negative equity, however, varies widely by the age of the borrower and when a home was purchased.

Looking at our sample of borrowers, we see that negative equity is most common in younger age brackets with 39% of borrowers age 20 to 24, 48% of borrowers age 25 to 29, and 51% of borrowers age 30 to 34, underwater on their mortgages. All told, 48% of borrowers under the age of 40 are underwater on their mortgages. However, while the rate of negative equity is higher in younger age brackets, the delinquency rate is noticeably lower.

Among those underwater, delinquency (measured as a borrower who is 90 days or more past due on a mortgage payment) is most common in the oldest and middle age brackets with 10.6% of underwater borrowers over the age of 85 delinquent on their mortgage payments and similar percentages of borrowers in both the 40 to 44 and 45 to 49 age brackets delinquent on their mortgages.

And you'll remember our report on Monday, that America's middle class households now have less real income and less real wealth than they did 10 years ago.

In particular, at the dawn of the 21st century, the Baby Boomers went surfing. They hoped to catch a wave on stocks...then on housing.

Alas, they 'got worked.'

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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