Even without knowing anything about the future, we grow nervous. The more we look, the more we see dangerous distortions and illusions caused by central bank meddling.
Page one of yesterday’s Wall Street Journal: ‘Debt Rises in Deals Despite Warnings.’
Regulators deem six times leverage (putting in $1 million…and borrowing $6 million…to do a $7 million deal) to be the upward limit of what is ‘safe’. But the Journal reports that 40% of US private-equity deals are leveraged beyond that level. According to the paper, that puts private-equity debt at heights not seen ‘since the pre-financial crisis peak of 52% of buyout loans in 2007.’
Then, over on page C1: ‘Riskier Fannie Bonds Are Devoured.’
Fannie Mae would have gone broke in 2008. Instead, the feds stepped in with enough new cash to rig the mortgage market to a whole new level.
Do we know the US property market is softening?
Do we know that interest rates will go up and Fannie Mae will go down?
Most economists and investment advisors make their forecasts based on what they know. We rely on what we don’t.
Go ahead. Ask us what is ahead for the US economy. ‘We have no idea,’ is the quick and ready answer.
And when will QE end?
‘Hey, what do you take us for? Some sort of psychic?’
Will stocks go up or down?
‘If we knew that, do you think we’d tell you?
No, dear reader, ignorance is more valuable than knowledge. Because it is far more accurate and reliable. We don’t know what will happen in the property market…or to mortgage rates. But that doesn’t stop us from trying to understand the facts in front of us right here…and right now.
What does Fannie Mae do? Why does it exist?
You’ll recall that Fannie Mae stands at the left hand of the US government… and that the government’s aim is always to reward the elite who control it, while keeping the mob (more or less) under control.
Fannie Mae helps it do both. It creates a quasi-monopoly in mortgage finance — with rich rewards to the finance and home-building industries. And it lures the lumpenproletariat into another fatal illusion.
The typical voter hallucinates that he controls the government. The typical investor imagines he is on a level playing field with Goldman Sachs. And the typical mortgage holder believes he ‘owns’ the house he lives in.
What really happens is the financial industry borrows funds at a rate of interest near zero to make mortgage loans. Aided and abetted by Fannie Mae, it is now landlord to 44 million Americans.
The poor ‘homeowner’ is turned into a mortgage slave. He is stuck for life — or longer — making payments on a house that cost the financial industry nothing.
What will happen next?
We’re too fascinated by the here-and-now to care. For example, we look out at the US stock market, and we are amazed.
The S&P 500 is trading at 25 times the average inflation-adjusted earnings from the previous 10 years — what’s known as the Shiller P/E (after Yale economics professor Robert Shiller) or the CAPE (which stands for Cyclically-Adjusted Price-Earnings ratio). That’s a nearly 54% premium to the average Shiller P/E, going back over a century.
What would justify such high prices stock prices? Not earnings. The index’s dividend yield, too, implies foreknowledge. At 2.4%, it is just over half the level of annual consumer price inflation, as measured by MIT’s Billion Prices Project. Investors must believe stock prices are going up; otherwise they’ll lose money every year.
Meanwhile, we note that a dollar’s worth of dividends from hated Russian oil and gas producer Gazprom costs less than half as much. And in terms of proven earnings, you get more than six times more for your buck.
(Gazprom trades at just under three times 12-month ‘as reported’ earnings. The S&P 500 trades at 18 times 12-month ‘as reported’ earnings.)
Why the big difference? Investors must know something. But what? Will Putin do something that further suppresses capital values in Russia? Will Obama?
Again, we know as little about the former as we do about the latter. All we know is you get a lot more for your money in Russia than in the US.
Draw your own conclusion.
for Markets and Money