“This time it’s different.” That quote is from Sir John Templeton, a legendary investor who is considered the father of the modern mutual fund industry. For most of the month of December, I’ve been hearing ads from mortgage brokers who are promoting the idea of refinancing your house in order to take care of holiday bills. It reminded of the early 2000’s when then Fed Chairman, Alan Greenspan, was urging Americans to use their house as “an ATM” by taking on home equity loans as a means of drawing out cash against home equity for consumption spending. Adding more debt against your house to pay off big credit card balances merely shifts household debt from one creditor to another. What’s worse, it frees up room under the credit card accounts to enable the consumer to take on even more debt.
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In reference to the mortgage and housing market collapse in 2008, Ben Bernanke wrote, “Clearly, many of us at the Fed, including me, underestimated the extent of the housing bubble and the risks it posed.” It’s hard to know if that statement is genuine or not, given that many of us saw the housing bubble that was developing as early as 2004.
The Federal Government’s low-to-no down payment programs via Fannie Mae, Freddie Mac, the FHA, VHA and USDA, combined with the hyper-promotion of cash-out refinancings (bigger 1st mortgages and/or second-lien mortgages) tell me that, once again, most people in this country believe – or rather, hope – that the outcome will be different this time.
The graphic just below is an interesting way to show the affect that Central Bank monetary 
inflation has on asset valuation vs income. Asset valuation should be theoretically derived from the income levels connected to the assets. Either the asset requires a certain level of income level to purchase and maintain the asset or the asset itself generates income/cash flow.
You’ll note the pattern that developed starting with the tech bubble era. Prior to the Clinton administration the Fed subtly intervened in the financial system by been printing money in excess of marginal wealth creation (GDP growth) once Nixon closed the gold window. But, in conjunction with the Greenspan Fed, the Government’s willingness to print money as an official policy tool took on a whole new dimension during the Clinton administration. Note: I’m not making a political judgment per se about the Clinton presidency, because the Fed’s ability to print money to prop up the stock market was established with Reagan’s Executive Order after the 1987 stock crash. You’ll note that the household net worth to income ratio began to rise at a sharp rate starting in mid-1994, which was when the Clinton-Rubin strong dollar policy was implemented. It’s also around the time that Greenspan began regularly printing money to address the series of financial problems that arose in the 1990’s.
The current ratio of household net worth to income is 6.75 – the highest household net worth to income ratio in history. It peaked around 6.5x in 2007 and 6.1x in early 2000. You’ll note that from 1986 to 1995 the ratio averaged just around 5.1x.
A graphic that is correlated to the household net worth/income ratio is the household net worth to GDP. The pic to the right shows household net worth (assets minus debt) vs. a 
plot of the U.S. nominal GDP. As you can see, when the growth in household net worth deviates considerably from the growth in nominal GDP, bad things happen to asset values. Note: household assets consist primarily of a house and retirement funds. Currently the level of household net worth – that is, the value of homes and stock portfolios – relative to GDP is at its highest point in history. This will not end with happiness.
I wanted to present the two previous graphics and my accompanying analysis, in conjunction with the theme that “it is not different this time.” The extreme degree of household asset inflation relative to incremental GDP wealth output is yet another data-point indicating the high probability that a nasty stock market accident will occur sooner or later. To compound the severity of the problem, household asset inflation has been achieved primarily through massive credit creation. The amount of debt per home sold in this country currently is at a record level.
During this past week, the bullish sentiment of investors continued to soar. A record level of investor bullishness never ends well for the stock market. Speaking of which, there has been an interesting development in the Conference Board’s Consumer Confidence metrics. The headline-reported index showed an unexpected declined from 129.5 to 122.1 vs 128 expected. This is a big percentage drop and a big drop vs Wall Street’s crystal ball. However, while the “present situation” index hit its highest level since April 2001, the “expectations” – or “hope” – metric plunged from 113.3 to 99.1. It seems the current euphoria connected to the stock and housing markets is not expected to last.
The chart above shows the spread in consumer confidence between “present conditions” and “future conditions” (present conditions minus future conditions). A rising line indicates that future outlook (“hope”) is diverging negatively from present conditions. I’ve marked with red lines the peaks in this divergence which also happen to correlate with stock market tops (1979, 1987/1989, 2000).
The above commentary in an excerpt from the last issue of IRD’s Short Seller’s Journal. I think retail stocks are going to be hit relentlessly beginning some time this quarter. In fact, one stock I presented as a short in early December was down over 12% yesterday after it released an earnings warning. Some of the best SSJ short ideas in 2017 were retailers. You can learn more about this short-seller newsletter here: Short Seller’s Journal subscription information.
What I pray will truly be different this time around will be the reliance of so many people on that malignant, corrupt gang of grifters along the Potomac. You couldn’t have lived the past 60 years or so-back to the mid 60’s-and not have come to believe that government is just a cruel, murderous, cold hearted con.
Vote, my ass.
There is a much more important reason to never use home equity to pay off credit card balances. Home equity loans are secured against the house. Credit cards are unsecured (fuck you, walk away in case of meltdown) loans. If we did have a financial crisis in this country, you can tell credit card companies to go pound sand. Tell that to your mortgage holder, and you could be living on the street. Reverse is true with student loans (non-dischargable). If that problem becomes central to your life, switch that debt over to credit cards, if you can find a decent rate. Again, you’re putting yourself in a position where you can negotiate. If you really think things are going to crash, that’s a much better position to be in.
Your home equity isn’t protected in bankruptcy if your creditors demand it, and credit card companies winning lawsuits against you can collect in all sorts of manners that won’t allow you to evade them without bankruptcy.
Best Idea is, if you end up with huge credit card balances and use a home equity loan to pay them off and get our from under the high interest of them, get rid of your credit cards and DON’T START RUNNING UP THE DAMN BALANCES AGAIN!!
That’s entirely incorrect. Here in Florida they can’t touch your house. And I think anywhere else, all they can do is lein your property, they cannot force you to sell. You have unsecured debt, and you have secured debt, and they are very, very different. And nobody said anything about avoiding bankruptcy. The issue was staying in your house
Then tell your mortgage holder to stuff it.
I have told kids that are hell bent on going to College to take out credit cards to pay for tuition, books etc. This way, if they can’t pay them, walk. Why? The sheeple response would be “oh, now you are saddling them with bad credit to start their life”. Well, yes, if you look at credit as the be all, end all of life – for about 7 years. However, consider this. These assholes in banking want to shove credit cards on financially illiterate kids to tempt them to spend, fine, spend it on their education in a way that will not enslave them forever. Then, if the “guaranteed jobs” that these institutions are claiming, never materialize, then they simply go chapter 7. They are college kids, they don’t have anything anyway. Go ahead bankster, sue, and try and repo their brain….good luck with that.
Student loans are the road to hell. Baby boomer parents that stupidly put up their home equity to finance an overpriced education soon learn the hard way how things really work. Credit card delinquency….like was said by Starfcker, easy to walk, low risk, and little chance they could EVER collect from a college aged kid with no assets.
It is the ultimate in shoving their own crap back in their faces, and allows kids to have a college education without a lifetime of enslavement. So, for 7 years you have a bankruptcy – from about 19 to 26. So flippin what? I do not know many in that age range that should be , or are, buying a home anyway. Statistics on Millennials living with parents in this age group…anyone?
The smart Millennial (although rare, there are some) would find a good trade school, take out credit cards to pay the tuition, then walk. For the next 7 years, build up cash working in that trade, living with parents, then buy a home IN CASH, or darn close. I know, I know, that is not MORAL to relinquish on your debts….but again, look at the industry pushing the debts. That old saying comes to mind, of a moral person in a room full of thieves…The youth is being literally harvested by these people, and sometimes I would like to see the harvested become the harvester – by their own system.
Muh integrity.??
Had I known I could have done that 30 years ago, I would have. In fact I think student loans were discharchable back in my day. I just didn’t know it.
That’s the Will Robinson warning, whatever the domain. The warning’s unheeded, mostly.
‘This time it’s new to me’ might put it into perspective. But that’s intellectual. And emotional Goliath usually kicks intellectual David’s ass.
Hope is a 4-letter word that’s come a long way since Pandora’s Box. The man from rope-a-dope Hope…that’s not just a wide spot in Arkansas.
Thing that caught my eye was that graphic showing the peaks, then valleys of the 2 biggies during my quest to squirrel away enough for retahrment, independent of social security funding expectations.
Tech / dot.com bubble crash in 2000? 30% haircut in the value of all funds on Wall St. Ouch.
Financial adviser: “Yes, but the long term trend in stocks still makes a strong case. Now that your IRA fund’s share price (and value) took that hit, you should buy more / contribute more pre-tax income while share prices are ‘on sale’, because the eventual rebound will make you happy.” Hmmm. OK…stay the course…more contributions.
Housing bubble crash in 2008…another 30% haircut.
Time to switch strategies. Moved a lump sum of that IRA into a guaranteed annuity (is it really?), and since then, the last 7 years the market’s gone up like like a space shuttle launch.
Missed out on a lot of potential profit, but am not moaning about that.
We’ve had market crashes, and a couple space shuttles go down in flames. Pattern?
Those 2 crashes I believe put a lot of people on the sidelines w/ their nest eggs in cash, if there was any left, and wondered what strategy to employ, in the search for yield? CD’s or MM funds? > 1%. Metals? Have gone sideways for the most part the last few years, only recently rising. But, and here’s the thing. Physical metals aren’t for investment, but for wealth preservation. If stocks tank again, I think you’ll initially see spot prices and metals mining companies’ stock price drop, as people dump them to raise cash for margin calls, or other liquidity needs, briefly flooding the metal supply. There would be a sale worth shopping.
After that, we might…MIGHT see it reverse and spot prices go ballistic. If so, then the mining stocks will march higher. For spot price elevations, here’s the other thing.
Gold bullion coins, do not ‘cost’ $1370.00. More accurately, it now takes 1370 of the inflated dollars to secure a 1 oz. gold eagle, krugger, maple leaf, philharmonic, or buffalo, which is the most beautiful of the bunch. If out of your league with your available funds, go the poor man’s gold route…Silver Eagles, currently costing about 20 inflated USD to purchase a 1 oz. coin.
Who among us here thinks those might be a better gift to a kid than a US Savings Bond or cash? Or a way to park savings in a secure asset, which can be held or stored outside the banking system in vaults for a monthly fee. Even in another country, as buffer against confiscation?
Bitcoin? On the fence on that one still. I do wish I would’ve sunk 1k into it, when I first heard about it 4 years ago, and had the option to take money off the table, then let the remainder house money run with the pack. Those that did will owe taxes, but so what? I’d pay the tax bill on an extra 200k of income from that speculation. Investment? Could be a ponzi, and trying to time any market is a low odds game of getting it just right. Mike Shedlock warned about the housing bubble bust a good 2 years before the pin found it’s mark. It would have been a huge set of brass balls to sell my only house in 2005 at top of market, rent for a few years, and then buy it back as a foreclosure in 2009 for 50% or less of the sale price in ’05. All hindsight tho.
But the wise individuals who bought a rental house after the crash, rehabbed it, and is now producing an income stream…well done. For me, another regretful opportunity missed.
All this is just looking at history, reading articles like the one above, paying attention to experienced people like at the list of resources Admin. lists at the right side of the page.
Then place your bets, carefully. The strategies we use could sink us, pay off handsomely, or we could end up breaking even. Diversified strategies make the most sense. All of your eggs in one basket (all in on Gold? Bitcoin? FANG stocks? Housing? Cash?) …crazy. Good Luck, sincerely.
May the Good Lord bless you and keep you. Make His face to shine upon you, and be gracious unto you. Lift up his countenance upon you, and grant you peace.
-suds
My real estate broker friend who insisted on having a New Year’s Eve toast in spite of my intruding upon she and her 76 year old friend and lover (I’m Big Dog Shaming here Admin) engaged in Viagra inspired (surely?) activity… well, she was telling me all about her Two Bitcoin purchased a year or so ago and also explaining about how the portability issue was similar to that of real estate as an investment. Think of it as being in your possession, but not always easily moved.
On the other hand, if you own the real estate and have the physical documentation you own it and have the means to utilize the real estate for your own sustenance, it is in your possession and YOU are not easily moved.