Wednesday, March 11, 2015

The Obama Legacy: Totally "Unforeseen" Collapse

The Federal Reserve aligns the business cycle with the election cycle

1 Year Treasury Yields (Forward interest rate expectations):


Following the Asian currency crisis in 1997 and Russian debt default in 1998, the Fed quickly lowered interest rates to prevent systemic collapse. That late cycle liquidity injection propelled the Nasdaq from 1400 in late 1998 to 5000 by March 2000. As we see above, throughout that time, the Fed was actually back to raising rates (except for December 1999, for Y2K), to alleviate the obvious equity bubble.

Therefore, the last year of the Clinton Administration, Y2K, marked the blow-off top in the Nasdaq and subsequent melt-down of the Nasdaq from 5000 down to 1600 within one year (March 2001). The Fed's rapid lowering and then raising of interest rates had created the bubble and collapsed the bubble in the span of a little over one year. In the event, interest rates were 'normalized' on the day Bush was elected (November, 2000).

Shortly after Bush took office  in 2001, the economy entered full blown recession. And then of course the 9/11 attack. So as we see above, interest rates were lowered from 6% to 1% over the course of two years. That of course spawned the "subprime" era. At that low point in interest rates, Greenspan was extolling the virtues of Adjustable Rate Mortgages - just before he moved to once again normalize interest rates by raising them 17 times in a row, back up to 5%. He obliterated millions of households that had taken advantage of the 1% interest rates via ARMs. There were many many warning signs of the subprime, housing bubble. Entire blogs were devoted to the topic, mine to say the least. I started blogging in December 1996 on the topic.

My favourite blog in that era was "Housing Panic" which has since been shut down. It was story after story of empty tract developments, mortgage fraud, appraisal fraud, NINJA loans etc. Nevertheless, as we know, the stock market peaked in Bush's 7th year as President. And the lamestream never saw the collapse coming. Ironically, one of the last posts, hails the new President Obama and the new era of "hope and change":

Nov. 5, 2008: "HousingPANIC congratulates President-Elect Barack Hussein Obama on his historic win. America thankfully chose hope over fear."

"The good news for Obama? The bar is set low. Really, really low.

The bad news? George W. Bush, the GOP (and many of Obama's fellow Democrats in Congress) wrecked America, spent all the money and demoralized the nation."

Well, here we are now in Obama's 7th year as President.
Once again, The Fed is attempting to normalize interest rates, albeit from a ludicrously low level. Once again, there are myriad warning signs ever single day that an even bigger bubble has formed. Once again shit is breaking due to (the mere suggestion of) higher interest rates.

And once again, the lamestream is intentionally clueless as to the level of risk.

The Fed has to normalize interest rates prior to the next election (2016). It's the way the game is played.