It is amazing how much “we” forget in the entire short space of “cycles.” That may be a function of an overload of information coming in from all sides, but I doubt it. I have always thought that more was better in that regard. Instead, I prefer to think of it as another monetary corruption.

I am speaking about the “portfolio effect” that monetary economics uses as a primary tool. The idea is simple, in that you penalize “safe” investments (or buy the full allotment of them so they aren’t available – just as the ECB spoke of this morning in their intended “spillover”) so that investors are “forced” (literally, they do not choose of actual free market concerns, but are coerced toward such beneficence) toward risk. I don’t need to rehash how that is supposed to work in the economy, as we are pretty well acquainted in 2014 with how that hasn’t happened.

What is interesting is how that process plays out over time, in that what is almost universally recognized as force and coercion at the outset mutates into rationalizations about how and what counts as “safe” or “rational.” On August 28, 2005, the LA Times published an article that should be required reading for anyone with even a single dollar of “investments.”

This spend-now-rather-than-save-for-later phenomenon has produced undeniable benefits. Experts attribute much of the nation’s economic growth to cash-out refinancings, home equity loans and other methods of tapping rising home values. And additional real estate investments financed by home equity have contributed to the rising home prices that bring owners such pleasure…

If mortgage rates rise sharply or home prices fall, many homeowners could be in financial turmoil. They may be unable to service their loans, or could even find that their homes are worth less than their mortgages.

Such a prospect seems unimaginably distant to Doug Levy, a university administrator in San Francisco.

“Unimaginably distant” was all of twelve months (or less, depending on when you mark the absolute top in the housing “market”). But that was not the main idea presented in the article, which was more about how what used to be universally recognized as prudent fiscal management was turned totally upside down.

Such thriftiness has gone out of fashion. What was once considered undesirable — taking on large debt — is now seen as smart. And what used to be smart — becoming debt-free — is described as imprudent.

Why was being debt-free “imprudent?”

Anthony Hsieh, chief executive of LendingTree Loans, an Internet-based mortgage company, used a more disparaging term. “If you own your own home free and clear, people will often refer to you as a fool. All that money sitting there, doing nothing.”

In other words, if you bought a house for $100,000 in the 1990’s, saw its “value” rise to say $500,000 by 2005 and sat there with no mortgage you were a “fool.” And the “market” of that time made sure you “knew” that you were a fool. Instead of paying down the principal value, supposedly the “best” course was to “do something” with “your money.”

“If you paid your mortgage off, it means you probably did not manage your funds efficiently over the years,” said David Lereah, chief economist of the National Association of Realtors and author of “Are You Missing the Real Estate Boom?” “It’s as if you had 500,000 dollar bills stuffed in your mattress.”

He called it “very unsophisticated.”

There were no “dollar bills” stuffed under any mattress, only that the theme of the time meant turning the place you lived in (for the vast majority) into an “investment.” The only means to do so was a systemic evolution of shadow banking to turn such into a liquid “market.” The establishment of that, and the flow of “money” (eurodollars, mostly), was the sophisticated view of interest rate repression; the “portfolio effect” turned houses into t-bills, or “dollar bills stuffed in your mattress.” To great effect, mind you.

The point of this review exercise is not to belittle anyone caught up in the last bubble, but how that relates to the market climate into which we are functioning. Kurtosis is a statistical term that boils down to the size of the tails – how likely that we experience a large swing or event (to either size). Conventional wisdom still, STILL, thinks of such events as exceedingly rare. But we have had three, THREE, major market “events” in just the first decade of the 2000’s.

The combinations of events and confluence of factors were different in every case, but the presence of the “portfolio effect” is a common strand. The riskiest asset classes become the “safest”, at least in mind of the vast majority of marginal price setting behavior. Economic and market analysis in 2014 has to contend with that paradigm; meaning has anything changed in that regard in this decade to rule out the frequency of “tail events” that plagued the last?

Rate repression is a dangerous allure because it is the living embodiment of the “crowded trade.”  When even houses, or stocks (twice), look a “sure bet” then that simply means everyone is on the upside.  It is axiomatic that everyone will also be on the downside, though you can be sure they will tell you how there is no such thing right up until the moment it all descends into chaos.  The three bears of kurtosis “nobody” saw coming, as even thinking the possibility in real time meant being “imprudent” and acting the “fool.”  History may rhyme and not repeat, but the main point in this century is to why the rhyming has been so foolishly frequent and how we can still hear even now its awfully faint “poetry.”


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