Housing bubble two is the next shoe to drop in 2022 as the everything bubble implodes as the Federal Reserve and its western-aligned central banks implement the most aggressive tightening in over four decades.
In the wake of the 2020 global lockdowns, the cost of shutting down economies, forcing and, in some cases paying people not to work, has led to unprecedented public deficits financed by historic central bank currency creation.
“Housing bubble two is the next shoe to drop in 2022 as the everything bubble implodes”
Housing bubble two likely to be worse than housing bubble one
M2, which includes all components of the money supply, has been closely watched by economists and market watchers for decades.
One school of economic thought argues that inflation is caused by the money supply.
The Friedman money supply theory asserts that money supply is the primary factor in determining inflation/deflation in an economy.
But critics of Friedman’s money supply theory cited that M2 alone is unlikely to cause inflation and that the other factor in the equation is the velocity of money M1V.
“One school of economic thought argues that inflation is caused by the money supply”
So, if central banks expand the money supply M2 but businesses and households decide to save, not consume and invest, then expanding M2 has no impact on inflation.
So the velocity of money M1V in the second quarter of 2022 was 1.2.
Money velocity is at an all-time low, which suggests that USD is circulating through the economy less, and there are fewer transactions.
An economy in freefall means household demand freezes, sending M1V lower.
“Undisciplined M2 leads to a sovereign debt crisis and housing bubble two burts ” – Win Investing
Even more concerning about Housing bubble 2, is that the Fed has changed the frequency with which it is reporting the M2 money supply
M2 weekly data is no longer published.
M2 data was viewed as important to determine the trajectory of inflation and asset prices and it was published every week.
So the Fed believes that market watchers and economists should stop obsessing about M2 despite it heading into the stratosphere.
But rising M2 leads to larger public deficits, the debasement of the currency, and inflation.
Undisciplined M2 leads to a sovereign debt crisis and housing bubble two burts
Increasing the money supply without increasing economic production or output means more cash chasing a fixed supply of goods and services, which leads to higher prices.
Moreover, if investors believe the economic outlook is negative and fiscal management is on an unsustainable trajectory, investors will sell the sovereign bonds of that country.
So, as the demand for the country’s sovereign bonds falls, its corresponding yield rises.
The US 10 Year, German 10 Year, and the UK 10 Year sovereign bonds, known as gilts, yield are all rising.
But rising sovereign yields, particularly the 10-year, impact borrowing costs for medium long-term business loans and mortgages.
The housing bubble two bursts will be significant because the real estate market inflated with decades of cheap credit
So the sovereign debt crisis in the UK is particularly acute due to the political wilderness, Brexit, and an unsustainable fiscal policy.
Global demand for GDP has collapsed since Brexit. Euro has more than double the international demand, but that is still well behind global demand for USD, which is more than 50%. While there is so much trouble in the world, USD rallies due to its currency haven status.
“There’s a lot of work to get UK interest rates to come back down, especially when we still face an enormous inflation threat” – Win Investing
Relationship between rising sovereign yields and housing bubble two
So sovereign yields rise and adversely impact the real estate market because it increases the cost of servicing a mortgage.
September Uk gilt crisis sent the UK 10 Year Gilt to near record highs, and Mortgage rates continued to climb in October hitting their highest levels in 14 years.
UK Consumer prices rose by 10.1% in the year to September, returning to a 40-year high as food, energy, and transport costs climbed.
Mortgage rates have been rising for months as central banks work in cahoots to tackle inflation.
However, UK rates rose sharply after financial markets reacted badly to the government’s mini-budget last month, which promised billions of pounds of unfunded tax cuts.
Bill Blain, from investment firm Shard Capital, said mortgage rates coming down depended on “when we can create stability again”.
“There’s a lot of work to get UK interest rates to come back down, especially when we still face an enormous inflation threat,” he added.
“The only way you can address inflation is by continuing to raise interest rates, so I think we’re a long way from seeing mortgage rates start to come down.”
But we know from the 2.2 trillion GBP gilt sovereign debt market crisis, which almost blew up UK pension funds, the currency GBP and triggered global contagion and a systemic crisis, that tightening policy is exhausted.
Housing bubble two is the last bubble to pop
So as we go along the asset risk scale, the riskiest assets, high beta stocks, technology growth stocks, and cryptocurrencies are the first assets to pop.
Real estate is the last asset class to crash and the last to recover.
As more investors realize the Fed tightening bluff has no credibility, the first assets to lead the recovery are high-risk assets, then eventually real estate as investors rotate their profits into the property.
But inflation is likely to become entrenched, particularly during these geopolitical uncertainties. War is inflationary, and leads to shortages because production is diverted from the civilian economy into the military economy.
Central bank pivot will play out in stages, from a reduction in rate hikes to a pause, then eventually central bank rate cuts.
The pivot could be too slow to save another housing bubble from bursting and causing another real estate crash. High end properties could be worse impacted from the pending real estate crash.