By Charles Biderman
Want to piss off homeowners? Tell them that while home prices have been cut in half since the bubble burst, stock prices are back to being down less than 15% the October 2007 peak. You heard that right: The S&P 500 (SPDR S&P 500 Trust ETF: SPY) is down less than 15% and home prices are down 50%, a half-price sale, from the high.
Why? Obvious answer. The Fed is rigging the stock market and doing everything it can to push stock prices higher. Each Fed easing somehow or other lowered interest rates, which pushed money into stocks. On the other hand, the Fed has nationalized the mortgage market, and that has made it impossible for anyone without perfect credit to get a mortgage. From 0 down during the bubble to no mortgage money available, no wonder housing prices have been cut in half.
As I have said in many previous videos, investors believe religiously that stock prices are protected by the Bernanke Put. Remember how low stock prices plunged in March 2009? Stock prices back then had dropped more than half from the October 2007 peak, as had home equity. Well, that March the Fed announced a major new monetary-easing program and stock prices soared by around 50%.
Then after a 20% sell-off, the Fed rolled out QE2; stock prices popped 40%. Then after another 20% sell-off, the Fed announced something called Operation Twist and stocks rose 30%. Notice a pattern here? Every Fed easing produces a smaller bounce. Now we are about 5% down from the most recent market peak in April. And at the April high, the U.S. stock market was only down about 10% from the peak.
Yet home prices are still down about 50%. How many of you know that at the cycle top in 2007, total household holdings of stocks and all home equity net of mortgages were roughly the same, according to the Federal Reserve Z1 Flow of Funds? That's right. At the highs, home equity—the value of all homes minus all mortgages—was $13 trillion, and the value of stocks held by households was around $14 trillion. The most recent Fed Z1 reports that equity in all homes is about $6.6 trillion and total stocks held by households are about $13 trillion, just about double housing.
I am willing to bet very few of you know that back in 1982, the year before the 25-year bull market in stocks began, households owned about $1 trillion in stocks and $2.5 trillion in houses. What a turnaround. In 1982, stocks were 40% of the value of homes. Before the housing and stock bubbles burst, they were about the same. Now household home equity is half that of stocks.
Without the Bernanke Put, where would stock prices be? My answer is lower, lots lower. And I say the Fed fix will not work for very much longer. Interest rates and mortgage costs are as low as they can go. And yet after all the easings, the U.S. economy is barely growing. Wages and salaries of everybody who pays taxes, which to me is the most important metric of economic health, is growing by about $20 billion each month. And the U.S. government has to borrow $100 billion a month to pay its bills so wages and salaries can grow by $20 billion. Crazy!
Yes, everyone on Wall Street now believes that the stock market will surge when the Fed announces the next round of money printing. But then, have you ever tried to push on a string? Does not work. Neither will the Fed's next round of monetary easing. Zero cost money cannot get any cheaper. Once investors realize that the Fed easing is doing nothing, I say the stock market will roll over and die.
Ultimately, I see so reason why stock prices should be higher than housing prices these days. Both were huge bubbles helped out by cheap money. Without cheap money, housing prices are down big time. When cheap money loses its ability to prop up stock prices, look out below.