Mike Whitney
writes: The real estate market is crashing faster than anyone had anticipated.
Housing prices have fallen in 17 of 20 of the nation’s largest cities
and the trend lines indicate that the worst is yet to come. March sales
of new homes plummeted by a record 23.5% (year over year) removing all
hope for a quick rebound. Problems in the subprime and Alt-A loans are
mushrooming in previously “hot markets” resulting in an unprecedented
number of foreclosures. The defaults have slowed demand for new homes
and increased the glut of houses already on the market. This is putting
additional downward pressure on prices and profits. More and more
builders are struggling just to keep their heads above water. This
isn’t your typical 1980s-type “correction”; it’s a full-blown real
estate cyclone smashing everything in its path.

Tremors from the real estate earthquake won’t be limited to
housing–they will rumble through all areas of the economy including
the stock market, financial sector and currency trading. There is
simply no way to minimize the effects of a bursting $4.5 trillion
equity bubble.

The next shoe to drop will be the stock market which is still
flying-high from increases in the money supply. The Federal Reserve has
printed up enough fiat-cash to keep overpriced equities jumping for joy
for a few months longer. But it won’t last. Wall Street’s credit bubble
is even bigger than the housing bubble—a monstrous, lumbering
dirigible that’s headed for a crash-landing. The Dow is like a drunk
atop a 13,000 ft cliff; inebriated on the Fed’s cheap “low-interest”liquor. One wrong step and he’ll plunge headlong into the ether.

The stock market cheerleaders are ooooing and ahhing the Dow’s climb to
13,000, but it’s all a sham. Wall Street is just enjoying the last
wisps of Greenspan’s low interest helium swirling into the largest
credit bubble in history. But there are big changes on the way. In
fact, the storm clouds have already formed over the housing market. The
subprime albatross has lashed itself to everything in the economy
—dragging down consumer confidence, GDP and (eventually) the stock
market, too. The real damage is just beginning to materialize.

So why the stock market keep hitting new highs?

Is it because foreign investors believe that American equities will
continue to do well even though the housing market is slumping and GDP
has shriveled to the size of a California raison? Or is it because
stockholders haven’t noticed that the greenback getting clobbered every
day in the currency markets? Or, maybe, investors are just expressing
their confidence in the way the U.S. is managing the global economic
system?

Is that it—they admire the wisdom of borrowing $2.5 billion per day
from foreign lenders just to keep the ship of state from taking on
water?

No, that’s not it. The reason the stock market is flying-high is
because the Federal Reserve has been ginning up the money supply to
avoid a Chernobyl-type meltdown. All that new funny-money has to go
somewhere, so a lot of it winds up in the stock market. Evergreen
Bank’s Chuck Butler explains the process in Thursday’s Daily Pfennig:

Ah-ha! So the Fed gooses the money supply, stocks shoot up, and everyone’s happy—right?

Wrong. Growth in the money supply should (closely) parallel growth in
the overall economy. So if GDP is shrinking (which it is) and the money
supply is increasing then–Viola!–inflation. (“11.8%” to be precise) (05/05/07)

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