Captive Adaptations

I am no Economist, but I understand basics of how Economies work. Most private banks in developed countries are today insolvent. Below is also the current market cap of most banks in the US.

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So while we are trying to solve their insolvency, there is nothing we can expect from them, to revive the Economy.

The primary bail-out instrument for Govts have been treasury bonds and notes. The US treasuries in particular operate on the following simple principles.

• The higher the treasury price the lower the yield and hence lower the interest rate. Read full basics here.
• The lower the interest rate the more beneficial it is for the revival of the Economy. For eg. Home Loan & Mortgage Rates will be low

So that should rejuvenate the housing market, and other asset markets which are currently being crushed because of de-leveraging.

But here is what is currently unfolding. Most govts are printing money and also printing treasuries without any regard to any type of benchmark. Mostly US treasuries have had a great demand and enjoyed very good support for the past 4-5 decades, which in turn enabled US to capitalize its debt and has managed to bail itself out every time its in trouble.
Even now, all the bail-out and stimulus packages announced so far are primarily via treasury bonds and notes. But mostly countries with trade surpluses like China, Singapore, Korea, UAE have been hoarding US treasuries. But off late they have started shunning Treasuries, mostly to fund their own stimulus packages in their own countries. Read here, here and here.

What does this mean for the US ? There will be surplus of treasuries in the market, hence the prices of treasuries will fall and the yields will rise. If the yields rise, the interest rates rise. If the interest rates rise, mortgage defaults and foreclosures will accelerate and the Economy will further deteriorate, so the revival will likely go into early 2010.

Exactly around 2010 the baby boomers will start to retire, and every year around 4 million will start to retire for the next 20 years. Baby boomers (born between 1945-1965) are around 84 million in strength, so there are atleast 42 million homes that they own. So every year there will be approximately 2 million homes that will be added to the existing home inventory.

Unfortunately the next generation (Generation X - born between 1965-1980) is only 43 million in strength, so as couples or families there are only approximately 20 million buyers. Even if we say all Generation X couples are capable of buying a home, there will still be 20 million homes in surplus. This will further drive down the housing prices. And there is no easy solution for this atleast for the next 10 years till Millenials (Born between 1980-2005 and 78 million in strength) get enough purchasing power.

We have definitely run into big time rough weather, looks like a very long time it might take. Like one famous pilot said, “Brace for Impact“.