The deflating U.S./global asset markets are much like Churchill's Russia: a riddle wrapped in a mystery, inside an enigma. "Who is driving delevering?" asks the Financial Times , and the answer comes back, "all of us;" yet it is hard to see it except in the headlines or to fix it, given a lineup of 6.8 billion suspects. Accustomed to the inevitable credit expansion spawned in the bowels of WWII finance, investors wonder why levered government agencies, banks and hedge funds must sell assets, raise capital or in the extreme, meet the market's grim reaper in bankruptcy court. Aside from cyclical contractions and a brief bout of deflationary monetary policy in the Volkerian 80s, credit has always been available and at a relatively cheap price. Credit and debt finance is, in fact, the mother's milk of capitalism: without it, entrepreneurs may transact, but economic progress would be most difficult with seashells or gold bars for mediums of exchange. And so governments and modern day central banks do their best to provide just enough milk in the form of credit to their economies so that business and employment thrive, while the rancid taste of inflation is disguised.
Yet credit creation modeled after mother's or better yet - cow's milk - is not always a predictable event. Almost always the milkmaid or modern-day farmhand is blessed with an ever increasing pail of the white elixir. Occasionally, however, because of irritable bovine bowel syndrome or just bad grass, Old Bessie doesn't produce. So it is in today's financial markets. Debtors in need of more milk are squeezing the teat and not much is coming out. And this deflating supply of credit is in effect the financial market's version of Mad Cow disease. It can be deadly.
While the ultimate explanation rests with a host of factors associated with leverage, financial derivatives, lax regulation, and indeed the sociological willingness of the investment public to take excessive risk in search of diminishing returns, let's just simplistically point - in keeping with our bovine analogy - to the one asset that best typifies all of these fragilities. Let's blame it on the barn, or if you must, home prices. Here is one asset that all observers can agree is going down in price for justifiable reasons. Maybe not Donald Trump's Palm Beach mansion at $95 million big ones - thank you very much - but everybody else's. They're going down because quite simply, they went up too much and were financed with excessive debt. The housing bubble was well inflated by low interest rates, easy, and in some cases fraudulent credit, a lack of federal and state regulation, and a gullible public who read the history books for the past half century and knew full well that home prices never, ever go down. Not much of an enigma there. No riddle to be solved it would seem. It was simply a fairy tale too good to be true.
Yet housing, unlike other asset classes, carries with it an aura more like a bad dream than a fairy tale. Unlike the frog that when kissed turns into a handsome prince, housing can morph a froglike economy into something resembling Godzilla. That is because it is the most levered asset class and the one held by more "investor" citizens than any other. U.S.
