Supply does not create demand

The present state of Spain’s real estate market should suffice to explode that theory:

A better known real estate debacle is a sprawling development in Seseña, south of Madrid, one of Spain’s “ghost towns.” It sits in a desert surrounded by empty lots. Twelve whole blocks of brick apartment buildings, about 2,000 apartments, are empty; the rest, only partly occupied. Most of the ground floor commercial space is bricked up.

The boom and bust of Spain’s property sector is astonishing. Over a decade, land prices rose about 500 percent and developers built hundreds of thousands of units — about 800,000 in 2007 alone. Developments sprang up on the outskirts of cities ready to welcome many of the four million immigrants who had settled in Spain, many employed in construction.

At the same time, coastal villages were transformed into major residential areas for vacationing Spaniards and retired, sun-seeking northern Europeans. At its peak, the construction sector accounted for 12 percent of Spain’s gross domestic product, double the level in Britain or France.

But almost overnight, the market disappeared. Many immigrants went home. The national unemployment rate shot up to 20 percent. And the northern Europeans stopped buying, too.

A number of mainstream analysts believe that the downturn has reached its bottom and things are turning around. However, it defies reason to believe that a 12.8% decline in prices is enough to offset the preceding 500% increase, especially when the banks that financed the boom haven’t booked their existing losses from the bust yet. My suspicion is that we are getting very, very close to the end of the reactive bounce in Europe and the USA alike. All of the conventional signs of Wave 2 bullishness appear to be present now and the rejection of the omnibus spending bill indicates that Congress is not going to play along with the Fed’s plan to replace private debt and spending with public debt and spending.

Those who think the Fed can print money ad infinitum have forgotten that it requires the government to play along and take on more debt that can be monetized. While I don’t expect an actual reduction in public debt, I do expect a rate of increase that is insufficient to keep pace with the private contraction.

UPDATE: Thanks to Wikileaks, we now know that the central bankers were lying and those of us who identified the crisis as being a solvency issue rather than a liquidity problem were right all along. Notice the date of March 2008, while Bernanke was still making speeches about how the Federal Reserve would solve the liquidity problem in May.

“Monday, 17 March 2008, 18:27
C O N F I D E N T I A L LONDON 000797
EO 12958 DECL: 03/17/2018