Tuesday, August 30, 2011

When the Fed Is Blind to Stock Price Bubbles

Aug. 26 brought another round of disappointing news for real estate. Home prices dropped 5.9% in the first quarter of 2011, and the number of new homes on the market in July was the lowest on record.

The housing market's stagnation has prompted some to suggest that it's time the Fed intervened. Lest we forget, the government did buy $80 billion worth of toxic assets and issue first-time homebuyer tax credits -- both of which failed to change the long-term trend.

But what's most ironic is that the Fed denied the housing bubble's existence in the first place.

This excerpt from the Oct. 28, 2005 Elliott Wave Financial Forecast shows you how both Greenspan and Bernanke were completely oblivious to the coming calamity (emphasis added).

According to the outgoing Federal Reserve Board chairman there's "no national bubble in home prices, but rather 'froth' in some local markets." With years of central bank leadership under his belt, Alan Greenspan knows how to hedge his bet by acknowledging a measure of ebullience. The headline in today's Washington Post credits Ben Bernanke, the incoming Fed chairman, with a categorical denial: " There's No Housing Bubble to Go Burst"

Right around the time when these "no-bubble" quotes appeared in the press, real estate began a swift and steady decline. See the drop for yourself in this chart from the special, August video issue of Robert Prechter's Elliott Wave Theorist.

To be fair, Bernanke and Greenspan weren't the only analysts fooled by the real estate bubble. Time Magazine published an issue with "Home $weet Home" on the cover right before the peak.

Yet not everyone was surprised.

EWI's Elliott Wave Financial Forecast called the housing bubble for what it was and sounded the warning bells long and loudly. The July 2005 Financial Forecast told subscribers that housing was in its "home stretch," and the September 2005 issue declared that a " bear market in real estate has just begun."

At the time, those who listened to the Fed, Time Magazine and other mainstream voices were caught off guard. Financial Forecast Service subscribers, on the other hand, were prepared.

Click here so you can be too.

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