October 12, 2006
The Coming Correction
By: Bill Bonner, Addison Wiggin, & The Daily Reckoning Crew
** The whole world is turning its weary, pleading eyes on the American consumer…the marvelous contraption of the modern financial system…
*** There is no way housing has hit a "bottom" yet…living in oblivion…
*** The massive transfer of wealth from West to East continues…glory days are over for hedge funds…an earnest reader takes our words a bit to literally…and more!
———————
Let us step back for a minute.
Stock market investors are giddy because the Dow has hit new highs, even though the broader market has been going down. And even though in real terms, the Dow is 20% below its peak set six years ago.
Speculators, meanwhile, are said to be shifting into Dow stocks and out of gold in order to increase their short-term results, which are the only results they are interested in.
Trillions of dollars are being gambled on spliced and diced derivatives whose real risks are both unknown and probably unknowable.
Meanwhile, house prices in America are going down. House sales are falling sharply; inventories of unsold houses are now twice average levels. And housing costs are now higher than they been for nearly a generation. Which has an obvious and almost immediate effect on the purchasing power of the people who live in them. With no further equity to extract…and a "wealth effect" that has turned either ineffective…or actually negative…the poor householder cannot keep spending. And since 70% of the U.S. economy - the highest percentage in history - depends on consumer spending…and since the world economy still depends on the U.S. economy… the whole world now turns its weary eyes to the poor U.S. householder:
"Please keep spending money you don’t have on things you don’t need," they say to him.
"How about a newer, faster automobile…so you will look rich and powerful as you crawl through rush hour traffic?"
"What you need is a bigger television set…think how your family will applaud when you bring it home!"
"Go ahead, buy a new house…this little setback in the housing market is only temporary…everybody knows houses always go up in the long run. Besides, this new house has granite countertops…end the embarrassment of Formica forever."
What a pity, the poor man is willing to spend. He is ready to spend. He is psychologically, sociologically, and pathologically ready to part with his last dime. But when he reaches for his billfold…what a pity, his pockets are empty!
What a marvelous contraption this modern financial system is!
Investors are paying record prices for companies with record earnings. And whence cometh these record earnings? From the spending by the same consumers who derive their purchasing power from the aforementioned rickety houses!
But not to worry. The National Association of Realtors joins Alan Greenspan in saying "we think housing has now hit bottom." Why do they think it has hit bottom already? What kind of bottom is it that is less than 2% below the all-time high? What kind of world is that allows consumers, homeowners and speculators to go on the biggest, debt-fueled binge of all time…
…pushing up housing so much that the typical house went up more than 50% in the last five years…and permitting Americans to ‘take out’ $1.3 trillion from their houses over a two-year period…
…and then, when the bubble finally pops, punishes them with a decline of less than 2%? The median house in August was worth precisely 1.7% less than it was worth the year before.
Is it not a great world, dear reader? Is it not a wonderful world? Is it not a guilt-free, sinless, all-forgiving, gain-without-pain, two-steps-forward-none-back kind of world?
Is it not a world that doesn’t exist?
More news…
————–
Mike Shedlock, reporting from Illinois:
"…Pondering the latest birth/death revisions once again, I see construction jobs are being added by the model. 157,000 construction jobs were added between February-September, in the face of the massive housing slowdown…"
For the rest of this story, and for more market insights, see today’s issue of
Whiskey & Gunpowder
————–
More thoughts…
*** Long term, Asia is almost certainly a better bet for your investments than the United States, says our old friend Mark Faber. Speaking to the magazine Wirtschaftswoche, he noted that while real incomes in North America are stagnant, those in Asia are rising sharply. In China, for example, income per capita has doubled each of last two decades.
What’s more, Asia is becoming less and less dependent on the United States. Instead, of selling things to people who don’t need them and can’t pay for them, Asia will soon be selling to its own rising consumer class. In China, for example, 84% of car buyers are first time buyers. They’ve never had a car before. And think how many people in China still go through their entire lives without the benefit of granite countertops! It takes our breath away.
A "massive transfer of wealth" from West to East is underway, he says. Not only will this make Asia richer…it will also doom people in the West to lower standards of living, simply because, for the first time since the advent of the Industrial Revolution, Westerners must now compete with Easterners for scarce resources. All of Asia now only uses 22 million barrels of oil per day…the same amount as the United States. But Asia has more than 12 times the population.
China consumes only 1.7 barrels of oil per capita…an amount scarcely greater than the United States before the Industrial Revolution began. Asia has a lot of catching up to do, but it’s doing it quickly. And it will mean much higher prices for oil…and other natural resources critical to modern development. Look for oil at $100 to $200 a barrel…and higher gold prices too, says Faber.
[Ed. Note: If - and when - the price of oil soars again, the impact is felt all throughout the economy. The dollar gets destroyed. Energy-dependent industry goes bust. Many stocks go down.
That’s the bad news. The good news is when energy is under the gun, the rising oil price itself opens you up to all kinds of soaring investments. And just on energy shares alone, Outstanding Investments’ have helped their readers do extremely well…you can read all about it here:
There is Still Money to Be Made
*** BBC News tells us that the latest Nobel Prize winner in economics has merely explained a point we have made many times in The Daily Reckoning. Once investors, consumers and businessmen catch onto the Fed’s trick - introducing ‘liquidity’ as though it were additional purchasing power - the jig is up. They anticipate inflation and cease expanding the economy. Instead, prices rise while the economy stagnates. The Fed’s job now is managing inflation expectations so that they continue to inflate without anyone catching on. Otherwise, stagflation results.
The BBC:
"Professor Phelps has been concerned with explaining the relationship between unemployment and inflation, which had been described by some economists as a trade-off.
"He argued that inflation expectations could become embedded in the economy, leading to stagflation despite high unemployment.
"This also meant that if inflation expectations were kept in check, the economy could run at a lower level of unemployment than would otherwise be the case.
"Such views helped influence central banks to try and curb inflationary expectations promptly.
Read more…
"Professor Phelps said of his work:
"’I tried to put the people back into our economic model and in particular to take into account their expectations about what other economic actors are doing at the same time and in the future.’"
** The whole world is turning its weary, pleading eyes on the American consumer…the marvelous contraption of the modern financial system…
*** There is no way housing has hit a "bottom" yet…living in oblivion…
*** The massive transfer of wealth from West to East continues…glory days are over for hedge funds…an earnest reader takes our words a bit to literally…and more!
———————
Let us step back for a minute.
Stock market investors are giddy because the Dow has hit new highs, even though the broader market has been going down. And even though in real terms, the Dow is 20% below its peak set six years ago.
Speculators, meanwhile, are said to be shifting into Dow stocks and out of gold in order to increase their short-term results, which are the only results they are interested in.
Trillions of dollars are being gambled on spliced and diced derivatives whose real risks are both unknown and probably unknowable.
Meanwhile, house prices in America are going down. House sales are falling sharply; inventories of unsold houses are now twice average levels. And housing costs are now higher than they been for nearly a generation. Which has an obvious and almost immediate effect on the purchasing power of the people who live in them. With no further equity to extract…and a "wealth effect" that has turned either ineffective…or actually negative…the poor householder cannot keep spending. And since 70% of the U.S. economy - the highest percentage in history - depends on consumer spending…and since the world economy still depends on the U.S. economy… the whole world now turns its weary eyes to the poor U.S. householder:
"Please keep spending money you don’t have on things you don’t need," they say to him.
"How about a newer, faster automobile…so you will look rich and powerful as you crawl through rush hour traffic?"
"What you need is a bigger television set…think how your family will applaud when you bring it home!"
"Go ahead, buy a new house…this little setback in the housing market is only temporary…everybody knows houses always go up in the long run. Besides, this new house has granite countertops…end the embarrassment of Formica forever."
What a pity, the poor man is willing to spend. He is ready to spend. He is psychologically, sociologically, and pathologically ready to part with his last dime. But when he reaches for his billfold…what a pity, his pockets are empty!
What a marvelous contraption this modern financial system is!
Investors are paying record prices for companies with record earnings. And whence cometh these record earnings? From the spending by the same consumers who derive their purchasing power from the aforementioned rickety houses!
But not to worry. The National Association of Realtors joins Alan Greenspan in saying "we think housing has now hit bottom." Why do they think it has hit bottom already? What kind of bottom is it that is less than 2% below the all-time high? What kind of world is that allows consumers, homeowners and speculators to go on the biggest, debt-fueled binge of all time…
…pushing up housing so much that the typical house went up more than 50% in the last five years…and permitting Americans to ‘take out’ $1.3 trillion from their houses over a two-year period…
…and then, when the bubble finally pops, punishes them with a decline of less than 2%? The median house in August was worth precisely 1.7% less than it was worth the year before.
Is it not a great world, dear reader? Is it not a wonderful world? Is it not a guilt-free, sinless, all-forgiving, gain-without-pain, two-steps-forward-none-back kind of world?
Is it not a world that doesn’t exist?
More news…
————–
Mike Shedlock, reporting from Illinois:
"…Pondering the latest birth/death revisions once again, I see construction jobs are being added by the model. 157,000 construction jobs were added between February-September, in the face of the massive housing slowdown…"
For the rest of this story, and for more market insights, see today’s issue of
Whiskey & Gunpowder
————–
More thoughts…
*** Long term, Asia is almost certainly a better bet for your investments than the United States, says our old friend Mark Faber. Speaking to the magazine Wirtschaftswoche, he noted that while real incomes in North America are stagnant, those in Asia are rising sharply. In China, for example, income per capita has doubled each of last two decades.
What’s more, Asia is becoming less and less dependent on the United States. Instead, of selling things to people who don’t need them and can’t pay for them, Asia will soon be selling to its own rising consumer class. In China, for example, 84% of car buyers are first time buyers. They’ve never had a car before. And think how many people in China still go through their entire lives without the benefit of granite countertops! It takes our breath away.
A "massive transfer of wealth" from West to East is underway, he says. Not only will this make Asia richer…it will also doom people in the West to lower standards of living, simply because, for the first time since the advent of the Industrial Revolution, Westerners must now compete with Easterners for scarce resources. All of Asia now only uses 22 million barrels of oil per day…the same amount as the United States. But Asia has more than 12 times the population.
China consumes only 1.7 barrels of oil per capita…an amount scarcely greater than the United States before the Industrial Revolution began. Asia has a lot of catching up to do, but it’s doing it quickly. And it will mean much higher prices for oil…and other natural resources critical to modern development. Look for oil at $100 to $200 a barrel…and higher gold prices too, says Faber.
[Ed. Note: If - and when - the price of oil soars again, the impact is felt all throughout the economy. The dollar gets destroyed. Energy-dependent industry goes bust. Many stocks go down.
That’s the bad news. The good news is when energy is under the gun, the rising oil price itself opens you up to all kinds of soaring investments. And just on energy shares alone, Outstanding Investments’ have helped their readers do extremely well…you can read all about it here:
There is Still Money to Be Made
*** BBC News tells us that the latest Nobel Prize winner in economics has merely explained a point we have made many times in The Daily Reckoning. Once investors, consumers and businessmen catch onto the Fed’s trick - introducing ‘liquidity’ as though it were additional purchasing power - the jig is up. They anticipate inflation and cease expanding the economy. Instead, prices rise while the economy stagnates. The Fed’s job now is managing inflation expectations so that they continue to inflate without anyone catching on. Otherwise, stagflation results.
The BBC:
"Professor Phelps has been concerned with explaining the relationship between unemployment and inflation, which had been described by some economists as a trade-off.
"He argued that inflation expectations could become embedded in the economy, leading to stagflation despite high unemployment.
"This also meant that if inflation expectations were kept in check, the economy could run at a lower level of unemployment than would otherwise be the case.
"Such views helped influence central banks to try and curb inflationary expectations promptly.
Read more…
"Professor Phelps said of his work:
"’I tried to put the people back into our economic model and in particular to take into account their expectations about what other economic actors are doing at the same time and in the future.’"
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