Current Trader's Commentary
Updated in May 2012
A refreshing wrinkle on old age?
May 15, 2012: Francis Scott Key’s lyrics for “The Star-Spangled Banner” were inspired by the Battle of Fort McHenry in the War of 1812. The lyrics were set to the tune of a song with the catchy title of “The Anacreontic Song” (more commonly called “When the Warrior Returns”). That song came out of the First Barbary War (which gave birth of the United States Marine Corps).
Famous lyrics conclude “The Star-Spangled Banner”:
”O'er the land of the free and the home of the brave.”
Now imagine Francis Scott Key watching the Battle of Wall Street in the War of 2012, 200 years later. With the mighty flag of J.P Morgan flapping in the hot air of global markets, he would pen a slightly different conclusion:
”O'er the land of the fee and the home of the knave.”
The primary definition of “knave” from the Middle English is “an unprincipled, untrustworthy, or dishonest person." Many would consider that a perfect personification of Wall Street bankers and their legendary fees.
Morgan’s $2 billion “whoops” will change nothing, of course. Money has no conscience, no ethics, no morality. Gilt has no guilt. However, the Morgan fiasco represents a much larger systemic problem which all of us will suffer through and from.
Money just ain’t what it used to be.
It’s having a tough time finding a place to hide, much less seek. Good investments are smothered by crosscurrents of sliding commodities and runaway printing presses. Bloated debt hides in a forest of derivatives and speculation.
America has been blessed with a reserve currency, a weapon with which it can export its financial problems to less fortunate foreign exchanges. Screw Greece. Screw Spain. Screw Italy and Portugal and Ireland and maybe even the UK and Germany.
Foreign lands are catching on, of course. The Swedish kronor, for example, has devalued from around 6 to the dollar to over 7 in a matter of months. Sweden is a nation of engineers. They must export to survive. The Euro Albatross does not hang around its neck. Swedes can devalue their currency to maintain their markets (just as America does).
Let’s not forget China … the Renminbi could be the world’s next reserve currency, in a decade or two. Fighting the Yuan is a loser’s game.
What can a normal person do in a world of money gone mad? There’s no place to hide. The best answer may be to buy stuff that inflates as the money tsunami grows. Forget timing. Too many variables.
Inflation will storm ashore. If you own valuable, transferable things, you will survive. Stocks built on a solid foundation will go through the roof. Commodities, too. Paid-up homes will rocket higher. Cars will sell for more than you paid for them, provided you paid for them and did not lease them.
Perishables will do what they are named for; they will perish. Lettuce, Tomatoes, Dollars, Euros and Renminbi are all perishable.
When you buy something, ask yourself if it will last longer than yourself. If the answer is “yes’ and you can use it in your lifestyle, then buy it. If you are 20 years old, things that produce a “yes” may be hard to find. Longevity has its drawbacks.
If you are lucky enough to be in your 60s, 70s or 80s, all kinds of stuff returns a “yes”.
It’s good to be old. The older the better. A refreshing wrinkle on old age.
Earlier Trader's Commentary
January 26, 2012: I have not published a trader’s commentary for almost 6 months. I couldn’t really figure out anything to write about that was not covered in my August 12th, 2011, comments.
I want to talk about the Fed and the Treasury further. I painted them dark last August. I wrote: “…in the land of the blind, the one-eyed Fed has led us to the brink of disaster. The Treasury has tricked the ‘public’ into thinking we could borrow our way out of debt.”
I have not changed my mind. Throwing gasoline-soaked dollars on raging economic fires still seems odd. On the other hand, it worked for Red Adair, who was my god back in the early 1960s.
Paul Neal "Red" Adair was an American oil well firefighter who died eight years ago after a lifetime of exploding burning oil and gas wells to death. He would lower high explosives into the raging fire of an out-of-control wellhead and blast it into a harmless spout of gas or oil that could be capped and tamed. He was a demolition expert in World War II. In the Marine Corps, I became a demolition expert. As I was graduating from Parris Island boot camp, Red Adair was performing his greatesat feat ... tackling the Devil's Cigarette Lighter in the Algerian Sahara. That was the nickname of a 450-foot pillar of flame that burned from midnight on November 13, 1961 to a few hours after daybreak on April 28, 1962. Red Adair put it out. Killed it. He was a god to young demolition experts. He fought fire with fire, and he won.
Ben Bernanke is not Red Adair.
The Chairman of the Fed is a very smart man doing an impossible job, given the mandate of the Fed. He faces an out-of-control inferno that could consume several economies before it burns itself out. He is taking Red Adair’s approach. But he is not a demolition expert. He is not a god. And the Fed does not have the equipment, or the ammunition, to tame the world’s wayward economies.
The only way the Fed can operate is through the financial, mostly banking system. It has no other avenue, or mandate. When the Fed dumps greenbacks into the raging wellhead of America’s economy, it has no choice but to pull the strings of the banking system. Ipso facto, the Fed must TRUST the bankers.
The money which the Fed pushes into the economy (quantitative easing) supposedly finds its way into the pockets of the captains and lieutenants of industry, and eventually filters down to the employee/consumer who spends it. The entire cycle creates the volatility of money. One dollar becomes many as it passes through various stages of give and take.
It does not happen if the money stays at the banks. They just loan it back to the Fed. They make a slight percentage doing so, but the law of large numbers turns it into a hefty sum. The banks’ balance sheets bulge. But the money never gets into the pipeline of commerce. It is replaced by large salaries and ridiculous bonuses to the wealthy.
Being a banker is a good gig.
The Fed knows all this. These are not stupid people. They will eventually figure out a way to unplug the pipeline and the money will flow. Nobody knows what the spark will be. It will, however, be a spark.
That spark will explode with a roar and the beast it comes from will be Inflation. The volatility of money will multiply all the dollars sitting on the sidelines. For a moment or two (a couple of months, perhaps a year) it will seem OK, perhaps even GREAT! Everyone will be making money, and the Fed will pay down the massive debt the Treasury printed with the devalued dollars of inflation. In the end, it will go horribly wrong. Because it will burn out of control. There is no such thing as a good inflation run.
The Fed has the arrogant notion that it can control money volatility when it reappears as raging inflation. They don’t think it will start until after 2014. After all, we are in a faltering economy, and continuing high unemployment guarantees lower prices. Consumers gravitate to bargains. Producers have a tough time jacking up margins. Inflation remains under control.
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This is where we are today.
The only thing really holding back better times in America is the Housing Debacle and European politics. The Fed has no control over either one of these areas. Nor should it. The Treasury can play in economic muck, but it suffers from the same arrogant notion as the Fed. They think they can control and manipulate the economy. They can not. They are noise, not drivers.
The only people with control over the economy remain … the people.
That’s right. You and I. Us. The crowd. The masses. We actually control what happens to this world and their economies.
Before we puff up with “Power to the People” and start singing “All Together Now” … remember what Sigmund Freud said about crowds. I'll paraphrase: crowds tend to sink to their lowest common denominator of ethics, morality and values. Which explains a lot of wars, deception and general chicanery.
It also underscores the cancer of inflation. Once price increases infect the marketplace, they kill the economy.
Governments have always thought they could control economies. They take credit for good ones, and they blame bad ones on predecessors or the other guy. Or Greece.
I do not believe the Fed will be able to control the inflation which the Treasury’s printing presses have created. We have been led to the brink of disaster with a grand, unproven experiment. We have allowed it to happen. We were too busy trying to find jobs and save our homesteads to pause and reflect on what was actually happening. Our government promised us something that was too good to be true (borrow our way out of debt) and we bought it. Voices of reason (a tiny part of “the crowd”) were disregarded, politicized, dismissed.
When the spark of dollar volatility bursts into runaway inflation, that's when we get to pay for not listening more carefully. The result will not be any better than the brain surgeon who pronounces an operation “a fabulous success” … only the patient dies.
There is no Red Adair to cap the flaming wellhead of inflation. The only explosive that can be lowered into the inferno is … the passage of time. It will be a painful passage for most people. And, as always, it will disappear, slowly, into the repetition we call history.
Current Real Estate Commentaries
Updated in May 2012
Click here for critical statistics page
April 2, 2012: 24 hours after April Fool’s day and the housing market is not kidding. It may even be skidding. It still scares the hell out of a lot of people. The existing home sales numbers for March in Southeast Florida may unlock more misery. They show a massive slide in closed contracts by Realtors®.
You should trust these statistics as much as you trust a Realtor®. Sadly, their figure fudging leans towards overstatement. The real numbers are often worse than what the National Association of Realtors® sends to the news media.
The latest existing home sales numbers will hit the airwaves on April 19th, two days after the Housing Starts number comes out. The economic ripple effect of Housing Starts makes that number more interesting, and more powerful. Not to mention the fact that it does not get fudged by a bunch of sales-hungry Realtors®.
Nevertheless, the April 19th existing home sales number for March will slap the face of people banking on a housing recovery. Hard.
The numbers will be revised daily between now and their release, but not dramatically. A year ago 7,169 existing homes had closed contracts in March. This year, that number will probably be less than 5,500. This represents a collapse of close to 18%. The projected numbers for April do not look much better. They could be worse.
South East Florida (and Nevada and California) led the market higher to the bubble that burst in 2005 (or 2006 or 2007, depending on how you want to call it). Actually, the housing market in South East Florida started collapsing in July of 2004, over a year before Hurricane Wilma put an exclamation mark on it. In July of 2004, Year-on-Year sales went negative and remained so for almost four years straight (with one monthly exception in September of 2005). Sales turned positive in June of 2008 as prices collapsed into the laps of too-early investors (who have taken a beating ever since then).
South East Florida now finds itself in the unenviable position of leading the march back into the swamp of housing despair. In an election year, the government might develop a financial backstop of some sort to reverse the collapse. But they better be quick about it.
No economy has ever blossomed in the fertilizer of a collapsing housing market. None. Zero. Zip. Nada. Not one.
February 24, 2012: The housing market is a game of confidence. Consumer confidence. But that is no excuse for the National Association of Realtors® to turn it into a confidence game. The NAR has conned the public into thinking the housing market is about to bust out of its asset-eroding doldrums. Here’s how they did it.
On January 20th, they released housing numbers for existing homes that said the annual rate of sales had rocketed to 4.61 million homes. That was a whopping jump of 5%. Bloomberg officially exclaimed: “Low mortgage rates and low prices are doing the trick for the housing sector where sales are up and, for the first time in a long time, supply is coming down. With gains sweeping all regions, sales of existing homes rose 5.0 percent to a 4.610 million unit rate in December, a third straight month of improvement that has drawn down supply on the market to 6.2 months. This is the lowest reading on supply since 2006!”
The news sent a sigh of relief through the canyons of Wall Street. The housing debacle was over. The last piece of the puzzle that could put a stamp of approval on better times seemed to fall into place. After all, only crummy housing numbers hold back a roaring bull market.
On February 22nd, the NAR announced that big price reductions gave yet another lift to existing homes, which rose another 4.3% to an annualized 4.57 million homes.
Wait a cotton-pickin’ second. What the heck happened to that 4.61 million rate reported a month earlier? How did another 4.3% jump in sales result in a move backwards to 4.57 million homes?
Turns out the latest report included “revisions to seasonal adjustments” that turned the previous 5.0 percent gain into a 0.5 percent decline. The month before that was also revised lower, but “only slightly lower.”
Dr. Peter Morici, Professor at the Robert H. Smith School of Business, characterized the revisions as “huge.” He blogged: “The market for existing homes continues in the doldrums, as young couples op for renting and older couples can’t unload homes to retire or relocate to find employment.”
It will be interesting to see if the NAR’s existing home numbers next month, released on March 21st, show that the latest 4.3% number also went up in smoke. If that happens, then perhaps the NAR should develop a new slogan.
Best suggestion so far? “Liar, liar, house on fire.”
February 20, 2012: Unless you believe in castles in the sky, you know you can’t build a house without starting at the foundation (usually a basement). Same thing when you build a housing market. Start at the bottom (small developments, small geographical areas) and move higher. The trickle-up theory. Foundation economics. Focus on small. Big takes care of itself.
That was the basis of my call last September. I said the housing crisis was over.
It was also the basis of my fear last week that September's call was wrong.
And it’s the basis right now of a feeling that the initial positive call may have been correct. In other words, a serious bout of Flip-Flop has grabbed me.
The January numbers released this week will probably disappoint the talking heads in financial media. Using the trickle-up approach, existing home sales nationwide may drop more than expected (they are January numbers, not February numbers).
January’s sales collapsed in Palm Beach, Broward and Dade counties, falling from 5,568 in December, 2011, to less than 4,300. Even the year-to-year comparison shows a disappointing 9+% slump. All bad news, which could trickle up into negative nationwide numbers.
In Southeast Florida, last year’s sales for January, February, and March were very positive (up over 15%). So year-on-year comparisons will be tough through the April releases. But they could be beaten.
Subdivisions in the Palm Beaches are starting to see nibbles at higher prices in the last week or two. Boca Country Club prices are rising, but on a statistical basis of only 2 sales.
In what feels like housing’s darkest hour, a candle of hope flickers. Hold your breath. Cradle the flame. The faint clicking sound in the background sounds like a bunch of buyers in “lock and load” mode, targeting an improving real estate market.
February 13, 2012: In the first 6 weeks of last year, a half a dozen homes sold at the Boca Country Club, where we live in southeast Florida. For many years now I have used the club as a proxy for real estate in general. The characterization has been reasonably accurate. The development is a “typical” middle-class conglomerate of 13 subdivisions with just under 1,000 homes. Total sales at the club jumped from 38 in 2010 to 45 in 2011. Reduced prices helped. The average sale skidded from $265,218 to $220,800.
In the final months of 2011 it looked like residential real estate was on the mend. The increased sales at the club were statistically mirrored in all of Palm Beach County and in Southeast Florida as well.
Last September, I wrote: “The housing debacle is over. Ended. The bottom is finally here.” Maybe not.
In the first six weeks of this year, only one home has been sold by Realtors® at the Boca Country Club. One. At a discount from list price of almost 27%. By the end of the month, with a little luck, perhaps two homes will sell. The other contract is still pending. It may not close.
It looks like the housing market is about to collapse. Again. Nothing being suggested in Washington will help. A lot of what has been suggested will hurt.
The economic recovery in America can only continue if the housing sector continues to heal. Construction jobs must reappear. Lumber needs to be bought. New carpets and washing machines and tile and refrigerators need to be sold.
None of this is happening fast enough to turn the tide.
The housing market is about to move from hopeful back to hopeless. The numbers released this month and next will lock politicians’ fingers into pointing at “the other guy.” The blame game will escalate into further inaction.
It no longer matters that corporate profits were privatized while staggering losses were socialized. Cash-rich balance sheets can never feed a shrinking middle class which considers home ownership stupid and jobs in danger.
When housing breaks this time, money and power will disappear quickly. Once the pendulum swings far enough to frighten the truly powerful, the truly wealthy, action might occur, but probably not until after the November elections.
When reality finally sets in, the diagnosis will be both frightening and painful. The cure may be even more so.
January 23, 2012: for the past 4 years, existing home sales in SE Florida have risen. They jumped from 38,303 in 2007 to 69,665 at the end of 2011.Lower prices drove this 82% growth. A serious reversal now appears in the charts. click here.
The Southeast Florida drop in existing home sales (by Realtors®) from 69,665 to 48,997 remains preliminary (the chart above shows the latest numbers). A few good months could change it quite a bit. Still, it forebodes a serious sales collapse in the market if nothing improves.
Congress and the Executive Branch will stick their fingers into the problem, but current, publicized solutions might make it worse. Selling foreclosures en masse to investors (the most popular suggestion so far) would create “renter nation” … rental pools are the primary reason deep-pocket investors would get involved. That would put pressure on rental prices. Lower rental prices would persuade increasing numbers of potential home buyers to put off buying.
The home sales number may drop back to 2008 levels (miserable). Home prices will continue lower. Underwater mortgages will grow. The housing recovery which I suggested was in place on September 9th of last year ... will shrivel up and die.
The government can always change the rules, of course. The grand experiment of borrowing our way out of bad times has made almost anything possible at the Federal level. They might buy up all the foreclosures themselves, rather than dumping more money on the banks.
Put poverty-level folks in homes of their own, with minimal payments, and lots of social issues start to fix themselves. Or not. Sigmund Freud was fond of saying that crowds always regress to their lowest level of intelligence, morality, ethics and behavior. History remains on his side. At best, a further collapse in housing will be a serious and continuing drag on the American economy (but not necessarily its stock market). Housing problems will widen the economic gaps of our society further. Which means ... dangerous times ahead.
Although the problem seems almost hopeless, housing will recover. Some day. It always has. Ever since someone traded their first cave for an upgraded model with running water dripping from the cavern walls.
It might take a while, however. Hopefully, civilization will not revert back to the caveman's Paleolithic Era before it occurs.
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