Current Trader's Commentary
Updated in February 2012
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 Commentary
Updated in February 2012
Click here for critical statistics page
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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