The Daily Reckoning
Tuesday, August 4, 2009 |
Four reasons why house prices are still headed down... Free food in Tokyo City...in London... Wall Street responds to low earnings - by lying... James Kunstler on thinking that "the worst is over"...and more!
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Housing Numbers Err on the Bright Side
by Bill Bonner
Ouzilly, France
Is it time to buy a house?
Depends...
If you need a place to live and want to own a house, why not? Prices in some areas are fairly reasonable. But if you're speculating, our guess is that you'll get a better deal if you wait.
Why? For the many reasons we have given you in these Daily Reckonings. House prices may be firming in some areas - that's what the Case- Shiller numbers seem to show. But nationwide, they are probably headed down for quite a while longer.
Herewith, four reasons why:
First, as you know, this is a depression. It will probably be long. And deep. You wouldn't know it from looking at the stock market or reading the news. The Dow went up another 114 points yesterday. Oil rose to $71. And the dollar - anticipating inflation - fell to $1.44 per euro.
But that's what bounces are supposed to look like. They look good enough so that people mistake them for the real thing...and get suckered into more losses.
This is a depression. Depressions drag down asset prices. Typically, prices become much more reasonable. And then they reach UNREASONABLE levels. House prices have become reasonable. Now they will become unreasonably cheap...
Second, waves of resets and foreclosures are still washing over the housing market. As Barry Ritholz told us in Vancouver, we're only half way through the foreclosure process. There are more than 18 million empty houses in America. A news report yesterday told of a 32-storey apartment building in Florida with only one lonely tenant. And still coming up are more refinancings...more drowning homeowners ...and more people giving up on homeownership altogether. The bubble era created new households at the rate of 1.2 million per year. Practically every one of them wanted to get in on the housing boom. Now, there are only 500,000 new households per year. And few of them still believe that housing is the route to wealth. At the current rate, it will take many years to fill up all America's empty houses.
Third, incomes are falling. Property crashed because people with average incomes could no longer afford to buy the average house. Now, they can afford even less. Ken Rogoff estimates that the consumer needs 6-8 years to pay his debts down to a more reasonable level. Part of that deleveraging process will mean getting rid of heavy mortgage debt - one way or another.
Fourth, there are too many houses that are too big...and in the wrong places. Big houses were a status symbol in the bubble years. Now they're a symbol of extravagance and error. Plus, they're expensive to own. People will want to dump them - even if they can afford them. There was far too much building in the outlying suburbs of the sand states too - Arizona, Nevada, California and Florida. Those houses may have to be abandoned as people are forced to move closer to where the work is.
There are also a couple of more technical reasons why the Case-Shiller numbers may be erring on the bright side: seasonal adjustments and a changing mix of houses sold. But our guess is that real house prices - adjusted for inflation - will continue going down for many more years.
[This decline in housing prices is just one small facet of why a market recovery will be nearly impossible in the coming years. But not to worry... There are seven "super shields" that you can use to protect yourself from any further losses. Click here to find out what they are.]
More news from The 5 Minute Forecast:
"The dollar index found a new 2009 low yesterday," writes Ian Mathias in today's 5 Min. Forecast. "The American stock rally plus better than expected manufacturing data from China, Europe and the US pushed the dollar index as low as 77.4. You'll have to go back to late September 2008 to find the index that beaten down.
"The dollar index arrested its slide this morning, but still remains around 77.5.
"As the dollar slumps, commodities are soaring. The Reuters Jefferies CRB index of the 19 most popular commodities shot up 3.9% yesterday, its best day since March. With a score of 266, it's at the highest point since November. What's more, the CRB just got a technical tailwind...check it out:
"And if the greenback has any bearing on the price of commodities - which it certainly does - the dollar index makes the CRB look a bit cheap as well. The last time the dollar index was at today's value was back in late September...when the CRB was just under 350.
"'People will blame the higher oil price on speculators,' adds Chris Mayer, 'but something interesting is happening in the markets for minor metals like molybdenum. Prices are rising, too. The silvery metal, used to strengthen steel, is now $15 a pound - nearly double the $8 and change it fetched in April. This is significant, because there is no futures exchange for moly. It trades on a physical spot market. Speculators play a very small role here. The buyers of the metal use the metal.
"'So there is a demand story shaping up here, too, mostly focusing on a fragile recovery of some sort and mostly centered on China and the emerging markets. The market is looking ahead...
"'Every rally, like every bottle of beer, has a finite life span. There will be lots of bumps along the way, but the prices of many commodities - such as oil, iron ore and moly - will tack higher, in my view.'"
Each day, Ian Mathias writes for The 5 Min Forecast, a daily executive series e-letter that provides a quick and dirty analysis of economic and financial developments - in five minutes or less. It's a free service available only to subscribers to Agora Financial's paid publications. One such newsletter, Wayne Burritt's Easy Money Options, offers a "bread and butter" technique for discovering the most lucrative gains around...like 150% plus in as little as two weeks. Click here to learn more. And back to Bill, will some more thoughts:
You want to see deflation? Go to Tokyo City in London. The restaurant chain says it is going to give its food away for free. Customers will pay for drinks plus 2 pounds 50 pence for service.
Meanwhile, in Tokyo itself prices are falling - again. The Japanese have had on-again, off-again deflation for the last 20 years...ever since their stock market crashed in 1989.
Hey, what's the matter with those Japanese? Don't they know about stimulus?
Hold on there, pilgrim. What the Japanese don't know about stimulus ain't worth knowing. They've stimulated their economy so much that their government debt now measures 200% of GDP. And what did they get for all that stimulus? Did it get their economy moving?
Are you kidding? Now, the latest news tells us that they also have the highest jobless rate in 6 years. And the latest figures show the inflation rate NEGATIVE. In fact, never has the inflation rate been lower.
In other news, jobless benefits are running out for 1.5 million unemployed Americans, says a New York Times report.
And here a commentary by David Pauly on what Wall Street is doing about low earnings - lying!
"Stock analysts continue to promote corporate earnings lies, insisting that net income isn't really what investors need to know...
"In analyst speak, Intel Corp. wasn't hit with a $1.45 billion fine from the European Union in the second quarter for anticompetitive practices.
"After setting aside funds to cover the fine, which Intel is appealing, the semiconductor-maker had a quarterly loss of $398 million, or 7 cents a share. Disregarding the fine altogether, analysts maintain the company earned 18 cents a share, beating their average estimate of 8 cents.
"As Wall Street tells it, the employee stock options Google Inc. granted in the second quarter didn't cost its shareholders $293 million.
"Google, according to generally accepted accounting principles, earned $1.48 billion, or $4.66 a share, in the period. Not enough for Wall Street, which prefers to say the company earned $5.36 a share, leaving out the cost of stock options.
"Viacom Inc., an entertainment company, this week reported second- quarter net income of $277 million, or 46 cents a share. Analysts had estimated profit as if money Viacom paid out in severance in the period wasn't the real thing. On that basis, Viacom earned 49 cents a share, beating the average estimate by 1 cent.
"Time Warner Inc., a rival of Viacom for entertainment dollars, said it earned $519 million, or 43 cents a share, in the quarter. Analysts insist Time Warner earned 45 cents, excluding, according to Bloomberg data, costs related to litigation and asset sales. Lawyers must work for nothing.
"By similar Wall Street reckoning, the expense of cutting jobs and selling an asset that reduced McGraw-Hill Cos. second quarter earnings per share by 10 percent was immaterial.
"Analysts also say investors should ignore $129 million that Textron Inc., maker of small airplanes, helicopters and golf carts, charged against net income in the latest quarter. Included was the cost of shutting a plant for an eight-seat jet Textron decided not to build.
"General Electric Co., which makes jet engines and electric power equipment and has a financial services arm, had a second- quarter profit of 24 cents a share. GE and the analysts emphasized earnings from continuing operations, which at 26 cents a share, exceeded their estimate by 2 cents. A $194 million loss from discarded businesses was discarded."
And so on...and so on...
As You Like It was as we liked it - lively, bawdy, and raucous. It is not Shakespeare's finest play - or so the critics say. But it has some marvelous dialogue. "All the world is a stage..." is the most memorable.
Our hostess had set up a stage on the lawn and put out a hundred or so chairs for guests. But by the time we sat down it had begun to rain. The chairs were wet. A Frenchman gallantly wiped off Elizabeth's chair. Your editor sat down in a puddle...and the play began...
The rain continued throughout the performance. Some spectators - perhaps those who listened to the weather forecast - came equipped with parkas and anoraks. We had an umbrella, which we held over our heads throughout the performance.
Despite the drippy conditions in the bleachers, a good time was had by all. The English actors who performed the play were real pros. They enlivened the set with music and acrobatics, moving the story forward four centuries, to the days of Peace & Love and strawberry fields forever. We never quite got the connection...but it seemed to work, somehow.
After the play was over, we retired to a stone barn for soup and dessert. There, we met neighbors whom we only see once a year - in August. Among them was a dear Daily Reckoning reader.
"I'm glad I bought gold when I did," he said. "It was $600 or so at the time. So I made a gain on the gold. But the important thing was that I wasn't caught in that sell-off in stocks last year.
"What do you think gold is going to do now?"
"Probably, it will go down," we replied.
"So, you're selling your gold?"
"No...we're holding on... It's too risky to sell it."
[And even if our favorite yellow metal does go down in price, we won't be too upset. It'll just be an opportunity to buy at lower levels...before it shoots back up.]
"Of course, that's the big question," Elizabeth began on the drive home.
"What's the big question?"
"About whether the world is just a stage. It's really a question of free will. About whether we do things because we think them through ourselves, or whether we just play our roles.
"I suppose it's related to the 'Great Man' theory of history...the idea that people actually determine history, rather than play their parts in it..."
"It's probably like all the great questions...that is, both true and untrue at the same time. I mean, Louis XIV couldn't have been Louis XIV if there hadn't been a Louis XIII...and if France hadn't been the leading country of Europe...and if it hadn't been the peak of the monarchic age.
"And Rommel couldn't have led a Blitzkrieg in WWII if the tank hadn't been invented in WWI...
"In both cases, it appears that Shakespeare was right...that the roles were already there, just waiting for someone to play them..."
"Yes, but I wonder if that is true...or as completely true as it looks. The fellow who took over from Lenin didn't have to be a monster, did he?"
"I don't know. If he hadn't been so ruthless some other guy probably would have purged him out...sent him to the gulag. Once a revolution gets started, the most violent and ruthless groups seem to take over. So, I guess you could say that even there...the role must be played..."
"Does that apply to our personal lives, too? Are we just playing roles? You are pretending to be my husband. I am pretending to be your wife. We are pretending to love each other. Is that all there is to it?"
"No...no...that's very different..."
"How so?"
"I don't know...but when I say I love you, it comes out of my soul like smoke from a sacred volcano..."
"What does that mean?"
"I don't know...I just like the sound of it..."
Until tomorrow,
Bill Bonner
The Daily Reckoning
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| The Daily Reckoning PRESENTS: That's it. Happy Days are here again... So sayeth the mass media machine and so many others touting the "end of the downturn." Well, this week, James Howard Kunstler explains why "the worst is over", may just be the four most dangerous words in the English language. Read on...
Hunky Dory
by James Howard Kunstler
Saratoga Springs, New York
Whenever the herd mentality lines up along a compass point leading to "permanent prosperity," or a yellow brick road lined with green shoots, or something like that, I tend to see the edge of a cliff up ahead. We are now completely in the grips of the deadly diminishing returns of information technology. The more information comes to us about How Things Are, especially from TV, the more confused or wrong the conventional view gets it.
A broad consensus has formed in the news media and among government mouthpieces and even some "bearish" investors on the street that "the worst is behind us" in this tortured economy. This view is completely crazy. It will only lead to massive disappointment a few weeks or months from now, and that disappointment might easily transmute to political trouble. One even might call the situation tragic, except a closer look at the sordid spectacle of what American culture has become - a non-stop circus of the seven deadly sins - suggests that we deserve to be punished by history.
The reason behind this mass delusion is not hard to find: it's based on wishing, especially the wish to retain all the comforts, conveniences, luxuries, and leisure that had become normal in American life. These are now ebbing away in big gobs for most of the population - while a tiny fraction of the well-connected pile on ever-larger heaps of swag, enjoying ever more privilege. Those in the broad bottom 95% were content as long as there was a chance that they, too, could become members of the top 5% - by dint of car-dealing, or house-building, or mortgage-selling, or some other venture enabled by easy credit and a smile. Those days and those ways are now gone. The bottom 95% are now left with de-laminating houses they can't make payments on, no prospects for gainful work, repo men hiding in the bushes to snatch the PT Cruiser, cut-off cable service, Kraft mac-and-cheese (if they're lucky), and Larry Summers telling them their troubles are over. (If I were Larry, I'd start thinking about a move to some place like the Canary Islands.)
Too many disastrous things are lined up in the months ahead to insure that we're entering a new phase of history: The Long Emergency.
Government at every level is worse than broke. Our currency, the US dollar, is hemorrhaging legitimacy. Inability to service old debt at all levels or incur new debt. Bad (toxic) debt lurking off balance sheets everywhere. The housing bubble fiasco is far from over. Commercial real estate fiasco just getting started. Unemployment rising implacably. So-called "consumers" unable to consume consumables. Crucial energy import supply lines fragile. Food supply subject to energy problems and climate abnormalities. A world full of other societies who would enjoy watching us fail and suffer. When The Long Emergency was published in 2005, I said then that the greatest danger this society faced would be its inclination to gear up a campaign to sustain the unsustainable at all costs - rather than face the need to make new arrangements for daily life. That appears to be exactly what has happened, and it didn't happen under the rule of some backward-facing, right-wing, Jesus-haunted crypto-fascist, but rather a "progressive" party led by a dynamically affable young man unburdened by deep cultural allegiance to Wall Street. Barack Obama has been sucked in and suckered. "Change you can believe in" has morphed into "a status quo you will bend heaven and earth to hold onto."
| "We're prisoners of our wishes, living in a strange dream-time, oblivious to the forces gathering at the margins of our vision, lost in a wilderness of our own making." | |
Whatever else you might think or feel about Mr. Obama's performance so far, this strategy on the broader question of where we go as a nation pulses with tragedy. What's remarkable to me, to go a step further, is the absence of comprehensive vision - not just in the president, but in all the supposedly able and intelligent people around him, and even those leaders not in government but in business and education and science and the professions.
History is clearly presenting us with a new set of mandates: get local, get finer, downscale, and get going on it right away. Prepare for it now or nature will whack you upside the head with it not too long from now. Attempting to maintain anything on the gigantic scale will turn out to be a losing proposition, whether it is military control of people in Central Asia, or colossal bureaucracies run in the USA, or huge factory farms, or national chain store retail, or hypertrophied state universities, or global energy supply networks.
These imperatives are so outside-the-box of ordinary experience right now, that to drag them into the arena of politics can only evoke blank stares or nervous giggling. But whether we like it or not, these are the things that will really matter in the years ahead - not whether General Motors can ever make a profit again, or what Target Store's sales figures are next quarter, or whether the latest high-rise condo- and-gambling complex in Las Vegas will be successfully marketed.
Here, in the dog days of summer, it seems to me that the situation in the USA is so fundamentally bad, so unpromising, so booby-trapped for failure, that I wonder if there has ever been a society so badly deluded as ours. We're prisoners of our wishes, living in a strange dream-time, oblivious to the forces gathering at the margins of our vision, lost in a wilderness of our own making.
Anything can happen now. I certainly wouldn't rule out international mischief as we arc around into fall. The air is so full of black swans that the white swan now seems like the exceptional thing. Whatever else happens, it sure will be interesting to see the public's reaction to Wall Street's announcement of Christmas bonuses. The folks at Rockefeller Center better be thinking about getting a fireproof tree.
Regards,
James Howard Kunstler
for The Daily Reckoning
Editor's Note: Mr. Kunstler was part of an all-star lineup of speakers at this year's Agora Financial Investment Symposium. The invaluable insight we gained from his presentation (along with many others), helped make this event one for the ages.
That's why we decided to record it all. Every speaker and every recommendation. So that, even if you couldn't make it to Vancouver, you could still benefit from all of the expert advice that was given out there. Click here to get yours now.
James Kunstler has worked as a reporter and feature writer for a number of newspapers, and finally as a staff writer for Rolling Stone Magazine. In 1975, he dropped out to write books on a full-time basis.
His latest nonfiction book, The Long Emergency describes the changes that American society faces in the 21st century. Discerning an imminent future of protracted socioeconomic crisis, Kunstler foresees the progressive dilapidation of subdivisions and strip malls, the depopulation of the American Southwest, and, amid a world at war over oil, military invasions of the West Coast; when the convulsion subsides, Americans will live in smaller places and eat locally grown food.
You can purchase your own copy here:
The Long Emergency
You can get more from James Howard Kunstler - including his artwork, information about his other novels, and his blog - at his website.
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