A Cash Shiller Housing Index Update

Are we seeing another "tremor" in the housing sector?

Casey's Case For A Gold Run - Part II

"That’s because when people lose faith in a currency, as they will before this crisis is over, they unfailingly rush to exchange the unbacked paper money for something more tangible. While pretty much anything with an intrinsic value will do – real estate, antique cars, old masters – for all the reasons that Aristotle enunciated, gold is viewed in a class of its own, and so has an unblemished history as a universally accepted store of value.* And, thanks to its portability, divisibility, durability, and consistency, it has also always been looked upon as a convenient form of money."
Casey Research

The New Home Sand Pile

In "The Slope Of The Sand Pile" I elaborated on the steepness of curves prior to collapse.  The recent charts published on New Home Sales sure do look like the "same o same o". A very steep curve, anomalous to the prior history, ends in rapid collapse.

NEW HOME SALES

Guidance From Our Leaders

Mass Delusion

"It appears that mass delusion has replaced baseball as the national past-time in America. In the space of the last 15 years the American public have fallen for the three whopper delusions:
1.Buy stocks for the long run
2.Homes are always a great investment
3.Globalization will benefit all Americans"
James Quinn, TheBurningPlatform.com

Quinn On Housing

"The truth is that millions of irrationally exuberant people bought houses they couldn’t afford, using “creative” mortgage products, and then borrowed against the inflated value of these houses so they could live the good life. They rolled craps and now need to accept the consequences. These worthless government programs have cost taxpayers $100 billion and just postponed the ultimate bottom for housing."
James Quinn, The Burning Platform

A Sandy Update

"Four states -- California, Florida, Nevada and Arizona -- accounted for all top 20 metro foreclosure rates."
Source: Sacromento Business Journal, July 29, 2010

"Things built on 'sand' will continue to struggle: California, Dubai, Arizona, Florida, and Las Vegas. Golf courses and cities are not naturally aligned with the habitat of a desert."
Random Roving, January 1, 2010

More Mortgage Facts

"Believers in the fledgling recovery are ignoring some key facts. There are already 11 million homeowners underwater on their mortgages. As of March, banks had an inventory of about 1.1 million foreclosed homes, up 20% from a year earlier. Another 4.8 million mortgage holders were at least 60 days behind on their payments or in the foreclosure process. This “shadow inventory” was up 30% from a year earlier.  At the current rate of sales, it would take banks nine years to clear this inventory. They are likely to increase the rate of sales as inventory continues to pile up. This will compel prices to go lower. Prices would fall even if a tsunami of Option ARM and Alt-A resets weren’t hurtling down the track – but they are. Beginning in June, a surge in resets will begin and not subside until late 2012. These liar loans were riddled with fraud, and the vast majority of these mortgagees will default after the reset. A surge in foreclosures is just over the horizon. Reversion to the mean cannot be circumvented. It can be delayed, but it will not be denied. "
James Quinn, The Burning Platform

"Casey Research presents the chart below. It confirms that we are in a "default lull" of the adjustable rate mortgages (ARM's). April 2010 will kick off the next round of chaos. June 2011 could be the peak. Buckle your chinstraps!"
Random Roving, February 14, 2010

Shiller On The Housing Situation

“Recent polls show that economic forecasters are largely bullish about the housing market for the next year or two. But one wonders about the basis for such a positive forecast. Momentum may be on the forecasts’ side. But until there is evidence that the fundamental thinking about housing has shifted in an optimistic direction, we cannot trust that momentum to continue.”
Dr. Robert Shiller, Yale University (Case-Shiller Index)

Source: theburningplatform.com

Entire article:
http://theburningplatform.com/blog/2010/08/01/john-paulson-will-be-wrong-this-time-featured-article/#more-4507

Pruning The Late Bloomers

"Here in 2010, a few late bloomers are making new all-time highs. I never thought the long term inflationary topping process would take this long, but it has. At each of these peaks, investors have focused on one area or another. Every time it’s happened, the area of focus has reversed trend, plummeting in price by 50% or more.  This latest credit reflation is the weakest yet, so it hardly inspires confidence that today’s isolated bull markets will end any differently. Each time a bull market matures, investors are sure it can’t reverse. They said that about technology and internet stocks; they said it about real estate; they said it about oil. Now that a couple of markets are at all-time highs, we hear the same argument about them. This is natural, because investors always want to own markets that are way up. But investors in those previous booms are never going to get back to breakeven. Many of them were ruined."
Robert Prechter, Elliott Wave International

Another Steep Slope

In April, 2009 I presented "The Slope of The Sand Pile". This recently released graph from www.chartoftheday.com reveals another steep slope.

The Prolonged Bubble Aftermath

BOCA RATON, Fla., Jan 12 (Reuters) - "Renowned Yale University economist Robert Shiller said on Tuesday he sees U.S. housing prices falling further in coming months, fueling more fears about the broader economy. Housing prices have already dropped nearly 30 percent since their peak in early 2006, in a freefall at the center of the global financial crisis. Shiller, pioneer of the benchmark Standard & Poor's Case-Shiller home price index, told Reuters more declines could derail the country's fragile recovery by dragging more financial institutions to the brink of collapse and further discouraging sorely needed lending. Renewed worries about housing are shared by many economists, given the continuing U.S. foreclosure crisis and the number of Americans who now find themselves "under water," with homes that are worth less than their mortgages. The Case-Shiller index, a measure of housing prices in 20 metropolitan areas, showed impressive gains last summer but it rose just 0.4 percent in October from the previous month on a seasonally adjusted basis. "We saw this big upturn but it seems to be flagging," said Shiller.
When November data is published on Jan. 27, he said the index was likely to post its first overall decline since April, snapping five consecutive months of gains. "I think it's more likely to be a decline than a rise in the next few months," Shiller said. Shiller, 63, spoke in an interview in the palm-fringed retirement and resort community of Boca Raton, north of Miami. He declined to predict a renewed recession or "double-dip" in the overall U.S. economy if real estate prices continue eroding but acknowledged his concerns, despite recent gains in consumer confidence and slower declines in the labor market. "I worry about a double dip and worry about further declines in real estate," he said. "I worry that home prices will resume their fall and then the question is how much further down will they go. We're kind of stretched right now," said Shiller. "There are different estimates of what percentage of homes are under water ... Whatever that number is it can go up dramatically if home prices keep going down. And that would create another default crisis," he added. "This is what has bankers worried right now ... They're expecting a possible future crisis," said Shiller. "People forget that the aftermath of bursting bubbles can be very prolonged ... The last time we had such big bubbles was the Great Depression and that lasted a very long time." He noted that housing prices fell for 15 straight years in Japan after its real estate market collapsed in the 1990s. "Unfortunately, I think it's a model for what might happen," said Shiller."
Source: Reuters
http://www.alertnet.org/thenews/newsdesk/N12200896.htm

Inflation Hedging

A recently discovered this good article discussing inflation hedges.
by Dr. Krassimir Petrov, January 24, 2008:

AS THE MARKETS CONTINUE BUCKING WILDLY, and the fed slashing rates with more cuts to come, we can expect more volatility with our currency. The U.S. will likely spin into a long era of high inflation. The coming years will look like the 1970s. There is also a good risk of hyperinflation, which is a particularly severe bout of high inflation. Thus, the vital question for every investor is how to hedge, or protect, your wealth against inflation. Some, especially realtors, urge to hedge this risk with real estate. So should we really hedge with real estate?
To answer this, we need to consider two closely linked topics. First, what is an inflation hedge? Second, what makes a good inflation hedge? The first answer is simple. An inflation hedge is an asset that loses little value in periods of rising prices. Thus, it holds its value and purchasing power during inflation. This also applies to hyperinflation. An investor expecting inflation will buy this asset to hedge against inflation.

The answer to the second question requires understanding of the two basic types of assets: real assets and financial assets. Real assets have intrinsic value. They have value of their own. People value them for their direct or indirect usefulness. Examples include books, TVs, cars, wheat, gold, real estate, land, etc.

Financial assets, on the other hand, are a claim on the income or wealth of a firm, family or the government. Their typical form is a certificate or a receipt. Examples include paper money, stocks, bonds, mortgages and exchange traded funds. All money market and capital market instruments serve as examples.

In general, real assets hedge better than paper assets. By definition, real assets have a value of their own. Inflation does not erode their value. Thus, any real asset can be an inflation hedge. It follows that real estate is also a hedge, but it’s not the best.

Good hedges have a few key properties. We mention here only four. One key property of a hedge is that it holds its value. It should lose little value over time. Cars and eggs lose value over time. Land, silver and wine do not.

Another key property is marketability. This means that it is easy to sell. Other people will easily take it for payment. Hence, it is good for barter. Chairs and clothes do not sell. Corn and gold do.

A third key property is divisibility. This means that the asset splits into smaller parts without a loss of value. Houses, cars and cows are not divisible. Rice, wine, gas and gold are.

The last key property is financing. It is vital. Experts prefer to fully ignore it. Investors buy assets with either cash or credit. Cash-based hedges are good. Credit-based hedges are bad. History repeatedly shows that assets bought on credit are prone to speculation and bubbles. The hedge might be already overvalued. In this case, investors should avoid it. Credit clearly drives real estate. Moreover, real estate recently went through a wild bubble. It is grossly expensive, so a poor hedge.

The verdict is clear. Real estate is a hedge, but a poor one. It fails all of the above four tests. On the other hand, gold is a far superior hedge. Gold aces all the tests of a good hedge. That is why it is the ultimate inflation hedge. Better yet, now gold is cheap, while real estate is dear. Thus, as a hedge, gold handily beats real estate.

Real estate bought with cash, free and clear of any debt, might be a poor hedge, but it is nevertheless a hedge. It will protect the value of your money. It is not as good a hedge as gold, but it will do the job. However, we emphasize that real estate bought on credit (with a mortgage) creates substantial new risks to the investor. It’s possible to hedge one risk by assuming another, but not recommended.

So what are the risks, or traps, associated with leveraged real estate? We mention here four. First, we could be wrong! What if prices actually fall — or you have what people commonly call a deflation? Deflation kills those who borrowed to hedge with real estate, because it makes those debts more difficult to pay. Even worse, deflation triggers recession, unemployment and falling income. Similarly to what happened during the Great Depression and to Japan during the 1990s, deflation results in massive foreclosures and business failures.

Another trap for leveraged real estate is that the possibility of another credit crunch might spook the market. We saw this in February; we saw it again in August. Real estate was no place to hide then.

The third trap concerns how investors finance real estate. An ARM, or adjustable rate mortgage, can be a risky way to finance. Rising prices drive interest rates higher. Mortgage rates may rise from a modest 3-4% to 12-15%. This actually happened during the 1970s. Thus, monthly payments could easily triple. Obvious, yet millions of Americans fell for it once again in the early 2000s. Sure, they fell driven by greed. Still, many hedgers are oblivious to this.

The last trap is by far the most insidious, for it is the hardest to see. Inflation overwhelms the borrower; it eats him alive. Before long, food prices double, gas doubles, electricity doubles; prices of all the basic needs double in short order. Yet salaries do not; they lag far behind prices. Oftentimes, as in the 1970s, salaries lag many years behind. Similarly, prices of basic goods, such as food and energy, have more than doubled since 2002. Eventually, there comes the time that after paying for your basic needs, there’s not enough left to pay the mortgage. Let’s further clarify this point with an example.

Say the borrower makes $2,000 — $1,000 goes to pay the mortgage; the other $1,000 goes to pay the bills. Rising food and gasoline prices squeeze the borrower. To pay the bills, he cuts down on consumption, but the bills overwhelm him — they cost him now $1,600. He got a raise and his salary is now $2,300, but he must still borrow some more, maybe on his credit cards, to pay the bills and keep up with the mortgage. He falls deeper and deeper into debt. The higher interest on the credit drains more and more of his income, leaving less for living expenses and the mortgage. Eventually, the consumer buckles. Only now it becomes apparent that he erred — he knew all along that he was paying off his mortgage with cheaper dollars, but he didn’t realize that the same cheap dollars made up his monthly salary. Even a mortgage with a fixed interest rate and fixed monthly payments did not help. Many fell for this in the 1970s, but few saw it coming. Worse, many seem to fall for this today, yet no one warns them. Forewarned is forearmed!
Thus, leveraged real estate is not only a poor hedge against inflation, but also a very risky one. However, if you must hedge, then hedge with gold, not with real estate.

Source: http://whiskeyandgunpowder.com/is-real-estate-a-good-hedge-against-hyperinflation/

A Perspective On Financial Planners From iTulip.com

From Eric Janszen at iTulip.com
11-20-08

"As regular readers know, my background is in technology and finance, with experience as CEO of high technology companies and in venture capital management. It will not surprise readers to hear that many of my friends have similar backgrounds. You may wonder what they have made of my less than optimistic outlook on the US and global economy over the past several years. They had the option of hearing my opinions or the professional advice of an army of certified and well meaning financial planners and money managers, the vast majority of whom are trained to sell Wall Street’s main financial product: stocks. Armed with 'efficient market hypothesis' that claims that markets are all knowing and asset prices reflect all knowable information and charts and graphs that “prove” that buy-and-hold is the way to make money in the stock market, they carefully develop for their clients, my friends, portfolios heavy in stock assorted funds and indexes, various flavors of bonds, and perhaps a few commodity ETFs for the adventuresome. The mantra, delivered with the consistency of religious belief, is this: you cannot time the markets. Entrepreneurs are by nature optimistic, and busy, so they tend to go along with the traditional and rational sounding presentation of the official source for such opinion, a certified financial planner or money manager. Over the years, most of my friends have regarded my warnings about Wall Street and the stock market with skepticism, even amusement. Over the past few months, however, I have received calls and emails from friends I have not heard from in years. The tone is anything but humorous. The typical note goes like this: “I remember what you told me. I wanted to sell last year but my financial planner told me not to, that I can’t time the market. What should I do now?” Reminding my friends always that I am not a certified financial planner and cannot provide personal investment advice, I proceed to give my views on the markets and economy."

"That forecast back in 2001 was complicated by the housing bubble, the most idiotic and irresponsible act of government economic manipulation in world history and completely beyond me to predict. Not even in my darkest dreams did I think our Federal Reserve and banking regulators could be so stupid: bursting real estate bubbles bring down banking systems and economies. They did in the US in the 1870s and 1930s, in Japan since the 1990s, and many other nations as well. The US 2002 to 2006 housing bubble extended the tax cut, rate cut, dollar devaluation reflation boom by two of years longer than the 1930s version sans housing bubble. As you can see, that extension made the collapse we are seeing today considerably more severe. Now we have a post bubble reflation boom crashing around the fake boom created by the technology stock bubble- two crashes nested one within the other– thus the terrific cascading financial and economic collapse we see today. We wrote dozens of occasionally over-the-top, but always factual and data driven, warnings on iTulip.com since March 2006 to try to scare readers out of the stock market. As it turns out, we were able to determine and notify subscribers on Dec. 27, 2007 when the DJIA was trading at 13,365 that, if they were for some crazy reason still in the market, that was it: the last chance to get out. That forecast was informed primarily by two pieces of information. One, our research told us that US markets were likely to begin in 2008 to experience a bear market that more or less tracked the Nikkei during the first year of the Japanese debt deflation in 1990, off 40%."

"Yes, we know. “No one has a crystal ball” and “no one can foresee the future of the markets.” Is that what your financial planner told you? We hear that all of the time that no one can forecast the markets, certainly not to this degree of accuracy. But this forecast was uncomplicated if you understood the simple underlying dynamic: US households and businesses, and the government itself, had since 1980 built up too much debt. The rate of increase in debt was unsustainable.The credit bubble began in 1980 after the Fed raised short term interest rates to 19%. The 1975 to 1980 inflation that preceded that drastic action deflated all the debt in the economy, leaving US households and businesses with a clean slate. The “fat spread” between high but falling wholesale borrowing rates paid by banks and more gradual declines in rates paid by retail borrowers made lending very profitable and vastly expanded lending and, with it, increased debt. Once the fat spread effect ran out in the early 1990s, bank reserves rules were changed to extend the credit boom. Once those benefits ran out in the early 2000s, lower lending standards, low interest rates, and financially engineered debt products together enabled by newly deregulated debt markets, extended the credit boom for one final spurt of growth. At its height, the US credit machine was producing five dollars of new debt for every dollar of GDP growth, up from a ratio of one to one in the 1960s. The entire 27-year old edifice of debt came crashing down starting with the crash of the securitized debt market in Q1 2007. It was game over and 2008 was the first year of the American debt deflation. All credit bubbles end with a sudden withdrawal of purchasing power from the markets and economy that have become dependent on the massive flows of fresh credit. Debt deflations go on and on until the debt is deflated, one way or another, either by monetary deflation and debt defaults as in the 1930s or by monetary inflation as occurred between 1975 and 1980 in the US. The Japanese have since 1990 deflated debt the slow, hard way, siphoning off cash flow from households and businesses for nearly two decades to pay it all down, and in the process transferring mountains of private debt to the federal government through public spending programs. Our government is hoping to do that, too, except unlike Japan in 1990 our government is deeply in debt to foreign private and official lenders already. If somehow we manage to pay our debt down the hard way as Japan has over nearly two decades, what was Japan’s reward for toughing it out? The Nikkei is today at 8,273 after reaching 39,000 at the end of 1989, off 80% in nominal terms in 19 years. The first relevant fact in our Dec. 27, 2007 Debt Deflation Bear Market forecast was that the US is entering a debt deflation and that debt deflation is a bad investment environment for a buy-and-hold strategy. Two, contacts on Wall Street conveyed in many ways, some subtle and others not, that a last ditch effort was on to run up the market going into the end of the fiscal year in 2007 to collect the last bonuses that the current generation of bankers expected to see before Wall Street went down for the count in 2008. So much for efficient markets. Quite a few are unemployed now. Some of the analysts I know from Lehman landed at Barclays, a few bearish and therefore well-positioned hedge fund managers did well shorting stocks and are still active, and a few old contacts at JP Morgan and Goldman Sachs are still there, but I can’t imagine the industry will ever be the same. Huge imbalances in the US and global economy developed for over 30 years. Now they are rebalancing, as many non-mainstream economists have warned was certain to happen sooner or later, warnings which were argued as alarmist by mainstream economists. The global monetary system cobbled together in the 1970s after the US unilaterally abandoned Bretton Woods, and the unintended consequences of that -- the inflated purchasing power of the US dollar, buildup of gross external debt to 95% of GDP, and America's gigantic current account deficit -- started to come apart in 2007 following the crash of the securitized debt market, that followed the collapse of the housing bubble. It had to come apart anyway; the securitized bond market happened to be the proximate cause."

"Why did the credit markets crash? The credit market is best understood as a transactions network. One node or set of nodes crashes, and in the process transmit the information that caused the crash to other nodes. Entire sections of the network crash and become inoperative while others continue to function, which explains why credit continues to flow almost normally in some credit markets that function as more or less autonomous sub-networks. However, eventually the entire network may fail, with only a few isolated sub-networks functioning, and large sections of the US economy will devolve into operating on a cash-only transaction basis as has occurred in other instances of credit market breakdown in other places in the world."

"The stock market buy-and-hold era ended in 1998. In a world where the so-called business cycle is dominated by bubbles, inflation, crashes, deflation, recession, and reflations and all manner of government interference, stock market timing, and sector analysis, will continue to be the key to making money. In fact, across the broad stroke of American history, there is never a period when markets are not either largely or entirely influenced by the actions of government. For hundreds of years the US has either been at war, recovering from war, growing asset bubbles, crashing asset bubbles, recovering from asset bubbles, or mucking around with the monetary system–entering the gold standard, leaving the gold standard, entering into a new global monetary regime, leaving that regime– endlessly. How can markets possibly be efficient if they are perpetually driven by large-scale events produced by government policies? The idea is profoundly naive. On a final note, given what were to me and many others glaringly obvious risks with predictable outcomes for the stock market going back to 1998 when I got out of stocks and started iTulip.com, and the horrific advice that many certified financial planners have given their clients over the years, I wonder if the licensing of financial planners has operated for the last decade as a scheme to portray a unified Wall Street financial products sales force as an independent, disinterested, and expert -- and therefore unquestioned -- collection of investment professionals with only their clients’ best interests at heart. Except for the few renegade licensed financial planners who escape the indoctrination with an ounce of common sense, most doggedly stick to absurd investment theories like “efficient markets” that have no relevance in the real world, follow arbitrary portfolio balancing rules that just happen to favor a large stock market position no matter that a large cash position is warranted by clearly observable risks, and express antagonism toward asset classes such as precious metals that, unfortunately, have a legitimate place in the portfolio of any citizen of a government that has a printing press and knows how to use it, that is, all of them. The financial mayhem the majority of financially planners have unleashed upon the portfolios of millions of Americans over the past year informs my view that the entire financial planning licensing system should be abandoned and replaced with a simple referral system that qualifies financial planners entirely on performance based metrics, not abstract theory that favors one asset class over another. No one expects a perfect crystal ball, but going to cash to dodge a 40% correction in 2007 was not rocket science. All you had to do was look at all the debt: there was and is too much of it, and there is no way that the unwinding of all that debt can possibly be good for stocks. That’s just common sense."

"You can interpret this either as the bond market smelling a repeat of 1930s deflation or late 1970s inflation times two or three. Hoover or FDR? Pick your poison. I expect Hoover then FDR, disinflation then inflation ala late 1970s but more extreme, to deflate the debt. Will these market and economic anomalies diminish, the markets recover, and the economy return to normal within the timescale of the 50 or 60 year old buy-and-hold stock investor? Perhaps, but more likely a transformation of the entire structure of the global markets and economy is starting that will take decades to resolve. In my view, these historic events will next year be complicated by political responses to high unemployment globally, and it is reasonable to expect that some of these responses will not be entirely constructive."

"Last year we warned you of the start of the Debt Deflation Bear Market. It will continue in 2009 but with rallies driven by cycles of fiscal stimulus optimism and disappointment, fear of deflation and fear of inflation. For the next several years, economies and therefore markets will be largely driven by ebbs and flows of sentiment driven by government spending or expectations of government spending, as well as fears of unintended or intended consequences–inflation. Political confusion expressed as policy paralysis over the cause and cure for the root of the problem–the credit bubble debt overhang–will dominate the markets this coming year. "

The entire post is available at:
http://www.itulip.com/forums/showthread.php?p=61898#post61898