In a bust that has lasted three years, they have gone through phases: denial, blaming the media for messing with the heads of buyers, predicting bottom soon and laying off staff. Now a chastened industry has reached a new stage, openly acknowledging its mistakes.
“‘We’ve effectively stolen from the future. The demand we should be having now we stole in 2005 and 2006. We’re paying for the sins of our past right now.’”
President Tom Sullivan of San Diego's Sullivan Group Real Estate Advisors.
http://www.sacbee.com/103/story/975645.html
Friday, May 30, 2008
Tuesday, May 27, 2008
My Take on Inflation versus Deflation
It is really hard to make a case for deflation when the price of just about everything is going up right now. My previous post was about $4 gas (up 25% in a year). Likewise, commodities and precious metals have been soaring over the past year and have been in long bull markets for the better part of a decade now.
But what if I was to tell you that we are actually in a deflationary environment right now. Deflation is defined as a contraction of the money supply, it is achieved by banks lending out less money and credit being destroyed in the marketplace.
If you look at the housing market and the credit markets, they are screaming deflation right now. Yesterday, the Case Schiller Home index says that housing values fell by 2.2% in March! That's on top of a 2.6% drop in February (revised up). That's almost a 5% loss in two months! Annualized out that's a 30% drop in home values.
The value of housing in America is about $20 trillion. That means we lost $440 BILLION in housing wealth in March alone. We lost nearly $1 TRILLION in housing wealth in those 2 short months!
Can the price increases were seeing in food and energy possibly offset that gap?
Oil prices have risen from $80/barrel to $135/barrel in the past 6 months. America consumes 20 million barrels of oil a day. That means we are spending $1 BILLION a day more on oil than we did last year. That's only $30 Billion a month in inflationary pressure against that giant wall of deflation coming down from the housing market.
When you consider the fact that the energy market is bigger than any other commodity, and it has moved up much more than any other commodity over the past 6 months, it's easy to conclude that commodity inflation is no match for housing deflation.
The housing market is too big. Even when you add in the inflationary pressure from a falling dollar, it doesn't appear to be enough to overpower the losses in the housing market.
Just today there was a major move down in commodities and oil. I'm thinking most of these markets are overbought at this point and we will see a pretty good pullback over the next few months. That's deflationary, too.
In deflation, cash is king. People scramble to unload their assets at greater and greater losses. Those with the cash can buy up this stuff for pennies on the dollar. I still think this is the end scenario, but we may not see it until after the election.
The losses in the housing market are almost unfathomable they are so huge!
Saturday, May 24, 2008
Follow Up on FJ Prediction from February 11th, 2008
Back on February 11th, I predicted that we would be seeing $4 gas by Memorial Day. Here's a link to the previous post.
http://www.blogger.com/post-edit.g?blogID=1336300683106618557&postID=2190842543631246914
BTW, the picture above is from a local gas station here in Santa Fe. As you can see, I was damn close in my prediction! Of course, at the rate oil is going up right now, I'm probably a week early on my prediction. But $4 gas is a reality now in many parts of the country.
Saudi Arabia and OPEC have us literally over a barrel right now. Poor pathetic Bush went to Saudi Arabia begging them to pump more oil, but why would they do that? Of course they said no, and they also told him that they don't like us devaluing our dollars like we've been doing.
They've told us they are going to raise the price of oil $4 (or 3%) for every 1% the dollar goes down in value. That's a pretty steep penalty but I'm still not sure that our leaders get it, yet.
Well, they get it, but they're doing the wrong thing. Congress is talking about suing OPEC, like that's going to help us get more oil. We've also got Hillary and Obama wanting to increase taxes to oil producers (which I think is a big mistake).
The biggest impact our Government could have on energy prices right now is to support the dollar. Just think what would happen if Bernake on Tuesday made a surprise 1% rate increase to the Fed Funds rate. Immediately, you'd have a flood of money move out of the commodity market and into dollars. Likewise, ending the war in Iraq and bringing the troops home would also be a big support to the dollar. Pipe dreams like a balanced budget would also work, but I'm not counting on that happening until China and Saudi Arabia decide they don't want to loan us money anymore.
In the meantime, the best way we can fight back is to use less oil. That means driving less, being more strategic with your errands so you can combine trips helps. Keep your car tuned properly and make sure the tires are properly inflated. If you're in the market for a new car, buy a more fuel efficient vehicle.
Oh yeah, call your congressmen and women and tell them you're not going to vote for them in November unless they do something to strengthen the dollar!
More predictions coming soon! They will be doozies!
http://www.blogger.com/post-edit.g?blogID=1336300683106618557&postID=2190842543631246914
BTW, the picture above is from a local gas station here in Santa Fe. As you can see, I was damn close in my prediction! Of course, at the rate oil is going up right now, I'm probably a week early on my prediction. But $4 gas is a reality now in many parts of the country.
Saudi Arabia and OPEC have us literally over a barrel right now. Poor pathetic Bush went to Saudi Arabia begging them to pump more oil, but why would they do that? Of course they said no, and they also told him that they don't like us devaluing our dollars like we've been doing.
They've told us they are going to raise the price of oil $4 (or 3%) for every 1% the dollar goes down in value. That's a pretty steep penalty but I'm still not sure that our leaders get it, yet.
Well, they get it, but they're doing the wrong thing. Congress is talking about suing OPEC, like that's going to help us get more oil. We've also got Hillary and Obama wanting to increase taxes to oil producers (which I think is a big mistake).
The biggest impact our Government could have on energy prices right now is to support the dollar. Just think what would happen if Bernake on Tuesday made a surprise 1% rate increase to the Fed Funds rate. Immediately, you'd have a flood of money move out of the commodity market and into dollars. Likewise, ending the war in Iraq and bringing the troops home would also be a big support to the dollar. Pipe dreams like a balanced budget would also work, but I'm not counting on that happening until China and Saudi Arabia decide they don't want to loan us money anymore.
In the meantime, the best way we can fight back is to use less oil. That means driving less, being more strategic with your errands so you can combine trips helps. Keep your car tuned properly and make sure the tires are properly inflated. If you're in the market for a new car, buy a more fuel efficient vehicle.
Oh yeah, call your congressmen and women and tell them you're not going to vote for them in November unless they do something to strengthen the dollar!
More predictions coming soon! They will be doozies!
Thursday, May 15, 2008
Masking a lousy market with a declining dollar
So, what do you think of the bull market in stocks that we've been in since 2003? In 2002 the Dow bottomed out at 7701. It recently closed at about 13,000, and has been as high as 14,000. That means the market has gone up about 81% during that time.
The S&P also doesn't look that bad. It bottomed out at 800 in late 2002. It currently sits at about 1423, which is about 78% higher.
However, during most of this time, the dollar index has been declining against most other major currencies in the world. In 2002 the dollar index topped out at about 120, today it sits at 73, which is a decline of 39%. That means that the dollars you hold can purchase, on average, 40% less than they could just 5 short years ago.
So what, you say? After all, if your investments are up 80% and the dollar is down 40%, then that means you are still up 40%, right? Actually that's wrong. Losses are magnified on the way down. A 50% decline wipes out a 100% gain.
It's important to view our market from a foreigners perspective. After all, they have lots of money and they choose where they want to invest it. Many foreigners like to invest in the United States and our stock market because it has been such a good place to keep their money for many years. That is, until this latest bull market.
From 2002 to 2004, the stock market was in major rally mode. Aggressive rate cutting by the Federal Reserve (down to 1% on the Fed funds rate) gave the stock market a reason to rally. The market jumped up 33% during this time, but to foreigners the rate was not that great because the dollar declined 30% during this time. So all the gains in the market were not realized by foreigners, they essentially broke even on a nominal basis.
2005 was a more interesting year. The Federal Reserve decided to start raising interest rates again. They steadily moved the Federal Funds rate up from 1% in mid 2004 to 5.25% in early 2006. During this time the dollar rallied 10%. However, on the stock market side, it was the weakest year of the rally. The stock market went up about 5% in 2005. For American investors, this was a so-so year. Foreigners, on the other hand, had their best year of the current market because the 10% gain in the dollar juiced their 5% market gains to give them a 15% return for the year.
Then, starting in 2006, the dollar resumed it's slide down from 90 all the way down to where it currently sits at 73. That's a 19% decline in the value of the dollar. However, on the stock market side, the S&P 500 went from 1285 to it's current value at 1423, that's only a 10.7% gain. This means the market has been declining for foreigners during this time, they're down 8% even if nominally the market is higher.
So, over the past 5 years the average foreign investor has not made any money in the stock market. I could make the argument that it's the same for American investors because our dollars buy so much less than they did back in 2002 (thank you inflation).
I have talked in the past how dependent we are on foreigners to fund our excesses. If you were from France, or China or Saudi Arabia, how much longer would you have patience in the American stock market if it's earned you a big fat goose egg for 5 years running? I've got a feeling that their patience is wearing thin and they're looking for any excuse to pull their dollars out of our market and go invest it in something else.
Of course, everyone is talking about how the dollar is set to rally right now. After hitting an all time low of below 71 in March, it has moved up to 73 currently. However, what is going to cause foreigners to want to buy more dollars (more demand for dollars will cause the dollar to rally)? I don't see any rally in the dollar until Ben Bernake grows a pair and starts to raise interest rates.
Despite the tepid rally in the dollar right now, I think it's setting itself up for another 10% plunge before the end of the year, maybe more. In the meantime, any rally in the stock market will be completely offset by declines in the dollar.
There is no new wealth being generated in our country, there hasn't been for a long time.
The S&P also doesn't look that bad. It bottomed out at 800 in late 2002. It currently sits at about 1423, which is about 78% higher.
However, during most of this time, the dollar index has been declining against most other major currencies in the world. In 2002 the dollar index topped out at about 120, today it sits at 73, which is a decline of 39%. That means that the dollars you hold can purchase, on average, 40% less than they could just 5 short years ago.
So what, you say? After all, if your investments are up 80% and the dollar is down 40%, then that means you are still up 40%, right? Actually that's wrong. Losses are magnified on the way down. A 50% decline wipes out a 100% gain.
It's important to view our market from a foreigners perspective. After all, they have lots of money and they choose where they want to invest it. Many foreigners like to invest in the United States and our stock market because it has been such a good place to keep their money for many years. That is, until this latest bull market.
From 2002 to 2004, the stock market was in major rally mode. Aggressive rate cutting by the Federal Reserve (down to 1% on the Fed funds rate) gave the stock market a reason to rally. The market jumped up 33% during this time, but to foreigners the rate was not that great because the dollar declined 30% during this time. So all the gains in the market were not realized by foreigners, they essentially broke even on a nominal basis.
2005 was a more interesting year. The Federal Reserve decided to start raising interest rates again. They steadily moved the Federal Funds rate up from 1% in mid 2004 to 5.25% in early 2006. During this time the dollar rallied 10%. However, on the stock market side, it was the weakest year of the rally. The stock market went up about 5% in 2005. For American investors, this was a so-so year. Foreigners, on the other hand, had their best year of the current market because the 10% gain in the dollar juiced their 5% market gains to give them a 15% return for the year.
Then, starting in 2006, the dollar resumed it's slide down from 90 all the way down to where it currently sits at 73. That's a 19% decline in the value of the dollar. However, on the stock market side, the S&P 500 went from 1285 to it's current value at 1423, that's only a 10.7% gain. This means the market has been declining for foreigners during this time, they're down 8% even if nominally the market is higher.
So, over the past 5 years the average foreign investor has not made any money in the stock market. I could make the argument that it's the same for American investors because our dollars buy so much less than they did back in 2002 (thank you inflation).
I have talked in the past how dependent we are on foreigners to fund our excesses. If you were from France, or China or Saudi Arabia, how much longer would you have patience in the American stock market if it's earned you a big fat goose egg for 5 years running? I've got a feeling that their patience is wearing thin and they're looking for any excuse to pull their dollars out of our market and go invest it in something else.
Of course, everyone is talking about how the dollar is set to rally right now. After hitting an all time low of below 71 in March, it has moved up to 73 currently. However, what is going to cause foreigners to want to buy more dollars (more demand for dollars will cause the dollar to rally)? I don't see any rally in the dollar until Ben Bernake grows a pair and starts to raise interest rates.
Despite the tepid rally in the dollar right now, I think it's setting itself up for another 10% plunge before the end of the year, maybe more. In the meantime, any rally in the stock market will be completely offset by declines in the dollar.
There is no new wealth being generated in our country, there hasn't been for a long time.
Friday, May 2, 2008
Meat!
With all the bad news about inflation going on right now, especially regarding food and energy prices, there is some good news out there.
The price of meat is going down. Way down.
In fact, last week I picked up some 85% lean hamburger meat for $1.65/pound. I also picked up boneless, skinless chicken breasts at $1.88/pound.
This week in my Albertsons circular they are advertising USDA Choice Top Sirloin or Petite Sirloin steaks at $2.99/lb. Roast beef is only $6.99/lb. These prices have to be about 30% lower than they were a few months ago!
Are you ready for the horrible reason why these prices are going down? The herds are being culled. Feed and grain has gotten so expensive that many ranchers are killing off a big portion of their herds to save money. This has created a temporary glut of meat in the marketplace. Therefore prices are going down!
It is time to go to your local grocery store and stock up! Fill your freezer to the brim with as much as you can now, because in a few months the glut will be over and prices are going to rise in a dramatic fashion.
A typical frost free refrigerator can keep meat fresh for about 6 months. A deep freezer can keep meat fresh for years. I recommend you try to estimate how much meat you will eat during the next 6 months to a year and go out and purchase it now!
Likewise, look to milk, eggs and other dairy products to keep going up (hens and dairy cows are getting slaughtered, too).
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