The Contrarian's View s published 11 times per year on a mostly-irregular schedule, and the views expressed are those of the author and editor, Nick Chase. Because nobody can predict the future, results of past suggestions or recommendations are no guarantee of future results. My own material in this publication may be freely quoted provided proper attribution is given to its source; quotes from other people are subject to fair-use copyright restrictions. Subscription rate: Selections are free on the Internet. Using your favorite Web-browsing program, open URL http://onashi.org. Mailed paper subscriptions are currently not being accepted (current paid subscribers will continue to receive their paper issues). Unsolicited material sent to us by UPS or by courier other than the postal service is refused and returned to sender! ISSN 1536-4429 Phone: (508) 757-2881
When we arrived her house, which as you will recall from mentions in prior issues of The Contrarian's View was originally priced at almost $800K, had just had the asking price dropped to $660K.
Staying in this house for a week was an experience, because it had been "staged" for sale. "Staging" is a trend that began in California a few years ago and has since spread to other expensive areas of the country. The idea is to hire a professional who has the expertise to make your house as attractive as possible for sale, so it will bring a higher price.
Some of what a stager does make sense, such as eliminating clutter and making the house look clean and simple. But most of it borders on silliness, as far as I am concerned. My wife and I felt like we were camping out, and we had to return the "campsite" to its pristine state whenever we left.
For example, in the living room a perfect row of low candles lined the fireplace hearth, and a wicker tray of accoutrements was strategically placed on an ottoman between the sofas. Yuck. No living could take place in this "living" room.... it would disrupt the display.
In the dining room I noted that the color scheme of the elegantly-set table perfectly matched the color of the vertical blinds. I asked our host-friend how she managed to find matching china and cloth napkins. Those belong to the stager, she said. Well, we weren't planning to use the dining room, anyway.
We ate our meals (breakfast; others eaten out) at the kitchen table. It also had been perfectly staged. Each morning we would remove the four exactly positioned place settings (complete with finger bowls) onto a nearby counter, eat our breakfast, clean the table and then replace the settings.
The kitchen has an island countertop. On it the stager had placed a bookrack with cookbook open to a recipe for crème caramel, along with a wine glass and bottle. I asked our friend if she had ever actually cooked up the crème caramel. "That isn't even my cookbook!", she replied in disgust. But a friend of hers had liked it so much she borrowed, copied and returned it.
Taking a shower was an experience and a half. Of course, no toiletries could be left in the shower or on the bathroom countertop - they had to be stuffed away in drawers when we were done. But the drawers had already been "stuffed" with the stuff the stager had stuffed away to make the bathroom look uncluttered. My wife and I crammed the stuff even tighter, and freed up about a drawer and a half for our toiletries.
The stager had placed a color-coordinated towel and hand-towel together on the towel bar, neatly tied up with a ribbon. Naturally, this was not to be touched. Our real towels were plain white, and when we weren't using them we would hang them to dry in a storage closet in what was the ex-husband's office.
Part of the staging is that the house should be empty when prospective buyers come to look at it.... presumably so they will feel free to comment openly as they inspect the premises. Most any time of day is fair game for prospective buyers to look, from about 8 AM to about 9 PM. The real-estate agent showing the house will call with about a half-hour's warning for you to get out.
Since our friend had lowered the price just before we arrived, and the weekend was coming up, we anticipated a really busy weekend showing schedule for the house. We had visions of being awakened at 8 AM on Saturday or Sunday, and having to hide in the (drained, covered) hot tub in our bathrobes until the prospective buyers had left. Fortunately all the lookers showed up well after my wife and I were up and out of the house, and we had two busy weekend days visiting friends, so we did not return 'til late at night.
The day before we left for home the house sold.
Final price was $640K, or almost 20% less than the
initial asking price of a year ago. That seems to be
pretty typical of the San Diego-area housing market
generally... prices are off about 20% from the peak
of the housing bubble. The San Diego market is the
"canary in the coal mine" for the national market; if
prices aren't yet down 20% from their peaks in your
area, they will be.
Note: Permission is granted to all to forward, post or publish with credit to the author.
I will let the facts and charts do most of the talking.
Here is a bar chart:
To add insult to the injury, 70-90% more homes are being built RIGHT NOW due to the pipeline of the bubble period. During June 2006 more single-family homes were completed than at any other time prior to 2006! This will continue for another year or so and the supply situation will keep on getting uglier and uglier.
A soft-landing ahead is a fantasy created by bubble heads who find themselves too heavily into scams and a home that they can't afford (if you own a home with a mortgage that is more than three times the steady annual income you are in that category).
Cranks like myself were saying it all along but born-and-bred dupes kept on believing the self-serving E-Con-Whores employed by the industry. I got tired of getting articles sent to me that justified the claim that the supply was not enough to meet the "demand for housing" and that is why the home prices were going up. Now, we know that the demand was primarily a speculative demand.
As the Housing Over Supply Horror Show plays out over the next year or so, no one will be able to prevent the US economy from slipping and sliding into a recession, which will easily become a depression due to the Peak Debt coming into play. As it happened following the shallow recession of 2001, people will double and triple up to reduce the number of housing units that are occupied (yes, during 2002 that is what precisely did happen). Moms and dads, get ready to have the junior and the miss move back in.
Soon, the US will have 20,000,000 "empty housing
units year round." The construction industry will be
in a depression for a very long time once the current
pipeline is finished (some houses will not be
finished, though).
Here's a figure that I find stunning. When I was in college in 1972 (and paying about $3,000 a year total for an expensive private school), the average American had an average weekly paycheck of $334.60. Today, the figure is just $277.96 after it's adjusted for inflation. And that is down about 90 cents a week from August of 2005. Don't believe me? Look it up on the U.S. Department of Labor's Web site - www.bls.gov. The tables go back to 1964, when average earnings were consistently over $300 a week. If you look around, you'll see that Americans are obviously surviving and even thriving. But they are doing it by taking on additional jobs, or by having more than one adult in each household working. - John Crudele
Wage data covering 82 percent of all private sector jobs show that the purchasing power of weekly wages today is less than it was when the economic recovery began in November 2001. What kind of economic recovery is it when the purchasing power of wages falls instead of rises? - Paul Craig Roberts
Monetary easing in the past regularly followed prior tightening, which also had created pent-up demand in the economy. Rate cuts were equivalent to removing existing tightness. As a result, the economy and the markets took off. But those conditions that used to provoke strong economic and asset rallies are not at all present today. There never was any monetary tightness. Instead, there has for years been a sharply accelerating credit expansion that has grotesquely run out of relation to economic activity. We see an economy and financial system that have pathologically become addicted to a permanent credit and debt deluge. - Kurt Richebächer
It is, of course, perfectly true that monetary tightening impacts the economy and its inflation rates with a pretty long delay. The trouble in the U.S. case is that there never was any monetary tightening. There were many small rate hikes, and the Greenspan Fed had probably hoped that the higher costs of borrowing would exert some restraint on credit demand. But it has not happened. It was a vain hope. The fact is that the credit expansion has sharply accelerated during these two years of rate hikes instead of decelerating. During 2004, when the Fed started its rate hike cycle, total credit, financial and nonfinancial, expanded by $2,800.8 billion. In the first quarter of 2006, it expanded at an annual rate of $4,392.8 billion. Over the two years of so-called monetary tightening, the flow of new credit has effectively accelerated by 56%. In 2005, credit growth was $3,335.9 billion. Over the whole period of rate hikes, it had steadily accelerated from quarter to quarter. Borrowers and lenders, apparently, simply adjusted to the higher rates, trusting that there would never be serious tightening. - Kurt Richebächer
Common sense says that when a family doesn't make enough to make the payments, or even the interest, something's got to give... When payments demanded by creditors exceed income after taxes, what is there to do? Is there a recession or depression coming? If not, what can occur to change the seeming inevitable? To me it seems inevitable anyway. Damn! I hope I am wrong, but history does indeed repeat itself. The repeating will unwind with millions of bankruptcies and foreclosures. Literally. People will be foreclosed upon and have no place to live. Credit cards will be seized by the millions.... As economic woes increase, the homeless will be multiplied, and they won't be alcoholics and bums, but displaced families who are paying for their past mistakes. Hindsight is always 20/20, but foresight rarely is. People right this minute, are frantically attempting to sell their homes for the balances due before the foreclosures start, or they get behind in payments.... As times get worse, naturally the layoffs will proceed at a rapid clip, thereby exacerbating the process of an economic melt-down. - Don Stott
The harder the Fed fights core CPI inflation, the greater the risk of a bout of home price deflation on a scale perhaps not seen since the 1930s. As the housing market worsens, there will be more downward pressure on prices to rent and buy. Deflation could swiftly replace inflation as the main focus at FOMC meetings. And that would be an unfortunate development, given monetary policy's limited ability to fight deflation. - John Lonski [chief economist, Moody's Investors Service]
With only one clear exception in the mid-1990s, central bank ease since the mid-1950s means the economy is in a recession, or will be within a few months. - Gary Shilling
The Fed thinks consumers, business leaders, and investors are all manic-depressive and need Fed-dosed lithium to moderate the mood swings - or we'll destroy ourselves in the unbridled euphoria and depression. The millions of people driving the economy and stock market need the detached brilliance of a handful of experts - who often can't agree with each other on what policy mix is needed, or even where the economy or prices are going.... it's possible the big dips and gains we don't see in the economy because of the Fed would teach us restraint. Anyone who lived through the depression is wary of risk and speculation. Today's generation is quick to speculate on homes with high-risk mortgage products or emerging market stocks or commodities - just a few years after one stock bubble nearly caused a major problem in the economy. Maybe the Fed stopped a big wipeout with their 1% interest rates prescription, but maybe that wipeout would have stopped future speculation better than the Fed ever could. - Jonas Ferris
Trying to control the inflation rate within a very narrow band, e.g., 1-2% core CPI, is idiotic and tells you more about the mindset of the economic central planners of the US of A than about anything else. Trying to control the economy too finely, requiring too much meddling into the economy, is not a sign of a country committed to free markets. Higher degree of uncertainty is one price of freedom. Control freaks are never lovers of freedom and the Federal Reserve System is a dark mark against free-market principles. In case you haven't noticed, the Federal Reserve interferes in the markets, incessantly. These meddlers don't even know the meaning of hands-off policy most of the time (to a blind faithful whatever the Fed does must be right and for the good). In attempting to control inflation within a very tight range haven't these geniuses looked at the historical data on inflation? Oh, they are smarter than all the rest in the past? - Jas Jain
We regard government as a necessary evil, nothing more. All you can hope is that the government, its pernicious bureaucracies, and its propaganda do no lasting harm. But in America, when the government.... says something - everybody nods. It's disgusting. Again, this is the mentality of the Nazis. When Hitler said something everyone nodded, no matter how ridiculous the statements that came out of his mouth. Let's take the so-called 'Productivity Miracle' as an example.... In order to reap any benefit from productivity gains - such as higher profits or wages - certain conditions must also be present. A high savings, high investment society can reap enormous gains from increased productivity: rapid increases in production, higher profits, higher wages and likewise increased savings. None of those conditions exist in America today Yet, you have American economists treating productivity as if it were the Holy Grail of economics itself. Despite almost no business investment and a dismal, negative savings rate, you have leading American economists touting GDP growth as the result of 'increased productivity.' It is ridiculous. The problem is, hedonic price indexing and increases in asset prices - including houses - account for almost all GDP growth in America. Rather than looking at productivity as a measurement of existing economic activity, it is touted as the root cause of prosperity! Yet real features of the economy like wages, savings, employment are all stagnant or down. Mention productivity and everybody nods in unison. It is one of the pillars of American superiority. It is scandalous. - Kurt Richebächer
Asset deflation. Market-by-market price deflation. Declining interest rates, falling commodity prices, a debt induced slowdown in the post-bubble, post-bubble-bubble economy. It's all coming, folks. Brick by brick. In fact, it's unfolding as we speak. Real estate is the linchpin, just like it was in Japan after their Nikkei bubble popped in 1990. Real estate values there continued to rise for a couple of years (after their monetarists dropped their interest rates to zero), then real estate deflation began to take hold. When "everyone" figured out that real estate would cost less if you waited a few months, there was absolutely nothing that could be done to turn the psychology around. People stopped borrowing on their declining home equities, too. Real estate values in Japan fell for twelve consecutive years.... We have embarked upon a decade (or more) of real estate deflation here in the U.S. That will be enough to pull down prices across the board. All that's left is for people to talk about it at cocktail parties. - Steve Moyer
Although the abdication of responsibility in lending showed up in housing prices, this mania, at its heart, has been a lending mania. (If we'd had a bull market in houses that produced stupid prices -- but we didn't have folks buying homes they patently couldn't afford -- it wouldn't have to end in the absolute debacle we are headed toward.) ....At some point (sooner, rather than later), there will be a housing-finance-related "accident," due to an incendiary combination of housing debt and derivatives. That is what lies ahead. What remains to be seen is exactly when the financial bomb gets detonated. - Bill Fleckenstein
Consumer borrowing is fine for a young couple who can reasonably expect their incomes to rise over their lifetime. But today, you have credit expansion that is completely out of control. Even since the Federal Reserve began raising rates in 2004, bank credit expansion has continued unabated.... There has been no monetary tightening. Period.... What will happen next, we suspect, is that asset prices will decline precipitously and the consumer will be left with a pile of debts. With what resources will he repay them? Ja, it is consequences that matter - not assumptions. Still there is not a single critical word from the economic establishment in America. - Kurt Richebächer
In my opinion we are in the equivalent of that mini boom of 1930, just before the markets' final sell-off. Just as that final sell-off into 1932 was much worse than the initial crash, so too will this sell-off be much worse than our initial 2000-2002 sell-off. Please take note that the stock market bottomed in 1932 even though the depression lasted another 14 years. - Aubie Baltin
The S&P500 is now poised to drop through the freaking floor, signaling the beginning of the long-overdue economic adjustments necessary to purge the system of the stupidity, crushing debts, and suicidal mal-investments that result from allowing the Federal Reserve to create so much, so damned much, so excessively much, so horrifyingly much, so catastrophically much money and credit. - Richard Daughty
Every sign that pointed to small-cap stocks rising in 2002 now points to them falling over the next three years. Whether you like it or not, we are at or near the top of the current small-cap cycle. The writing is on the wall. Over the last seven months, the worst small-cap companies, aka "garbage stocks," have led the market. They are up 8.71%, while the fundamentally sound companies are down 18.8%. This kind of irrational buying always occurs at or near the end of a bubble period - just before it goes "pop." - James Boric
The stock market might have predicted, "nine out of the past five recessions," as Nobel economist Samuelson is supposed to have quipped, [but] how many have economists, as a group, predicted? A fat zero. So, please ignore a crank like myself, or any other non-economist prognosticator of the economy, if you must, but don't hold your breath for an economist to forecast a recession until after the economy is already in a recession. And in many cases until it has already come out of a recession.... A degree in economics is a very big hindrance in forecasting recessions and depressions; on that history's verdict is clear. - Jas Jain
To be a bull today, you have to think that this time it is different. You must believe that the inverted yield curve, which has yet to be wrong about a future recession, is giving us a false positive. Because if we do get a recession or even a "mere" serious slowdown, then the stock market is going to drop. It always has. Always. To be a buyer today, you have to think that the housing market is not going to be all that big a problem, that consumers will be able to once again maintain their increase in spending.... As more than a few commentators have noted, the market works diligently at creating the most pain for the most number of people. I sadly think there is some pain in the future as this economy slows down. Is a recession a certainty? Is it locked in? No. It's not. I could be wrong and this time it could be different. Someday it will be, I guess. But the probability of a recession is high and getting higher. I think a serious slowdown is a very high probability. And that is not a good environment for stocks in general, although there will certainly be exceptions. - John Mauldin
I will offer this prediction. It is an easy one, yet one that few believe.... We are indeed on the cusp..... of deflation. It is ironic that the Fed unleashed the very beast they feared by fighting it too early, at a time when there simply was no threat. Now that the threat is real, no one sees it. - Mike Shedlock
The bulk of the money in this world is managed in a cover-your-ass fashion. - Whitney Tilson [founder, T2 Partners]
The new federal pension bill, the so-called Pension Protection Act, is being passed and signed into law right now because the government wants more people to put more money into the stock market. Otherwise, the people already invested in the stock market will stop showing gains, and stop reporting taxable gains, and start showing actual losses, and deducting those losses on their income tax returns. The official rationale for this new pension law is that it will encourage more people to "take control of their own retirements", with the tacit admission that Social Security was a boondoggle in the best of days. But regardless of why they say they are doing this, it's really because someone needs your money, and if there is one thing that every Mogambo Scout knows, it is that "It's always about the money, and mostly about how everybody needs yours." - Richard Daughty
Washington's Enron-style accounting is now so widespread and so deeply ingrained, the nation could be bankrupt and not even know it. You go to work. You save and invest. You vote in the November election. And you assume that everything is business as usual. Then, one day, you wake up to the shocking discovery that it's not. Inflation is at least three percentage points worse than what they're telling you. Unemployment and the budget deficit is over double. The national debt is at least five times bigger than official tallies. Almost every number coming out of Washington has been thoroughly massaged and greatly distorted, almost always with a bias toward sweeping the dirt under the carpet and sugarcoating the truth. This is not a conspiracy. It just happens naturally. But that doesn't diminish the potential impact on your money. - Martin Weiss
Many of the conflicts seemed subdued or suppressed. Or they simply failed to rise to a level of significance that might dent the powerful economic growth engines of the industrial world. But now, all that's changing. Now, the conflicts are approaching critical mass, with a far greater impact on our economy and on our daily life than anyone dreamed possible a year or two ago. So no matter how tired you may be of the drumbeat of CNN or Fox News night after night, you can ignore this danger no more. You must sit up, listen and recognize it for what it really is: Not just a worldwide war on terror ... but also, potentially, a low-level World War III. - Martin Weiss
I was struck by the results of an L.A. Times poll on Americans' views about the conflict in Lebanon published yesterday [August 3].... Here's the real story: The Democratic Party, which has owned the Jewish vote for as long as anyone can remember, has abandoned Israel and, if this poll is right, fails to see much moral difference between the Jewish state and the terrorist organization Hezbollah. Let's look at the numbers. The poll finds 59 percent of Americans think Israel's actions are justified. But only 49 percent of Democrats do - and nearly half of those consider Israel's actions excessively harsh. By nearly a 2-to-1 ratio, however, Republicans believe Israel's actions are justified.... Overall, 50 percent said the U.S. should continue to align with Israel, while 44 percent backed a more neutral position. But Democrats supported neutrality 54 percent to 39 percent. Republicans supported alignment with Israel by a margin of 64 percent to 29 percent.... Can anyone give me one reason a Jew would continue to vote Democratic in light of this stunning information about the direction of the party's grass-roots? - Joseph Farah
If you think the worst has passed in the Middle East, and you recently altered your investment philosophy as a result, listen to me: You are going to regret it. In the last few days, investors all over the world have breathed a sigh of relief. They think the cease-fire in the Middle East has solved many of the geopolitical problems there. And they think the stand-off with Iran will somehow fade. My view: The world is stark raving mad, and anyone who thinks otherwise is going to watch their investments get plowed right over. - Larry Edelson
U.K. polling data showed almost 200,000 British Muslims approved the July 7, 2005, subway and bus terrorist attacks. A quarter of Britain's 1.8 million Muslims -- or some 450,000 people -- are sympathetic to violent jihad (holy war). A third, or 600,000, said they would rather live under Shariah, or Islamic law, than British law. And an overwhelming majority is convinced the war on terror is a war on Islam. - Arnaud de Borchgrave
When you think about it, we could further reduce threat levels by requiring people to fly either naked or in
their underwear, with the airline holding all wallets and documents.... - George Ure
So, you ask, what's with stocks, which usually "predict" the oncoming recession by starting their decline with a six-month lead? Frankly, I think the reputation of the stock market as an advance warning of a recession is greatly overrated. In my opinion, the bear doesn't start until investors begin to feel the impact of the recession that's underway as reflected in corporate earnings.... for if there were no recession (or other negative event), why would investors have cause to turn pessimistic? It's the nature of reporting recessions (well after the fact), and of the way they're defined (a shrinking GDP, not just a decline in GDP growth), that has given the stock market its reputation as a leading indicator. Sure, it leads the realization of a recession, but by the time the recession is recognized it's too late to bail out.
Anyway, if I'm right and the recession is beginning now, then the stock-market bear will return.... just about now.... in this traditionally unseasonable (September-November) period for stocks. And we could be in for a really hard landing! It's clear by now that the housing bubble is not going to gently deflate.... it's popping big-time, with only the size of the ultimate price declines in doubt. Since housing and housing-related businesses were responsible for about 40% of post-2000 GDP growth, having the housing market alone go into reverse is sufficient by itself to give us a pretty mean recession. Then, when you add in the leverage of the funny-money (ARM, neg-am) mortgages going into reverse, the potential for catastrophe greatly escalates.
The chart that follows illustrates the point. It shows a 79% correlation between the NAHB housing index (a sentiment indicator of the health of the housing market) and the level of the S&P 500 a year later, for the past ten years. Now, in fairness I should point out that such a correlation is not typical for most of U.S. economic history; generally, there was none. So before we extrapolate the recent past linearly into the future, we should ask ourselves, Is there good reason to believe this correlation will still hold, at least for the next few months or years? Because housing has been such a large part of recent GDP growth, I say yes; the correlation will probably persist until housing resumes a more "normal" (recession-independent) trajectory.
Chart from David Rosenberg, North American economist for Merrill Lynch
Note that the chart is "predicting" the S&P 500 will reach the 600 level in a few months' time. And may I point out.... the NAHB index itself may not have bottomed yet; it is still heading into the cellar. This all fits in with the "prediction" of the Half-Past-Human web bot project that the Dow will be decimated by the end of the year.
Speaking of HPH, it "predicted" there would be an "emotional release" around August 8/9. Bingo!, when the foiled terrorist airplane-hijacking plot was revealed. (Shampoo, anyone? Did this get your attention?) So far, I see no evidence of the "rebellion/revolution" HPH was hinting at for early September. HPH is also being interpreted as predicting an attack on Israel in December, though given the vagueness in wording of HPH, I think it's possible that this could mean an attack by Israel, for example on Iran's nuclear-"research" facilities. (The Israelis are even more determined than GW Bush that Iran shall not have The Bomb.)
Given the popping housing bubble and the many
other negative factors, in my opinion the current
odds for systemic failure are about 2 in 3 (67%), and
a stock-market crash during this unfavorable two
month period is possible. Even if you don't agree
with my odds, given the convergence of so many
negative factors, you definitely should not expect
stocks to suddenly take off in a roaring bull. Play it
safe for the time being.... in cash and near-cash.... at
least until the storm arrives.
A. "Inheritance" - real (normalized) "dividend distribution" portfolio:
SUMMARY - "Inheritance":
Original cost: $100,000.00 (normalized)
Present value: $109,823.21 (see below)
Increase: $9,823.21 [+9.82%]
COMMENT on "Inheritance": Other than the 2-for 1 Wells Fargo stock split, there are no changes to the portfolio for this issue.
The portfolio cost (normalized) is $106,700.04 (corrected from May issue) with $78,742.33 currently in cash or near-cash.
B. "Professors' Investment Group (PIG)" - investment club portfolio.
SUMMARY - "PIG":
Original cost: $10,699.00
Present value: $20,190.14
Increase: $9,491.14 [+88.71%]
COMMENT on "PIG": I continue to "roll over" 3-month T-bills, one per month.
C. Roth IRAs - real portfolio:
SUMMARY - Roth IRAs:
Original cost: $28,776.19
Present value: $35,532.35
Increase: $ 6,756.16 [+23.48%]
COMMENT on Roth IRAs: There is no change from the last issue.
D. TIAA/CREF 403(b) and (non-Roth) IRA retirement plans: My TIAA-CREF and Fidelity retirement investments, both the part from which I am making monthly withdrawals and the parts that are "resting", are invested as follows: TIAA traditional, 58.43%; T-bills and money-markets, 24.25%; CREF inflation-indexed bonds, 13.43%; TIAA real estate, 3.87%; TIAA-CREF High-Yield II, 0.02%
TIAA-CREF values, 18Sep2006: stock, 222.51; equity-index, 88.18; MM, 23.40; bond, 77.88; inflation-indexed bond, 46.56; real estate, 266.63; TIAA current yield in SRA, about 4.92%. COMMENT on NYSE "Timer's Trend": We are currently on a BUY signal of July 25, 2006.
COMMENT on NASDAQ "Timer's Trend": We're on a BUY signal given September 12, 2006.
NEXT ISSUE - will appear toward the end of October 2006.