But Mike, it seems to me that there is an "end game" or two that will stop us before that.

One, as China continues to suck in money from the United States it worsens it own bubble, creating greater potential for global economic instability.

Two, as it's economy continues to grow it puts greater and greater pressure on world oil production in a structural sense, which in turn puts pressure on world oil prices.

Three, financial markets will surely react to such obvious structural inflationary pressure by raising long term interest rates.

Four, the Fed will have to react similarly so that BOTH short and long term interest rates rise.

Five, the debt-ridden American economy is put in serious jeopardy by the increase in interest rates, putting serious strain on the global economy.

Six, the global housing bubble (a pet issue of The Economist two years running) would likely collapse, further putting pressure on the global economy.

Seven, Chinese and Japanese reintroduction of our dollars back into dollar-denominated assests here in the States continues to bolster our debt-crazed, consumer-driven expansion also increasing potential for global economic instability.

And there's probably more enmeshed within just those seven.

Furthermore, America's generational alignment is now just passed a fully mature 3T constellation, by which I mean a 4T mood is likely imminent. This means no more Nip & Tuck, consuming like there's no tomorrow, and fighting 4T wars in 3T style.

Between all of the above plus Al Qaeda, Iraq, North Korea, Iran, China, Summer Pulse, and who-knows-what-else, there's plenty of reason for me to think that a 15,000 Dow is not in the stars (but I'll have to consult with Eric on that one).

Saturday, July 3, 2004


Is there a housing bubble, and could the Fed rate hike be the first prick?


By Bruce Meyerson / AP Business Writer

Comment on this story
Send this story to a friend
Get Home Delivery


NEW YORK -- Barring natural disaster, a home generally won?t collapse like a stock market. That?s assuming, however, it?s been used primarily as a place to live, rather than a cheap source of cash.

Now that the Federal Reserve has officially embarked on the path to higher interest rates, the weighty question is what will become of a lengthy bull market in home prices which some experts see as uncomfortably reminiscent of the tech stock bubble.

Though such comparisons may sound alarmist, there are signs of speculative excess, not the least of which may be the emotion with which homeowners bristle at the suggestion of a bubble at the doorstep.

Regardless of whether that?s the wrong word to use, it?s clear that a prolonged period of rock-bottom interest rates and rising housing prices has emboldened consumers to borrow against their homes at unprecedented levels.

After a bruising affair like the stock market collapse, legions of investors turned inward, viewing their homes as the only safe investment. It wasn?t a silly notion, especially as the resulting demand pushed prices higher.

But a growing number of homeowners have exploited those rising values, turning the gains into cash by refinancing mortgages and taking out home equity loans based on the latest market prices.

And thanks to easy lending practices, home mortgages and loans can represent up to 90 percent of this theoretical market value. That level of collateral far exceeds the levels of borrowing permitted with stocks, a cap of 50 percent or less which nevertheless hastened the demise of the dot-com boom.

So while all the extra cash fueled consumer spending, the saving grace for a relatively minor recession, the resulting mound of debt could come back to haunt both homeowners and the overall economy.

By the end of 2003, the nation?s homes were worth $15.2 trillion, with mortgages and home loans accounting for about 45 percent of that value, according to Fed data.

Now, with interest rates rising, the risks of this situation are multiple.

To begin with, since a substantial portion of the borrowing came through adjustable rate mortgages and home equity loans with variable interest rates, monthly repayments will rise.

For most people, this will at least force a cutback in discretionary spending from home improvements to vacations, clothing and assorted other comforts. Since the Fed is hoping to prevent an inflationary spike, a modest drop in demand is one of the central bank?s goals in boosting rates.

A more problematic scenario could develop if the increase in monthly debt payments becomes more than many homeowners can handle -- and more than a would-be buyer for those homes can afford.

That?s where the dominos can really start falling. If homeowners need to sell at the same time that demand begins to taper, prices will likely fall, and houses could quickly come to be worth less than the amount of money borrowed with those properties as collateral.

One option would be to borrow more against the home to meet the rising payments, a troubling prospect.

?The problem is that home equity lines of credit are seductive,? Edward Yardeni, market analyst for Prudential Equity Group, wrote in a recent report he dared entitle, ?Home Equity Loan Bubble??

?If more households tap more of their home equity -- effectively turning their home into a credit card -- then I can foresee that such a development could seriously exacerbate the next economic downturn.?

Meanwhile, even among homeowners who can shoulder higher monthly payments, their incentive to do so could wane with falling real estate prices.

After all, many of them paid as little as 10 percent of the original purchase price with their own money, while banks or other lenders put up the rest.

Then, in many cases, lenders laid out even more cash to homeowners who turned the rising value of a property into extra income by refinancing a mortgage or taking out a home loan.

So, for example, if a house initially cost $300,000, a family may have put up $30,000 of its own money. Then, if the house rose in value to $500,000, the owners might have borrowed another $100,000 or $150,000, using the cash however they desired. Thanks to falling interest rates, this was often accomplished with no increase or even a decrease in monthly debt payments.

At that point, the homeowner has received more cash than he or she put into the house. If interest rates rise, and the value of the home falls to less than the amount owed, some people may not want to put up with rising monthly payments. Though a wrenching decision, some might opt to let the bank foreclose and take the house.

At the extreme, some worry, this scenario could spiral into a full-blown crisis for the nation?s financial institutions requiring a government bailout at a time when the federal deficit is ballooning.

For now, any talk of crises and market bubbles sounds farfetched.

But there is an element of overconfidence and risk-taking in the housing market that?s uncomfortably reminiscent of the stock frenzy. And among the many distinctions to be drawn between then and now, one is that even a modest downturn in housing prices could hurt some people where they live.

Bruce Meyerson can be contacted at bmeyerson@ap.org

Originally Posted by Tom Mazanec

Saturday, July 3, 2004


Is there a housing bubble, and could the Fed rate hike be the first prick?


By Bruce Meyerson / AP Business Writer

Comment on this story
Send this story to a friend
Get Home Delivery


NEW YORK -- Barring natural disaster, a home generally won?t collapse like a stock market. That?s assuming, however, it?s been used primarily as a place to live, rather than a cheap source of cash.

Now that the Federal Reserve has officially embarked on the path to higher interest rates, the weighty question is what will become of a lengthy bull market in home prices which some experts see as uncomfortably reminiscent of the tech stock bubble.

Though such comparisons may sound alarmist, there are signs of speculative excess, not the least of which may be the emotion with which homeowners bristle at the suggestion of a bubble at the doorstep.

Regardless of whether that?s the wrong word to use, it?s clear that a prolonged period of rock-bottom interest rates and rising housing prices has emboldened consumers to borrow against their homes at unprecedented levels.

After a bruising affair like the stock market collapse, legions of investors turned inward, viewing their homes as the only safe investment. It wasn?t a silly notion, especially as the resulting demand pushed prices higher.

But a growing number of homeowners have exploited those rising values, turning the gains into cash by refinancing mortgages and taking out home equity loans based on the latest market prices.

And thanks to easy lending practices, home mortgages and loans can represent up to 90 percent of this theoretical market value. That level of collateral far exceeds the levels of borrowing permitted with stocks, a cap of 50 percent or less which nevertheless hastened the demise of the dot-com boom.

So while all the extra cash fueled consumer spending, the saving grace for a relatively minor recession, the resulting mound of debt could come back to haunt both homeowners and the overall economy.

By the end of 2003, the nation?s homes were worth $15.2 trillion, with mortgages and home loans accounting for about 45 percent of that value, according to Fed data.

Now, with interest rates rising, the risks of this situation are multiple.

To begin with, since a substantial portion of the borrowing came through adjustable rate mortgages and home equity loans with variable interest rates, monthly repayments will rise.

For most people, this will at least force a cutback in discretionary spending from home improvements to vacations, clothing and assorted other comforts. Since the Fed is hoping to prevent an inflationary spike, a modest drop in demand is one of the central bank?s goals in boosting rates.

A more problematic scenario could develop if the increase in monthly debt payments becomes more than many homeowners can handle -- and more than a would-be buyer for those homes can afford.

That?s where the dominos can really start falling. If homeowners need to sell at the same time that demand begins to taper, prices will likely fall, and houses could quickly come to be worth less than the amount of money borrowed with those properties as collateral.

One option would be to borrow more against the home to meet the rising payments, a troubling prospect.

?The problem is that home equity lines of credit are seductive,? Edward Yardeni, market analyst for Prudential Equity Group, wrote in a recent report he dared entitle, ?Home Equity Loan Bubble??

?If more households tap more of their home equity -- effectively turning their home into a credit card -- then I can foresee that such a development could seriously exacerbate the next economic downturn.?

Meanwhile, even among homeowners who can shoulder higher monthly payments, their incentive to do so could wane with falling real estate prices.

After all, many of them paid as little as 10 percent of the original purchase price with their own money, while banks or other lenders put up the rest.

Then, in many cases, lenders laid out even more cash to homeowners who turned the rising value of a property into extra income by refinancing a mortgage or taking out a home loan.

So, for example, if a house initially cost $300,000, a family may have put up $30,000 of its own money. Then, if the house rose in value to $500,000, the owners might have borrowed another $100,000 or $150,000, using the cash however they desired. Thanks to falling interest rates, this was often accomplished with no increase or even a decrease in monthly debt payments.

At that point, the homeowner has received more cash than he or she put into the house. If interest rates rise, and the value of the home falls to less than the amount owed, some people may not want to put up with rising monthly payments. Though a wrenching decision, some might opt to let the bank foreclose and take the house.

At the extreme, some worry, this scenario could spiral into a full-blown crisis for the nation?s financial institutions requiring a government bailout at a time when the federal deficit is ballooning.

For now, any talk of crises and market bubbles sounds farfetched.

But there is an element of overconfidence and risk-taking in the housing market that?s uncomfortably reminiscent of the stock frenzy. And among the many distinctions to be drawn between then and now, one is that even a modest downturn in housing prices could hurt some people where they live.

Bruce Meyerson can be contacted at bmeyerson@ap.org

Tom,

Could you provide a link?

Originally Posted by William Jennings Bryan

But Mike, it seems to me that there is an "end game" or two that will stop us before that.

One, as China continues to suck in money from the United States it worsens it own bubble, creating greater potential for global economic instability.

Sure this is a possibility. It is even likely to happen (I certainly hope it does). It would be a replay of the 1997-99 Asian crisis. Was that so horrible for the US?

Two, as it's economy continues to grow it puts greater and greater pressure on world oil production in a structural sense, which in turn puts pressure on world oil prices.

And this is bad how? Gas prices go up, alternate energy booms, should work out to be a good thing as long as it is orderly. And if it is due to increasing demand as opposed to a sudden shrinkage in supply, it should be.

Three, financial markets will surely react to such obvious structural inflationary pressure by raising long term interest rates.

Ah, but they won't.

Four, the Fed will have to react similarly so that BOTH short and long term interest rates rise.

Fed is already raising short rates and will continue to do so just like 1994. So far it's been pretty much of a replay.

Five, the debt-ridden American economy is put in serious jeopardy by the increase in interest rates, putting serious strain on the global economy.

This assumes that long-term rates rise a lot. They won't.

Six, the global housing bubble (a pet issue of The Economist two years running) would likely collapse, further putting pressure on the global economy.

The housing market will peak and probably plateau. It's not really "high enough" to collapse, its still below its 1979 level.

Seven, Chinese and Japanese reintroduction of our dollars back into dollar-denominated assests here in the States continues to bolster our debt-crazed, consumer-driven expansion also increasing potential for global economic instability.

Yep, just like WW II, except it was US investors rather than Japanese and Chinese.

Furthermore, America's generational alignment is now just passed a fully mature 3T constellation, by which I mean a 4T mood is likely imminent. This means no more Nip & Tuck, consuming like there's no tomorrow, and fighting 4T wars in 3T style.

If WW II wasn't a debt-fueled orgy of consumption I don't know what was. Logically it should have been followed by a long and deep depression. This was widely expected at the time. It didn't happen. Why? Because it was a 4T.

Between all of the above plus Al Qaeda, Iraq, North Korea, Iran, China, Summer Pulse, and who-knows-what-else, there's plenty of reason for me to think that a 15,000 Dow is not in the stars (but I'll have to consult with Eric on that one).

I was thinking of the S&P500 which is the broad market average. I don't know how this might translate to the Dow. A 50% advance in the S&P500 would put that index about 8% above the 2000 peak, but still below the peak in constant dollars. I'm not saying the S&P500 will go higher than that and I am not saying it will go up there and stay up there. I also think that the market will be quite a bit lower than today, as well as being quite a bit higher than it is today before the 4T ends. We are in a secular bear market, after all, and the index purchased in 2000 will not outperform money markets for twenty years (the subtitle of my first book).

Originally Posted by Tom Mazanec

?If more households tap more of their home equity -- effectively turning their home into a credit card -- then I can foresee that such a development could seriously exacerbate the next economic downturn.?

Yep. This is why I believe the next recession and bear market will be much more severe that the last one. I discussed this in an article in Nov 2002:

One might point out that current strength in real estate reflects the 11 rate cuts made by the Federal Reserve since the beginning of 2001. But these 11 rate cuts have done nothing to prevent the stock market from falling 35% since then. The stock market fell because it had gotten too overvalued, that is, it had reached its peak in the Stock Cycle and thus had to start coming down, regardless of the what the Fed did. On the other hand, real estate valuation has not reached extreme levels as shown by the ratios of price to income in Figure 5. That is, the Kuznets peak has yet to be reached. Thus, rate cuts have supported real estate, just as they did for stocks in 1998. By 2004 we may well have reached a Kuznets peak and then one would expect rate cuts by the Fed to be ineffective in preventing a real estate bust in the next recession. This interpretation suggests that the current downturn is largely stock market driven, being the result of the inevitable downturn following a peak in long-term stock market valuation (P/R). Indeed, current weakness almost entirely comes from weak business investment spending, reflecting the poor business outlook generated by continuing weakness in the stock market. Consumer demand has remained strong.

Thus, if the cycle scheme suggested here is correct, no double-dip recession is to be expected and the stock market may well rally over the next few years, in accordance with P/R valuation.

Originally Posted by Mike Alexander '59

The housing market will peak and probably plateau. It's not really "high enough" to collapse, its still below its 1979 level.

Mike,

I didn't understand this answer above. What index are you comparing to 1979, house prices adjusted for inflation??

My view on real estate may be tainted by being in California. Let's take the example a 900 sq foot shack I affectionately call the "crack house". I know that it went for 65K in 1979, 243K in July 1999, 365K in March 2003, and was almost certainly 450+ last month (I say "last month" because everything suddenly stopped selling around here -- we're all waiting to see what that means).

I know people buying 500K houses with nothing down. I know someone who's been out of work for over two years and supplements his wife's salary by taking out home equity loans! Yet, the net "equity" in his condo has been barely touched beause the appraised price is rising just as fast as he's taking the equity out. There's tons of stuff like this going on out here.

Originally Posted by William Jennings Bryan

Originally Posted by Mike Alexander '59

The housing market will peak and probably plateau. It's not really "high enough" to collapse, its still below its 1979 level.

Mike,

I didn't understand this answer above. What index are you comparing to 1979, house prices adjusted for inflation??

My view on real estate may be tainted by being in California. Let's take the example a 900 sq foot shack I affectionately call the "crack house". I know that it went for 65K in 1979, 243K in July 1999, 365K in March 2003, and was almost certainly 450+ last month (I say "last month" because everything suddenly stopped selling around here -- we're all waiting to see what that means).

I know people buying 500K houses with nothing down. I know someone who's been out of work for over two years and supplements his wife's salary by taking out home equity loans! Yet, the net "equity" in his condo has been barely touched beause the appraised price is rising just as fast as he's taking the equity out. There's tons of stuff like this going on out here.

See this article, especially figure 5.

http://www.capitolhillblue.com/artma...cle_4856.shtml

Stocks slammed by employment data
July jobs growth about 200,000 below expectations

By Susan Lerner, CBS.MarketWatch.com
Last Update: 2:32 PM ET Aug. 6, 2004


NEW YORK (CBS.MW) - The major indexes all hit new lows for the year Friday after the Labor Department shocked Wall Street with a July jobs report that showed growth below expectations.



CBS MARKETWATCH TOP NEWS
U.S. stocks slammed by dismal job growth in July
U.S. July job growth slows to 32,000
MCI's shares rally on Lehman upgrade, dividend plan
Oil futures ease back, but output concerns lingering



The Dow Jones Industrial Average ($INDU: news, chart, profile) was last down 116 points, or 1 percent, at 9,846, while the Nasdaq Composite Index dropped below 1,800 for the first time since October.

The Nasdaq ($COMPQ: news, chart, profile) was recently down 30 points, or 1.6 percent, to 1,791. The S&P 500 ($SPX: news, chart, profile) skidded 10 points, or 12 percent, to 1,068.

The Labor Department reported that the U.S. economy added 32,000 non-farm payroll jobs in July, compared with the 235,000 economists had expected. Payroll growth in May and June was revised lower by a cumulative 61,000 as well. The unemployment rate fell to 5.5 percent from 5.6 percent. See Economic Report.

"This was the report for the month. This is what everybody had pinned their hopes on to really stabilize the market, so to have this kicked out from underneath us really creates some serious issues," said Paul Mendelsohn, chief investment strategist at Windham Financial Services.

Having taken out all critical support points in the major indexes, Mendelsohn said, things could "get really nasty" from this point on.

"This is a disaster shaping up in here," he said................................



http://cbs.marketwatch.com/news/stor...7D&siteid=mktw

A Daily Reckoning Investment Alert

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From an email investment newsletter I receive from Gary North, the Y2K guy. Take with a grain of salt, but just because he was wrong on 1-1-00 doesn't mean he is wrong this time.

Originally Posted by Tom Mazanec

A Daily Reckoning Investment Alert . . .

. . . From an email investment newsletter I receive from Gary North, the Y2K guy. Take with a grain of salt, but just because he was wrong on 1-1-00 doesn't mean he is wrong this time.

But if he is wrong this time I guess his reputation is finished? He must be pretty sure of himself, or stupid.

I don't know about the urgency he's emphasizing, but the risks he's underscoring are very real IMHO.

Originally Posted by Mike Alexander '59

If WW II wasn't a debt-fueled orgy of consumption I don't know what was. Logically it should have been followed by a long and deep depression. This was widely expected at the time. It didn't happen. Why? Because it was a 4T.

What most people understand by the phrase "debt-fueled orgy of consumption" involves spending and borrowing habits by consumers, consumers being individual people buying stuff for their own use. While it is technically not incorrect to use the phrase in describing a consumption of war material for purposes of fighting a terrible global conflict by the government with deficit spending covering the gap in revenue, to assign this the same implications is wrong. Consumption in the usual sense was severely curtailed during the war as it had been during the Depression, although for different reasons -- rationing instead of unemployment, a shortage in supply rather than a lack of consumer demand.

The reason the war was not followed by a deep recession is not because it was a 4T but because of the differences between that "orgy of consumption" and an ordinary one. In what most people mean by that phrase, consumer demand is exhausted by a combination of satiation and over-indedtedness. During the war, however, with most everyone working and earning good wages, and with nothing much to buy because of war-induced shortages, consumer demand accumulated to a very high level. After the war, the justification (profit potential) for investment in production of consumer goods was very, very high, consequently such investment was made, consequently employment stayed robust, consequently sales were good and profits strong, consequently there was no recession. It could be argued that such a vast nationwide effort as World War II could only be undertaken in a 4T; otherwise the Turning had nothing to do with the outcome.

Originally Posted by Brian Rush

Originally Posted by Mike Alexander '59

If WW II wasn't a debt-fueled orgy of consumption I don't know what was. Logically it should have been followed by a long and deep depression. This was widely expected at the time. It didn't happen. Why? Because it was a 4T.

What most people understand by the phrase "debt-fueled orgy of consumption" involves spending and borrowing habits by consumers, consumers being individual people buying stuff for their own use. While it is technically not incorrect to use the phrase in describing a consumption of war material for purposes of fighting a terrible global conflict by the government with deficit spending covering the gap in revenue, to assign this the same implications is wrong. Consumption in the usual sense was severely curtailed during the war as it had been during the Depression, although for different reasons -- rationing instead of unemployment, a shortage in supply rather than a lack of consumer demand.

The reason the war was not followed by a deep recession is not because it was a 4T but because of the differences between that "orgy of consumption" and an ordinary one. In what most people mean by that phrase, consumer demand is exhausted by a combination of satiation and over-indedtedness. During the war, however, with most everyone working and earning good wages, and with nothing much to buy because of war-induced shortages, consumer demand accumulated to a very high level. After the war, the justification (profit potential) for investment in production of consumer goods was very, very high, consequently such investment was made, consequently employment stayed robust, consequently sales were good and profits strong, consequently there was no recession. It could be argued that such a vast nationwide effort as World War II could only be undertaken in a 4T; otherwise the Turning had nothing to do with the outcome.

Another possible difference is what the "orgy" went toward. In our most recent case it went toward consumption and the building of factories overseas. In the 1940's, it went toward domestic infrastructure: roads, shipyards, factories. Later those items could be converted from war-time to peace-time usage and the ecomonic bonanza set off more than paid for the debt incurred.

Just a thought.

Gary North's REALITY CHECK

Issue 368 August 10, 2004


http://www.dailyreckoning.com/sub/GetReality.cfm

* * * * * * * * * * * * REMINDER * * * * * * * * * * * * *
On the days that I don't publish, like today, you will
receive Bill Bonner's DAILY RECKONING. This will help you
to keep pace with the changes in the markets. Bonner and
I agree on most things in the field of economics, so the
two letters will reinforce each other.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
Sorry, should have read this. The Aug 8 posting was by this guy, Aug 11 from Gary North.

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http://globalresearch.ca/articles/ENG407A.html

When am I going to get off my bottom and buy gold??

http://www.kitco.com

Last month's trade deficit hit $55.82 Billion. That's a $670 Billion annual rate. Holy crap!

http://apnews.myway.com/article/20040813/D84EBU4G0.html

From the president's post:

[image] http://ak.imgfarm.com/images/ap/ECON...0812113501.jpg [/image]

Hmmm.

edit to say: What?!! no pictures on this board? Bummer.

Originally Posted by mgibbons19 (71)

From the president's post:

[image] http://ak.imgfarm.com/images/ap/ECON...0812113501.jpg [/image]

Hmmm.

edit to say: What?!! no pictures on this board? Bummer.

My, my. That's a nice discount.

MGibbons19(71):

I fixed your code. The proper tags are "img" and "/img"

Originally Posted by mgibbons19 (71)

From the president's post:



Hmmm.

edit to say: What?!! no pictures on this board? Bummer.

Hey thanks!! Can you believe I am the webmaster in my little department? That has a lot more to do with what they don't know than what I do.

Anyway, I was thinking that picture sure is interesting. 8k off? Makes me nervous.

Originally Posted by William Jennings Bryan

When am I going to get off my bottom and buy gold??

Har!

About four years ago, when those of us paying attention snapped it up at $275/oz, would have been best. The expectation for now is that the ~$400 ceiling is going to hold for a bit longer, though, so don't feel that you need to rush too much.

Originally Posted by Justin '77

Originally Posted by William Jennings Bryan

When am I going to get off my bottom and buy gold??

Har!

About four years ago, when those of us paying attention snapped it up at $275/oz, would have been best. The expectation for now is that the ~$400 ceiling is going to hold for a bit longer, though, so don't feel that you need to rush too much.

When do you think the global market will realize that there are too many dollars floating around out there??