Britannia Radio

Monday, June 8, 2009 The markets are clearly in a deflationary downturn... Why it takes so long for housing markets to correct... The smart money is buying gold and commodities... The Mogambo on the recent run-up in commodities...and more! --------------------- Special Offer --------------------------- Only 63 People Know Why These Six Tiny Companies Will Change the World... You're #64 - and you're about to become Ultra-Wealthy. This will go down in history as the "story of our era..." - and you'll be rich because you took decisive action in 2009. See the full report right here. --------------------------------------------------------------- The Deflationary Downturn by Bill Bonner London, England Stocks and oil both held steady on Friday. Gold, however, took a big hit - minus $26. There are three kinds of money in the marketplace. There's the smart money that goes with the trend. There's the dumb money that bets against the trend. And there's the money that doesn't know whether it is coming or going. The trouble is always figuring out which is which. The markets are clearly in a deflationary downturn. No doubt about it. After a long period of credit expansion credit is finally contracting. The smart money is probably betting on lower asset prices. "Consumer credit falls the second most on record," reported Bloomberg last Thursday. Houses, as everyone knows, are deflating. There are signs that the fall in housing prices is becoming less violent, but the trend is still down. This from Robert Shiller, in the New York Times: "Long declines do happen with some regularity. And despite the uptick last week in pending home sales and recent improvement in consumer confidence, we still appear to be in a continuing price decline. "There are many historical examples. After the bursting of the Japanese housing bubble in 1991, land prices in Japan's major cities fell every single year for 15 consecutive years. "Why does this happen?" Shiller goes on to explain that housing markets don't adjust quickly. People make their housing decisions years in advance...based on changes in their lives. They may have found a job somewhere...or gotten a divorce...or their children may have left home...or they might just want to live in a different area. These plans take years to come together...and years to execute. They can be reversed by changes in market conditions...but not quickly. And then, when people are planning to sell a house, they may not be in a hurry. If prices slip, they may decide to hold off - maybe for years. Then too, decisions about buying or selling a house are often decisions taken by two people together. The husband may be desperate to get out of a sinking housing market, for example, but the wife may not want to leave her home. Even when they must sell for financial reasons, that decision can take months...even years...to reach. Often, they hesitate. The wife expects to get a better job...or the husband expects a raise...or they anticipate some other economic change in their lives that would forestall the need to sell their house. Then, after the decision is made, there's the actual process of selling a house -- setting a price...and finding a willing buyer. In a downward market, buyers' expectations tend to adjust most quickly. Reading in the paper about a correction in the housing market, the prospective buyer expects a great deal. The prospective seller, on the other hand, tends to deny the severity of the downturn. He reluctantly and belatedly acknowledges that he'll need to lower his price. But as he gives in the market gives way further. The prospective buyer hears about more great deals that other buyers are getting...and he lowers his price targets even faster than the sellers lower their asking price. Shiller gives another example... "An elderly couple who during the boom were holding out against selling their home and moving to a continuing-care retirement community have decided that it's finally the time to do so. It may take them a year or two to sort through a lifetime of belongings and prepare for the move, but they may never revisit their decision again. "As a result, we will have a seller and no buyer, and there will be that much less demand relative to supply - and one more reason that prices may continue to fall, or stagnate, in 2010 or 2011. "All of these people could be made to change their plans if a sharp improvement in the economy got their attention. The young couple could change their minds and decide to buy next year, and the elderly couple could decide to further postpone their selling. That would leave us with a buyer and no seller, providing an upward kick to the market price.... "Even if there is a quick end to the recession, the housing market's poor performance may linger. After the last home price boom, which ended about the time of the 1990-91 recession, home prices did not start moving upward, even incrementally, until 1997." We're also looking at $2.4 trillion worth of Alt-A mortgages that will need to be refinanced or reset. The peak in those resets won't happen until January 2013.Learn how to protect yourself (and even turn a profit) in the face of the second wave of loan defaults. See our special report here. So stay tuned...this housing bear market isn't going away any time soon. More news from Ian at The 5 Min. Forecast: "For the first time since at least second World War, Americans are acting like... well... everyone else," writes Ian in today's issue of The 5 Min. Forecast. "Americans are spending less this year than they did in 2008. Believe it or not, that's a first since WWII. What's more, we're saving at a historic clip...the personal savings rate (updated Friday) jumped from near 0% last year to 5.7%, a 14 year high and the fastest growth rate since at least 1950, when the government started keeping track. Check it out: "'We believe this is crucial to household balance sheet repair," adds our macro-man Rob Parenteau, "but it can only continue if some other sector of the economy is willing to reduce its net saving or increase its deficit spending. Otherwise, in a dynamic sense, saving by one household simply leads to income shortfalls and dissaving elsewhere. "'Contrary to the textbook story, intended saving does not automatically provoke planned investment, even with interest rates lower. With the monthly trade deficit improvement beginning to stall as U.S. consumption and production stabilize, the only other sectoral source that can support higher household saving besides fiscal deficit spending is higher business reinvestment rates, but that is probably a good year out from now. "'At best, then, we can hope the gross personal saving rate stabilizes near current levels until business investment revives. In the meantime, it all hangs on fiscal stimulus getting traction.'" You can catch Rob (along with all your favorite Agora Financial editors) next month, at the Agora Financial Investment Symposium in Vancouver, British Columbia. If you haven't secured your spot yet, you better act fast...this event is sure to sell out. Get all the information here: The Agora Financial Investment Symposium - July 21 - 24, Vancouver, B.C. And back to our thoughts: Housing is wealth for America's middle class. As long as housing is going down - or even NOT going up - the middle class is going to feel poor. It has the huge debts that it built up during the credit expansion...and it has to pay them, even though it has 1) falling incomes...and 2) falling assets. The smart money is probably betting that this deflationary correction has further to go...probably much further to go. But against this natural, normal -- and probably inevitable -- market trend are the hopes and fantasies of an entire generation. The baby boomers have staked their futures on continuing EZ credit. So have their leaders. And so now, the feds and the voters are of one mind. Both want to stop the market correction AT ALL COST - especially if they can lay the bill onto the next generation. Now, here's where it gets interesting. Because the dumb money is probably betting that the feds can make this work. That's what all this talk of "green shoots" is about. A huge part of the public believes that the 'worst is over'...and that the feds' policies are working. They're buying stocks in the belief that this is a recession just like any recession of the post-war period. Ben Bernanke says it will be over by Christmas; they believe him. Meanwhile, there are some very smart people who think the feds' efforts not only won't work...but will create an even bigger disaster. Those people are buying gold...and commodities. David Einhorn, the hedge fund manager who foresaw Lehman Bros. going broke, is now buying gold. John Paulson, who made billions by being right about the credit crisis, is also buying gold. The Chinese are buying gold. So many smart people are buying gold coins that they have become hard to get. What's our view? Who's right? The dumb money; the smart money; or the very smart money? They may be all right...but at different times. This rally could last a while longer. Then, prices will probably resume their downward path...and then, eventually, inflation fears will send gold soaring. And when it does you'll be prepared...because you've taken advantage of the golden opportunity of a generation. Click on the link below to learn more - but hurry...only 356 copies remain of this special report, Set for Life: Eight Keys to Getting "Miserable Rich" with Gold. See here. We continue to answer the question - "will we have inflation or deflation" - in the positive. 'Yes,' we say, 'both of them.' The markets must fully express themselves - which means they need to bounce...and then take the stuffing out of asset prices. Today's asset prices represent yesterday's economic calculations. The value of a house, for example, depends the economic conditions of the bubble period, 2002-2007...and on the whole swell of the great post-war credit expansion. That house price is now adjusting to the post-bubble era...when people have lower living standards and less expectation of a rising housing market. That adjustment will take many years and eventually leave house prices probably 20% to 30% below where they are today. But the feds must fully express themselves too. They're bound and determined to cause inflation. They believe the country's financial future depends on it. It may take them a long time to get the upper hand in their war against capitalism...but eventually, they will do it. And eventually, the very smart money will be proven right - when the dollar collapses...and gold goes up. Regards, Bill Bonner The Daily Reckoning P.S. The smart money is clearly going to the 'anti-stock market', where you can bank triple-digit gains every six weeks without buying or selling a single stock. If you get on board by midnight, Thursday, June 18th, these gains are yours for the taking - guaranteed. Keep reading here... --------------------- Special Offer --------------------------- The "Forever Oil Crash" Has Already Begun The era of "cheap oil" is long gone...but there are two investments that could give you a powerful shield against the fallout ahead - and have the potential to soar, despite the current market turmoil. Keep reading... --------------------------------------------------------------- The Daily Reckoning PRESENTS: This week, the Mighty Mogambo notices that as commodities are going up, the dollar is going down. And so, given the decline in his purchasing power, he predictably asks the government a simple question. It's doubtful he'll receive a simple answer. Read on... Stepping on the Commodities Gas Pedal by The Mogambo Guru Tampa Bay, Florida Oil has, finally, started to rise again, having been down below the breakeven point of pumping it, as they, too, have all kinds of rising costs like everybody else, as well as pension programs and myriad, large governmental entitlement programs to pay for. And what is this "breakeven point" for oil? The last I heard, a couple of years ago, is that oil needed to be higher than $70 a barrel to make their relevant governments' budgets balance, taxes and duties being what they were. However, that was back when the inflationary idiocy of "quantitative easing" was still considered an absolute stupidity by every known theory of economics since Adam Smith in 1776, but which now has become "conventional operational mode" thanks to a system of cowardly, corrupt and embarrassingly ignorant-to-the-point-of-stupidity governments (especially the federal one), a laughably incompetent public school system that has turned out generations of ignoramuses, the irresponsible greed and ignorance of the populace, and an ignorant and often complicit media, a pox upon all their houses. With higher energy prices begins the bleating of us beleaguered bumpkins who must pay these higher and higher energy prices, and the higher prices of all of the things made with petroleum products, without an offsetting increase in our incomes because my stupid boss says that I am overpaid as it is and she would cut my salary and fire me if she wasn't so afraid of me. And we whine, "Why doesn't the government think about me and my precious, precious children, and do something about higher prices, like give me money like they are giving everyone else?" "Sure enough, he includes a chart that shows the dollar index falling from 89 to less than 80 in a month! This is a shocking collapse in relative buying power..." And it is not just oil, but all commodities that are shooting up, as Ian Mathias here at The Daily Reckoning reports that commodities are on a tear (up 12.3%), and that "May was the best month for the CRB Index since 1974," which was more than a third of a century ago. And things are going to get worse, as we import most everything nowadays, and Mr. Mathias notes that "After falling through its 200-day moving average earlier this month, the dollar index has been in steady decay. The index crashed through another important level this morning - the 80 score, a long-standing point of support." Sure enough, he includes a chart that shows the dollar index falling from 89 to less than 80 in a month! This is a shocking collapse in relative buying power, sort of like my IQ during that "lost" phase of my life that I don't talk about mostly because it's all kind of a blur, but I somehow ended up married and working a full-time job, which I assume is the karmic price I must pay for whatever I did, which I figure must have been really bad. And when talking of foolishness, it is no mystery to me why the dollar has been falling, and is thus no mystery to me why Randall W. Forsyth, in his Current Yield column in Barron's, notes that "This has been the worst Treasury bond market ever, at least by some measures," which is sort of like saying "your performance has been the worst in company history, at least by some measures," which is almost exactly what my boss told me in my last Employee Annual Evaluation, although she could not cite relevant, inflation-adjusted statistics to prove the allegation of "worst in company history" to my complete satisfaction, and so the meeting degenerated into a shouting match of me calling her a lying shrew who is out to get me because she lusts for my Hot Mogambo Body (HMB), and she is yelling at me how she is disgusted and revolted at the thought of my HMB and she's yelling into the phone, "Get security personnel in here! Now! All of them!" Just as that episode in the Tragic History Of The Mogambo (THOTM) turned out badly, I expect the same for the economy, as Mr. Forsyth notes that "Amid concern about the Treasury's trillion-dollar borrowing needs, the reluctance of creditor nations to accommodate them and the Federal Reserve's money printing, the benchmark 10-year Treasury yield climbed to a high of 3.70% Wednesday, from just over 2% at the turn of the year. And the 30-year long bond vaulted more than two percentage points from its December lows to 4.63%" These are virtual doublings! Gaaahhh! Higher interest rates are NEVER a good thing! This comes at the same time as the Federal Reserve is "quantitatively easing" So Damned Much Money (SDMM), and then using the money to buy up scads and scads of other people's bad debt and Treasury debt, exploding the balance sheet at the Federal Reserve, so this is exactly what you would expect; inflation rises so interest rates must rise, too. And that means that our old friends gold, silver and oil, will rise, too, in the general inflation! Whee! This investing stuff is easy! Until next time, The Mogambo Guru for The Daily Reckoning Editor's Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter - an avocational exercise to heap disrespect on those who desperately deserve it.