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New home sales fall to record low as Social Security dips into the red, Markets trade sideways and gold holds its breath, digesting the news, Plus, Bill Bonner on the grasshoppers and the ants, and plenty more... The Daily Reckoning | Friday, March 26, 2010 Housing Market Recovery On the Same Schedule as Godot Why McMansions are going the way of the mullet Bill Bonner Reporting from Baltimore, Maryland... Not much action in the markets yesterday. The Dow lost 5. Gold gained 4. So far the markets have not seemed to notice, but there are not one...but two bulls in this china shop. First, the US government is going broke. Second, we're at the beginning of a Great Correction. As to the second item, here's this update from Bloomberg: Sales of new homes in the US unexpectedly fell in February to a record low as blizzards, unemployment and foreclosures depressed the market. Purchases decreased 2.2% to an annual pace of 308,000, figures from the Commerce Department showed today in Washington. The median sales price climbed by the most in more than two years. The new-home market is vying with foreclosure-induced declines in prices for existing homes in an economy where unemployment is forecast to average 9.6% this year, close to a 26-year high. Treasury Secretary Timothy F. Geithner yesterday said it would take a "long time" to repair the housing market as the administration takes steps to overhaul real-estate financing and regulation.  "It's going to be a long, slow slog and the lagging sector will be new home sales because they have to compete with existing sales and foreclosures," Bill Hampel, chief economist at the Credit Union National Association in Washington, said before the report. "New home sales probably have until the fourth quarter until they start recovering." What happens in the 4th quarter that makes the housing market recover? A sudden influx of immigrants? A sudden increase in employment? We don't think there will be a recovery...not in the 4th quarter...not this year...not next year...not for 10 years. Instead, housing prices are probably going to sink. Why? Because they're a consumer item, not an investment. For 100 years, a house was a place to live in...and housing prices more or less kept pace with inflation. Then, beginning in the mid-'90s people came to see a house as "the best investment you can make." They began buying houses as a way to make money...and as a way to save for retirement. It made sense. What would you rather have, a mutual fund growing at 10% per year...or a house that goes up by 10% per year? The house! Because you can live in it...and show it off. So you leverage up...you buy twice the house you can afford. You live better. And you make more money. Those days are over. But, not everyone realizes it. Some wait for the housing market to 'recover.' Some may imagine that they will once again see profits from their houses. Others just hold on...waiting for an up- tick so they can get out. There are still millions of people living in houses they can't really afford...and millions of others who are "underwater" and running out of air. That's why the number of houses facing foreclosure rose in the last quarter of last year. And it's why the inventory of unsold houses continues to rise. Gradually, people are coming to see houses in a new light. Soon, they'll see them as money-pits...as expensive follies...and as a pain in the neck. Instead of being proud to have a McMansion...they'll be embarrassed...like having a car with tail fins in 1985...or wearing a mullet in 2010. Not only that, it will also be seen as a big waste of money. As the Great Correction continues, unemployment will remain at high levels...savings will increase...and people will want to cut expenses. Among other things, they'll want smaller, cheaper houses. They'll want to dump their suburban castles and walk away from their country palaces. Houses will be losers. The Daily Reckoning Presents Chermany vs. Gremerica Bill Bonner Bummer! You work hard. You save your money. You make a product and sell it at a profit. Everybody's happy. And then, your customers, the silly spendthrifts, go broke. And what do you know? Everybody points his finger and blames you! "World leaders are choosing recession," charges The Financial Times. The "world leaders" the FT is talking about are Premier Wen Jiabao of China and Germany's Finance Minister, Wolfgang Schauble. The FT says they should loosen up; have some fun. China should raise the value of the yuan, adds Nobel Prize winner Paul Krugman, backed by 130 members of Congress. Germany should raise wages, says France's finance minister Christine Lagarde. That is, they should be more like grasshoppers than ants. But neither the Germans nor the Chinese prospered by being grasshoppers. They got rich by being ants. And they're still at it. China is still exporting...and making a $291 billion current account surplus this year. Germany will clear $187 billion. And now everyone is on their backs. La Tribune, in Paris, even dusts off a prophecy from a defunct 19th century critic, Friedrich Engels: "They will ruin not only other nations' industries but those of their own country too." Economists are normally reserved. This is not because they are well mannered. It is because they have nothing to say. But occasionally, timid bewilderment gives way to dangerous bursts of confident opinion. An opinion that has the support of The Financial Times, Paul Krugman, Christine Lagarde, Friedrich Engels and 130 congressmen is almost by definition a threat to the public weal and thereby a suitable subject for today's back page. To bring us all up-to-date, the world appeared to prosper in the boom years '97 to '07 years (the micro-recession of '01 excepted). The big exporters - China and Germany, who Martin Wolf calls "Chermany" - ran big trade surpluses. The big spenders - notably Greece and the US, who we will call Gremerica - ran large trade deficits. From these facts, Mr. Wolf infers that if the Cherman ants prosper by making, someone must impoverish himself by taking. In this case, the Gremericans...along with other grasshopper nations such a Great Britain. The gist of the Krugman, Wolf, and Lagarde et al position is that in the world economy is ruled neither by good nor by evil, but by mathematics. An exporter, such as China or Germany, can only run a trade surplus equal and opposite to the deficits of other nations. What's more, a grasshopper nation - such as the US - can only run a deficit insofar as the ants are willing to finance it. A deficit is no sin. Nor is hard work and savings anything to be proud of. We have heard this value-free line of talk before. Ben Bernanke claimed that the US was not making a mistake by spending too much; instead, it was doing the world a favor by consuming its "surplus savings." Lately, between them, Britain and America consumed as much as 70% of the world's total savings. While this couldn't go on forever, it went on long enough to give China a $2 trillion pile of the grasshoppers' money...and long enough to make Germany the moneybags of Europe. But by 2007, the consumer nations of Gremerica were completely spent. The cost of continuing to live beyond their means was too great. They couldn't afford to go on. And now, the world appears to suffer. The grasshoppers are laid up. Who will buy? The proposed remedy, in a nutshell... where it belongs, is to stimulate consumer demand in Chermany. It is hard enough for a sensible man to turn the knobs and adjust the levers of his own family budget. He wouldn't dare fiddle with a whole economy, let alone the economy of a foreign nation. The meddlers, though, are ready to throw the switch on the whole worldwide shebang. And as usual, those who presume to tell others what to do are those whose presumptions are idiotic. The math says it works. But common sense tells us it is absurd to pressure the world's most thrifty and productive people into not working so hard. Trade balances must sum out to zero, but that doesn't mean that consuming goods is just as good as producing them. Alas, the world economy is not organized in a way that makes it easy for an economist with a calculator. Instead, it's infinitely complex. Turn any knob you want; you'll get results you didn't expect. Turn the ants into grasshoppers? Maybe. But the bugs have ideas too - shaped by experience, culture and calculations of their own. Wolf's math tells him that raising German wages will make Greece more competitive. But don't expect the Greeks to build a Maybach any time soon. Instead of turning Germans into grasshoppers it will more likely turn them into unemployed ants. Likewise, you can raise the yuan. But China's export economy already looks like a bubble. And making it harder for Chinese manufacturers to sell their wares looks like a pin. Even the threat of sanctions has a sharp edge to it. It was just this sort of high-minded central planning - led by Misters Smoot & Hawley in the '30s, with their sharp pencils and dull wits - that tipped the world into a deeper, darker depression.  Chermany isn't responsible for Gremerica's problems. Chermany can't solve them. Gremerica made mistakes. It must now correct them. Bill Bonner for The Daily Reckoning Joel's Note: If you're what Bill likes to call a "long suffering reader," you'll know that our Reckoner-in-Chief is a very well-traveled man, with contacts from Bombay to Buenos Aires and back again. If you think you could benefit from the kind of "who-you-know" investment information this kind of contact list affords, you might be interested in this invitation from the Bonner & Partners Family Office. Details Here. Social Security Makes History With Negative Cashflow Bill Bonner Reckoning from "Charm City"... The US government is going broke. An item in The New York Times tells us that for the first time in its history, this year the Social Security program is turning cashflow negative. Social Security "surpluses" were the source of the Clinton administration's claim to have been running a balanced budget. Well, it was balanced...if you counted the excess Social Security contributions. But now the Social Security system is running in the red, just like everything else. And now the government is in charge of our health too. We were considering putting down our drink and going out for a little fresh air this afternoon. But then we realized that the feds have taken charge of our health. We don't have to worry about it anymore. Let the feds worry about it. So we got out another bottle of wine. The US government was already more than $50 trillion in the hole before passage of the health care bill. That's net of assets. The biggest hole in history. And now the health care program will dig the US in a little deeper...or maybe a lot deeper. No one seems to know exactly what is in the 2,400- page law. Whatever it is will surely cost money. And it will surely cost more and more money as time goes by. But it's a nice spring day...so we're going to think positive. Surely, the debt will increase. But if it ever gets to be too much, well, the country can just change course, right? That is, suppose we get into Greece's pointy shoes? What's the big deal? We can always lop off a social program or cut off a war, can't we? Well, yes Pilgrim...but maybe not. Let's imagine that the US budget goes to $5 trillion...and $2 trillion is borrowed (not too far from the facts). And let's imagine that interest rates go to half their peak in the late '70s. Well, you can do the math yourself. But what it means is that the feds couldn't cut expenses fast enough to keep up with the interest payments. Gardening really pays off. The house we rented in Bethesda has some of the most elaborate landscaping we've ever seen on an American house. Rhododendrons, azalias, camellias, box bushes, dogwoods, jonquils, redbush...red rose...red leaf...ferns, shrubs, bulbs...the place is coming alive. If it were on a naked lot, it would be a boring place. Instead, it is full of life...colors...textures...and, when a breeze blows, movement. It's all pullulating. Look it up. They've discovered yet another branch of the family tree. In Siberia. Taking DNA samples from a small bone, researchers have discovered a human...but not human like us. Maybe more like an Albanian. Or a Wall Street banker. Or people who listen to rap. That brings to 4 the number of human-like groups so far discovered. All of whom lived contemporaneously a long time ago. First and foremost, our own ancestors, Homo sapiens sapiens. Then, there were also our Neanderthal cousins. Just the two of us. Uh huh. Un huh. Until the discovery a few years ago of the little "hobbit" humans of Flores island in Indonesia. And now, in Siberia, we find another group, previously unknown... Who they were and what they looked like, we still don't know. But the bone fragment seems to confirm that they were human, but probably not a family you'd want your daughter to marry into. Those Japanese really know how to fight a downturn. They're veterans of a 20-year battle with economic slump. How's the battle going? The New York Times reports that Japan has just taken up its first $1 trillion budget: TOKYO - The Japanese government on Wednesday pushed a record 92.3 trillion yen ($1 trillion) budget through Parliament aimed at stimulating growth in the long-stagnant economy. It means another round of spending and adding to Tokyo's already substantial public debt. Also on Wednesday, the government said it would retain a significant stake in the country's extensive postal banking system, reversing the course of privatization efforts of previous administrations. The nation's fiscal largess has long been supported by Japan Post, the country's biggest customer for Japanese government bonds. A de facto government guarantee on deposits made at the postal bank has attracted huge amounts: about 300 trillion yen, or more than the annual gross domestic output of France. Recent data shows the Japanese economy, the world's largest after the United States, is slowly emerging from its worst recession since World War II, as a global recovery sets off a rebound in exports, production and employment. But some economists worry about runaway government spending in Japan, which is already saddled with a public debt twice the size of its economy - the worst ratio among industrialized countries. The government said it would issue a record 44 trillion yen in bonds to finance the budget for next year and cover for a sharp shortfall in tax revenue.  Japan's fiscal spending is often doled out to pork-barrel public works projects, like dams on virtually every major river and mountainous roads to nowhere. Regards, Bill Bonner, for The Daily Reckoning ----------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com