Saturday, July 28, 2007

This was a bubble (housing) to pay for a bubble (tech stocks 2000).

Quote of the week:

``Housing is bust, and wishful thinking cannot unbust it anytime soon,'' says Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.

Couldn’t have said it better myself.

For the past 18 months or so we have been listening to the National Realtor Assocociation, Federal Reserve officials, Wall Street executives, and the Mortgage Bankers Association (and every other “kook, loony and squalid” fill-in-the blank) “talk their book” (an old Wall Street term for promoting whatever securities that were “long” in ones portfolio) regarding the housing market. A group of Florida Realtor’s even went so far as to call on a higher power – they had a “prayer breakfast” to ask the Almighty for a better housing market. A better example of what you read and hear in the media CAN hurt you and is designed to manipulate you cannot be found.

Housing is doomed in many of the formerly hot markets, and is plain awful in the rest of the country. Not only had the prices soared due to an overabundance of cheap and easy credit (you won’t see that for at least another generation), now those markets are horribly overbuilt, and the units over-improved. I look at the future foreclosure market in my home of South Florida. McMansion after McMansion were built on lots that were overpriced to begin with, and then, in an effort to recoup a really silly purchase price for the lot, the builder over appointed the unit in order to raise their profit margin – after all, one can’t make money with a $300,000 structure built on a $700,000 lot.

Now the supply of these units is overwhelming the demand, and that circumstance is only going to get worse as the Wall Street debt distribution machine sputters to a stall. Turns out those multi-million dollar homes were not being bought with “cash” (you know, accumulated capital) after all – and as the “Little Rascals” know, “no tickie, no laundry” - or no financing, no buyers.

It is what it is.

But that is not the end of the story…

The oil import crisis looming over the U.S. has been mildly painful up until now. The refiner’s “crack spread” has narrowed significantly, leaving gasoline prices at the pump down nearly 10% from their peak earlier this summer even though crude oil has risen roughly 10% during the same period. The “crack spread” erosion is mostly done now, and a continued rise in the price of crude will be reflected at the pump directly… but that is not The Problem.

The Problem for the U.S. will be a sharp decline in imports over the next several years, sharply crimping the economy, while at the same time the housing market implodes. What is unknown is the reaction: Will we experience hyperinflation similar to Argentina earlier this decade, or a deflationary spiral (on steroids) like 1989 – 2006 Japan? It is simply unknowable at this time, but a plan “A” and a plan “B” would very much be in order. It is my opinion that it will be one or the other, not business as usual.

How might it begin? The Federal Reserve has to make a decision: Does it defend the U.S. $? Or does it try to support the housing market? It cannot do both. I cannot imagine a circumstance where the Fed does not abandon the U.S. $ in favor of the housing market; after all, the voters own houses in America, and foreign investors will feel the $’s decline more than the American public, at least initially (and that will change), and they do not vote in our elections.

I asked my good friend FireAngel (he is a contributor at, and a Phd. Candidate at one of our most prestigious universities) what he viewed would signal the oncoming event. Gold and Oil, as priced in $’s would surge in price, with gold exceeding $1000 per ounce and perhaps a great deal more (this is not a recommendation to buy gold – remember this is only his opinion as a signal of the $ weakness). I completely agree and I would add that food inflation would accelerate rapidly at this time as well.

The IEA and the EIA both have projected a world oil supply number for Q4 that will simply not be met. OPEC has 2 meetings planned at their Vienna headquarters during the remainder of this year, the next being September 11. How will the market react when OPEC cannot meet the IEA and EIA expectations? We will know soon enough.

Yours for a better world,

Mentatt (at)

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