Vigilant Investor

A true sign of hubris is often when the old rules don’t apply anymore… Here’s a bit of history mixed with current policy redux:

“When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve’s attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves (e.g. printed money) into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain’s gold loss and avoid the political embarrassment of having to raise interest rates. The “Fed” succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process.

The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930’s.”

–Alan Greenspan, 1966

While our perhaps situation may not be so dire, this quote is worth placing in context with the vast amount of credit and money supply expansion that has taken place in the last fifteen years. Since 1970 alone (with the end of the gold-backed dollar requirement) the Fed has increased money supply by over 1000%. Folks often wonder how bubbles are created, and we believe they are made possible and bolstered with excessive expansion of credit and money supply. With that in mind, given recent policy reactions to the bubble burst of 2000, it should come as no surprise that bonds and real-estate reacted with echo bubbles.

Certainly investors should not have their head in the sands on such issues. What concerns me today is that few in the mainstream — either investment types or economists — seem to care. And, while the real estate bubble is hardly debated by all but the most stalwart supply side defenders, few can explain how it was made possible, or why the methods are dangerous in the first place.

At what point does the savings poor, debt loaded US consumer cry “uncle!”?

-Drivers using plastic to delay the pain

-Stocks to watch oil as storm nears
-Katrina Targeting U.S. Oil Operations
-Equity Is Altering Spending Habits and View of Debt
-Alarms go off in Congress as savings rate falls to near zero
-Hawaii to Use Gas Price Caps; Hazards May Loom
-Infusion of Cash Could Boost Stock Market
-Downbeat mood at Jackson Hole Fed conference
-Trade protectionism, budget deficits pose risks, Fed chairman says

In the midst of an oil shock, with prices having tripled over the past four years, Hurricane Katrina is adding a little extra shock to the mix… Oil is now above $70 a barrel. That’s because 25% of US oil is refined in the New Orleans area.

At what point will the economy say “ouch!”?

“The voyage of discovery is not in seeking new landscapes but in having new eyes.”
–Marcel Proust

Greenspan is likely hoping his words will cause folks to think twice about crazy expectations in real estate. Just the same, he’s cautioning folks about being unrealistic with their economic and investing expectations.

When boomers start selling their retirement assets en masse, what happens to the supply-demand curve for equities?

Over the years we’ve noted one of the potential shocks that could be applied to the equity and bond markets could be the eventual forced sale of retirement investment assets as the baby boomer generation reaches retirement. We found this article to update our readers on the ongoing debate, which ranges from those who believe the market will drop dramatically, to those who believe it will be a non event. Continue Reading »

-Even in Summer, Americans Dread Winter Heating Bills
-Oil above $67 as hurricane hits U.S.
-Oil market spooked by possibilities
-Rents Head Up as Home Prices Put Off Buyers
-Recipients of jobless benefits at 4-year low
-Alarms go off in Congress as savings rate falls to near zero
-U.S. banks turning a blind eye to Fed’s rate policy
-European govt bonds fall as area wide money supply surges again
-GM to extend employee pricing to Sept. 30
-US housing bubble to burst in spring 2006-Krugman
-That Popping Sound Was Housing Stocks
-Greenspan: Fed watching asset-price closely
-Easy Credit in Mortgages May Backfire

If you don’t believe there is a real estate bubble going on, we remind you to visit CondoFlip.com. Truly this is reminiscent of the heyday of day-trading in the late 1990s. Fortunately for many in real estate, they don’t have to sell there homes. Speculators, however, may find their great investments that “never go down” turn out to be a little less exciting when the music stops in what is ultimately a game of musical chairs.

Who will be left holding the bag? Hopefully none of our readers!

There is talk that the first signs of a housing reverse are emerging… how bad will the downdraft be?

Well, to begin with, it may still be too early to ring the bell — While existing home sales are down a bit, but they are only modestly down from record levels.

Meanwhile, new home sales rose 6.5%… although, perhaps this is the final hurrah as people hop in with last minute attempts to lock in mortgage rates since the word is they have begun to slowly rise. (Read Mortgage Applications Fall, from Rueters)

Reading some of the usual suspects, I came across this gem:

“Over the years, I’ve learned to be wary of betting against the American consumer. But the history of energy shocks argues to the contrary. Moreover, today’s saving-short, asset-dependent, overly-indebted consumer is far more vulnerable than in the past. After years of such warnings, investors, of course, have all but given up on that possibility. That’s precisely the time to worry the most.”

That’s Stephen Roach, Chief Global Strategist at Morgan Stanley… And those are some heavy words for one of the nation’s largest investment and banking groups… Read the rest of his recent dispatch (quoted above). It is a good recap of much of a solid line of reasoning as to why investors might be well served to exercise more caution than “on average.” If only it were the only set of reasons for concern!

July inflation is jumping… not surprisingly, with gas prices up and energy costs finally getting passed on to consumers. So, with that weighing on the markets, finally we are seeing more and more analysts questioning if recession is not around the corner. Meanwhile, as the DOW wavers and shows virtually no gains since its peak of 2003 (and 1998…).. some are even now calling for the end to the short bull market, and others even acknowledging that this might have been nothing more than a secular bear rally (e.g. Forbes).

We’d agree with the latter if forced to give an opinion, and we provide the contents of Ernharth Perspective to support a compelling argument to that fact. Read up!

What to do? What to do!

It was only a matter of time…. How controlled will it be? Writes the Financial Times, , “Asian diversification hits Treasuries”. The best position to be in would be to have dramatically much less debt instead of what we now have. And as such, China is in charge of US debt, and arguably, our financial security.

But since we can’t seem to stop spending, and since we don’t bother to save… our debt must be financed somehow… sowe must borrow…. And borrow, we do…

-New York Fed Factory Index Shows 3rd Month of Growth
-Beneath the Surface (Roach, Morgan Stanley)
-Survey reveals optimism slipping among small firms
-U.S. Consumers Lose Confidence in Aug. on Fuel Prices
-Housing Price Slowdown Continues
-American investors move away from US assets
-Soros fund sheds energy stocks