The View From Main Street
An informed opinion from an outsider perspective.July 2007 - Goldilock's Housing Porridge Still Too Cold.
Right on cue, Goldilocks made a triumphant return this week. The government economic numbers look good (some of them at least) so party time on Wall Street, woohoo! The Nasdaq surged to take the lead on major US indices for the year. Why that's so is a mystery to me unless Wall Street truly believes the iPhone and Crackberry gadgets can boost tech to new heights while giants like Microsoft, Dell, Micron, Intel, Yahoo! and AMD struggle to keep pace. Also, see the last commentary for why US returns aren't as hot as they seem (hint: the Dow's negative YTD for Canadians).
Here's a quote from last week's Value Line:
"We think the recent past will be prologue. In fact, unless housing softens much further, consumers stop spending (due to record-high gasoline prices), or long-term interest rates ratchet higher, we would expect the long business expansion to remain in place over the summer and into the fall."
That's a pretty big unless. I'd take odds on housing softening MUCH further (unless banks plan on living in those houses they're taking back). Interest and credit rates are suggesting the jig is nearly up. And consumers...well, Value Line have that one right. Anyway, they go on to predict GDP growth of 2.5% into the first part of 2008 at which point housing will rebound and GDP growth will hit 3%.
At this point, I'd like to adapt Peter Lynch's strategy about investing in what you know. Lynch focused on the micro-level, using your shopping habits and work experience as possible leads for investing ideas. I find it useful to broaden that strategy to a macro-level. These economists, analysts and money managers spend all their time talking to each other and to corporate bigwigs. They haven't a clue what life in the real world looks like. To them, the housing market consists only of new residential construction and a bunch of mortgage-holders paying themselves owners-equivalent rent while yakking on their iPhones. So once home starts and permits level off, inventory will magically work itself off (tell me again, who's going to buy these houses and at what prices?) and we're back to the races.
A similar tunnel vision baffled politicians during the last election cycle. The pundits and the hacks couldn't figure out why people were ignoring the "strong" economy. After all, isn't it the economy, stupid? We Americans may be woefully ignorant these days but we can still see. And Iraq occupation aside, many of us saw a "burgeoning" economy lining someone's pockets but those pockets weren't ours. What's the result? A Smoot-Hawley sequel is coming into view. Bi-partisan fools pretending to be Congressmen threaten legislation against both domestic and foreign oil producers (talk about cutting off your nose to spite your face). And we can't stop envying Mulally's jet-setting ways and Schwartzman's lavish galas, so tax hikes on everybody.
It's amazing, really. There are some talking heads like Peter Schiff who believe other countries like China or Australia can decouple from the US economy -- that is, if the US economy takes a dive, those countries won't be heavily impacted. I'm skeptical about this scenario.
But Wall Street shills have taken it to another level. These folks believe the US economy can decouple from its own housing market!?! For the other possibility, check out the chart from Alan Abelson's ever-earnest Barron's editorial. A 15% drop in home prices could put over $1 trillion worth of adjustable-rate mortgages underwater and if those ARMs default at a moderate pace, underwriters are on the hook for $430 billion losses by conservative estimates.
The financiers think they can engineer their way out of this. I'm not sure if I've seen this movie before but I've got a clue how it ends -- badly and on the backs of average Americans via taxpayer bailouts.
I don't know. Perhaps they're right. Maybe America does belong to Wall Street and the rest of us are here to clean the bathrooms and serve up martinis. But consumer spending still accounts for near 70% of GDP so I have my doubts.
I have no specific recommendations for taking the other side of this bet. But I'd wait until blood is running through Wall Street before I jump into anything related to housing or financials. At the very least, prices will be cheaper by then.
07/08/2007 - posted by Davy Bui
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