Saturday, November 25, 2006

Who says we've lost the spirit of Xmas???

Been on a posting hiatus, but the subtle absurdity of this story brought me out of my bear hibernation. I only took the part of the story that I found the most ridiculous to highlight so as not to burden you with too much reading:

Expanded Hours, Discounts Lure ShoppersSaturday November 25, 5:32 am ET By Anne D'Innocenzio, AP Business Writer
Nation's Retailers Hope Early Start, Generous Discounts Lure Eager Holiday Shoppers

".....In fact, many of those who arrived at stores early Friday came away disappointed. They were plenty of customers like Brian Clark, 27, who left empty-handed from the West Hartford Best Buy after the televisions and computers he'd eyed as Christmas gifts were snatched by even earlier shoppers.

Alarmed by a recent shooting of a customer waiting outside a Connecticut Wal-Mart for the highly sought Sony's PlayStation 3 game console, Clark had tucked his Glock pistol in a holster under his jacket and put extra ammunition in his pocket before heading out early Friday. ...."


'nuff said, i reckon.


Sunday, November 12, 2006

More on RealEstate, Gold, and the Dollar

I decided to post this older post, originally written about a month ago, after I learned that at least two people had seen my blog....effectively tripling my viewship (including myself)! :) So, here I go making sweeping statements, that will be sure to turn off enough of my "audience" so that our numbers can return to the low single digits.

This post is effectively "part II" to an earlier post that noticed the "funny coincidence" that my bay area home, purchased in June of 2002 and sold in June of 2004 increased in value by 29%....almost *exactly* the amount of money that gold increased during the same time frame.

The inference was that excessive money (and credit) creation, was stealthily inflating the US dollar into oblivian.

In this post I will revisit what happened to my house since 2004. I'd also like to "debunk" the argument that investing in real-estate (in the last two years) was an effective way to avoid dollar devaluation in an inflationary environment. says that my home has appreciated ANOTHER 29% since I sold. OUCH! --- left a lot of money on the table...or did I?

Gold prices have increased 65% during that same time frame.

So what is happening?

RE is not a great store of value because it isn't fungible and it has a purpose other than money or a store of value.

huh? what the h3ll does that mean?

Fungible, as I'm using it here, means nearly infinitely divisible, without losing it's per unit value. In other words, a gold bar could be cut in half and be worth 1/2 the value of the whole bar. Try that with a house.

Think of the prospector paying for a whiskey with a pinch of gold dust. Oil is another good example fungibility. Imagine trying to pay for a whiskey with a piece of sheetrock.

The intelligence that goes into organizing the parts of the house, means that the value of the whole is greater than the sum of its parts.

ok, so what? why is that important?

The absurdly inflated prices had already gone up so far past anyone's ability to pay (even using the most ridiculously dangerous loan products and non-existent loan standards) that they couldn't possibly keep pace with the speed of the "real" inflation in cash and credit.

Once people couldn't afford to speculate in single family residences in the most desirable areas using traditional financing, they were forced to keep the party going using more drastic tactics:

"suicide" loan products (excessive levering)? check.
Pool into partnerships for speculating? check.
Speculate in traditionally less desireable areas? check.
Speculate in condos? check.
Fraud? CHECK!!!! (more on this in a later post -- this has been the single biggest contributor to keeping the decline shallow to this point, in my opinion).

That unfortunately means if you are using houses to guard against easy money inflating the value of your portfolio away, you have a problem.

As we've discussed here before, the obvious outcome is first slowing sales, slightly dipping medians (as builders run out of incentives to add to the purchase price), inflating inventories, and "stuck" sellers. At this point, the mainstream media is so "all over" this story that it is probably getting a bit old -- especially if you are trying to sell and can't.

The story that is still being completely missed is that in "real" terms (inflation adjusted dollars) housing has already been tanking for the last couple of years. This will continue, and unless the fed increases the pace of credit expansion, the nominal (non-inflation adjusted prices) will continue to go down, creating problems for levered buyers of all classes.

As Soros has pointed out, housing is one of the most "reflexive" assets around (more on reflexivity in a later post) and the reason they run so hard and fast and long on the way up and the way down.

Ok, so your unsolicited advice of the day is to wait for (probably years) before buying any more residential RE. It will take a long time to correct down, and will only be a reasonable buy with PITI is near or below a breakeven proposition with renting a similar property, IMO.


Friday, November 10, 2006

"But... I thought the Fed was tightening?...."

From the NYPost

""Whenever we discuss some of the darker theories of a conspiracy or market manipulation, I seek to discover a market mechanism that can explain the actions. For example, I was quite doubtful of accusations of energy price manipulation -- until Bill King identified the changes in the Goldman Sachs Commodities Index (GSCI). That change led to $6 billion of gasoline futures hitting markets in September and October -- and the subsequent 30% drop in gas prices over a few weeks. (fubarrio note: this 'atomic' drop in gasonline was the ignition for many twinkie induced rages this fall -- luckily the naive Montevideans had not heard the junk-food defense yet, and it's novelty led to two separate "not guilty" verdicts and a hung jury)

Might there be any similar mechanism around impacting equities? One possible answer comes from John Crudele of the NY Post. Crudele has long been a skeptic of government data; its no surprise he looks askance at some of the actions of ther Fed and Treasury. And indeed, it is the Treasury Department that comes under his watchful gaze.

Yesterday, Crudele wrote: "FOR the past few years the U.S. Treasury has been quietly involved in what the financial markets call "repo" agreements and this near-secret operation could explain why the nation's money supply seems to be confoundingly large. It might also explain why Washington decided earlier this year to stop publishing M3 money supply figures, the broadest and most popular measure of money in circulation.

Repurchase agreements - or repos - have long been used by the Federal Reserve to get money quickly into the hands of financial institutions, which in turn can put the money into circulation in the form of loans. Last Thursday, for example, the Fed executed $2.5 billion in overnight repos and $8 billion in 14-day repurchase agreements. These were reported on the financial wires. The Treasury completed a $5.5 billion repo operation on the same day under what it calls the Term Investment Option. There was no mention of the Treasury operation on the wires.

In the Fed's repo deals, the banks temporarily turn over securities to the central bank in exchange for cash. The Treasury TIO program works in a similar way, except the financial institutions pledge securities as collateral in exchange for the cash."

What does this mean? Well, instead of the (theoretically) independent Federal Reserve controlling Money Supply, we see the Treasury department has had an "unseen" hand. MZM, M2 and credit growth has been soaring. This has the effect of providing the fuel for increasing the leverage and risk in the system.

"Is this like the repo operation at the Fed? "Kinda'," says a spokeswoman for Treasury. "But not really." She said the TIO program only replaced the old way of putting government cash in banks without making the banks place bids, which gets the government a better deal." This repo action is not reported by the Treasury Department, and Crudele that "financial institutions have been using it for three years to increase their liquidity." Surprisingly, it is not well known by the investment community.

What's the problem with this? Crudele notes: Experts worry whenever there is too much money - liquidity - in the financial system because it can lead to things like price spirals in the housing market and bubbles in stocks (emphasis added). But even more worrisome for the financial markets than too much liquidity would be an inability to track the amount of money being pumped into the financial system.

Unless I find out differently, it looks as if the Treasury has created a way to duplicate the Fed's power. And that is a disturbing possibility unless it is somehow monitored. Bill King adds: "$20B was added to the system last Thursday and Friday. Where is it going with the economy ebbing? Of course it goes to the ‘new economy’, which is financial speculation and asset grabbling . . . The astute know that the repo world runs The Street. It is the lifeblood of The Street, and ‘The Money Desk’ of each big firm is the heart of the organization. Other traders garner the headlines and TV spots but the ‘money desk’ reigns supreme on The Street. Just ask the ex-principals of LTCM." Indeed. The plot thickens . . .

Thursday, November 09, 2006

Biggest Story You may have Missed

With all the other things going on, I'm not sure this got a lot of play in the US -- especially on the tube.

But, this is a big "story", with the caveat being that if it is genuine it is *beyond me* why the Chinese would telegraph this move so every trader and institutional and otherwise could front run them.

Is it possible that the Chinese are devious enough to plant a story to send people off the real scent? Certainly. And usually, I'd suspect just that....but in this case, I tend to believe what they are saying -- just because I can't understand what kind of insanity would make them do otherwise.

Please pay special attention to the last paragraph and my comment after the story.

The story:

">>Dollar Declines After Reuters Says China May Diversify Reserves By Daniel Kruger and Min Zeng Nov. 9 (Bloomberg) -- The dollar fell to the lowest against the euro in more than two months after Reuters reported People's Bank of China Governor Zhou Xiaochuan said he has a ``clear'' plan to diversify the country's foreign-exchange reserves.

China's foreign-currency reserves have exceeded $1 trillion to become the most ever held by a single country, China Central Television reported on Nov. 7, citing the nation's currency administrator. ``It seems to have pressured the dollar,'' said Michael Malpede, a senior currency analyst in Chicago at Man Global Research. The dollar traded at $1.2837 per euro at 12:37 p.m. in New York from $1.2757 yesterday. The U.S. currency touched $1.2848, the lowest since $1.2875 on Sept. 5. The U.S. currency also traded at 117.91 yen from 117.84. The dollar earlier reached 118.59 yen.

The People's Bank of China is the fourth central bank to announce it may diversify its reserves in the past two months. The People's Bank of China joins the Bank of Russia, the Swiss National Bank and the Reserve Bank of New Zealand in announcing an intention to diversify currency holdings. Gold Rises Gold rose after the announcement by the Chinese central bank's governor. Futures for December delivery increased $15, or 2.4 percent, to $633.30 an ounce on the Comex division of the New York Mercantile Exchange. A close at that price would mark the biggest percentage gain since July 11.

When asked whether China planned to shift its reserves away from Treasury notes and into higher-yielding U.S. corporate and mortgage-backed debt, Zhou said China is considering ``lots of instruments'' for diversification. "

WTF? could you imagine??? How stupid would one have to be? They see a coming collapse in the value of the dollar -- or at least more risk than they are willing to live with "undiversified" -- and to get *AWAY* from the risk, they just buy more dollar denominated crapola only with a few more basis points of return to compensate for their stench?

However bad a risk the US govt is, why why why why why would anyone accept the tiny spread between the US govt paper and some over extended greater fool's mortgage promise in bubblicious USA in the form of MBS (mortgage backed securities).

....even with the Chinese affinity for crappy/new residential construction, even *they* can't want to be holding the bag on that disaster in the making.

Maybe in 3 or 4 years when they can just walk in and buy it all at a severe discount....but move $1T into MBS?? hahahahhahahahaha....ok, i'm better now.

ciao for now,

Wednesday, November 08, 2006

Interesting Coincidence....

I was writing an email to an old friend today and noted that I sold my home in June of 2004 after "owning" for two years (really the bank owned it, but you get my drift).

When I sold, I thought RE was looking "toppy" and booked a 29.09% gain on my sale (not including commissions and transaction costs which obviously lowered the final take considerably)

The price of gold when I bought was 310/oz
The price of gold when I sold was 400/oz

That is a 29.03% gain.

So was the RE bubble created because of a chronic shortage of buildable land in the SF bay area, or something else? Well, given the national, if not global nature of the bubble, you already know my feeling.

The uncanny resemblance between the POG return and my home's return leaves us with the only explanation plausible, in my opinion....The run-up in prices since at least 2002 (probably earlier) was by credit expansion and incredibly loose monetary standards.

While continued inflation is possible, it is illusory.....the price gains are being eroded by a dollar decreasing in value....the only reason it isn't/wasn't more obvious is that anything that can be mfg'ed or serviced overseas was done in a great wage arbitrage leaving everyone wondering why gas was 2.50/gallon and microwaves at walmart were $99.

Home prices haven't gone up. Your dollar has gone down...Oh yeah, and some crappy plastic stuff at Walmart is pretty cheap too.

ciao for now,

Sunday, November 05, 2006

History "Rhymes"

I was doing some thinking the last couple of days about markets and cycles in general.

Although I didn't go back past the 1920's, their seems to be an interesting cyclicality in the financial markets evolving....While I can't be certain, I imagine that the birth/work/death cycle of the average human has a lot to do with it. I'm sure others have noticed and pontificated on the causes, but this is newer to me.

Lets talk about the great "busts" in US history


This is the most famous...The Great Depression. Even though outside forces (apparently) conspired to bring the US out of the GD, notice that is was "about" 14 years


Although most people realize that the market did not perform well during this period, most would think it anywhere near as severe as the GD. That is because the GD was *deflationary* and the 68-82 crash was *inflationary*.

The result was that the GD looked a lot worse in nominal dollar terms than the latter, however, they were more similar than casual analysis would at first appear.

There are lots of *dissimilarities* between the two, that although it took a war to bring us out of the GD, the 68-82 started closer to the beginning of a war, and ended during a time of peace.

However, (suprise suprise) it lasted about 14 years.

If we look at the Japanese realestate/Nikkei crash in this chart:

We can see that the Nikkei peaked right at the end of 89/beginning of 1990.

If we extrapolate out our theory, we can speculate that the "bottom" would be put in at the end of 2003 to the beginning of 2004. And, as we see from the chart, the "theory" holds. what? That might help predict when the crash might bottom....but what does it tell us about when the next crash might occur?

Well, on this I need more research and data to be SURE. However, I noted that 1929 to 1968 is a period of 39 years. 39 years is close to the working life of one professional...

39 years is 2X 19.5 years, which could be close to 2 generations removed.

1968 + 39 years = 2007

So, will 2007 be the beginning of major pain the general markets. I think so. It could happen sooner, frankly....I believe it is already happening although one does not see it in the averages yet. I believe that this relative underperformance could be deflationary and it could be inflationary....depending on how the US Federal reserve responds. However I believe there will be relative underperformance.

One way to possibly protect yourself is to move a portion of your wealth out of US dollar denominated assets....Gold, silver, shares of producers of gold, silver, energy, uranium sourced in geopolitically secure areas of the world should continue to outperform.
WARNING: in the case of a panic -- everything will underperform for a minute...maybe even the price of bullion as people (wrongheadedly in my opinion) try to raise cash... in a couple of months (or less) when they realize that it's just paper, the third phase of the great bull market in metals will be released.

Remember, however.....I'm just some conspiracy nut living in South America. This advice should be worth roughly what you just paid for it. :)

ciao for now,