Home Sales Collapse

"New home sales had collapsed 8.3%, not the 10% rumored. So it was a 'sell the rumor, buy the fact' morning, and the dollar was released from the woodshed. But why? Isn't a fall of 8.3% bad enough?"

by Chuck Butler

In This Issue…

* GDP is revised down…
* Euro hits another record high!
* Game On!… Again!
* A surprise rate hike for Norway!

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And now…today's Pfennig!

Home Sales Collapse

Good day… And a Happy Fabulous Friday to one and all! This is going to be shorter than normal… And that's OK, we all have other things to do on this Fabulous Friday!

We saw the euro (EUR) trade up to 1.4182 yesterday. As the morning began, I received word that the new home sales report had been leaked, and that they were going to show a drop of 10%! News spread pretty quickly, and the dollar was immediately taken to the woodshed.

When the report actually printed later in the morning, it "wasn't that bad". New home sales had collapsed 8.3%, not the 10% rumored. So it was a "sell the rumor, buy the fact" morning, and the dollar was released from the woodshed. But why? Isn't a fall of 8.3% bad enough? I, for one, would think that a fall this big would be enough evidence that the housing market continues to struggle at best! I also think the credit crunch in August aggravated the declining prices in homes, and this ever increasing inventory of homes is going to weigh on home prices for some time to come.

If the report hadn't been "leaked", I think the fall of 8.3% would have been looked at as catastrophic and the dollar would have been sold all day, instead of just early in the morning before the report. Oh well, the markets are well… The markets… There are times they just don't make sense!

But not to worry! Overnight, traders have taken the euro back to 1.4182! You just can't keep a good currency down… A truly "inspiring currency" to borrow a phrase from ECB President Trichet!

Second quarter GDP in the United States was revised downward to 3.8% from 4% in the final print. I think as we look to finish up the third quarter today, and then look back in a few weeks at the growth in the quarter, we're going to see that the housing meltdown will be a huge subtraction from growth. However, we may see an offset to that subtraction with exports, given the weakness in the dollar… But, that remains to be seen, so we'll have to wait-n-see!

Earlier in the week I was referring to the carry trade's on again, off again trading as a scene with Wayne and Garth playing street hockey… "Game On!" etc. Well… It's been a couple of days since I last checked the pulse of the carry trade, and once again it looks as if it is "Game On!" Risk aversion is being swept under the rug, as the markets forget the pain of August. Risk appetite is building to strong levels again, so watch those high yielders rally, while Japanese yen (JPY) gets sold.

Speaking of Japan… Industrial production surged 3.4% in August and at the fastest pace in four years. But before we go waving the rally flag for yen, we have to deal with the fact that risk appetite has returned to the markets, and tht's bad news from consumer prices, which fell 0.1% in August. Now don't get me wrong here… I'm always ranting about inflation… But in Japan, a little inflation would be a good thing! They've had deflation for so long, a little inflation would help to get consumers spending!

Yes… This is the tale of two economies. The United States can't stop spending and has inflation out the ears, while Japan won't spend, and deflation hangs over the economy. Again, don't get me wrong here… I love "savers"… But there's still room for some spending, Japan… Come on!

And just when some dolts thought we had seen the end of $83 oil… Guess where oil is trading again? That's right… Over $83! I just can't get over the long run of commodities… I remember being in Phoenix in the spring of 2003, and the USA TODAY had a front page article that claimed the Chinese economy was going to slow down, and the bull run in commodities would be over… And for about a month, the commodity currencies of Aussie (AUD), kiwi (NZD), Canada (CAD), and South Africa (CHF) all took it on the chin.

And here we are five years later… China's economy is still strong, and their demand for commodities and raw materials is as strong as ever! And the commodity currencies? Well… Kiwi has gained about 50%, Aussie about 60%, and so on since that article.

A few years ago I kept telling people that I had read Jimmy Rogers' book on commodities, and in it he outlined the history of bull markets for commodities going back 200 years. History shows us that every bull market for commodities has had a trend that lasted 17 to 22 years. We've only been in this bull run for about six years now. The other day, Mr. Rogers was on Bloomberg TV, which I bet someone recorded! No wait, I won't go there, it's a happy Fabulous Friday! What I'm talking about here is that no one in our company thought to record my talk on Bloomberg TV. No one! I guess that tells me what they think of me, eh?

OK… Back to Jimmy Rogers and his talk on Bloomberg TV… Mr. Rogers said that with the Fed's rate cut, he's sure that the bull run will last another 15 years… Which would put us at the far end of the historical bull markets for commodities.

Of course the shiny metal that is gold, has been the cream of the crop in commodities… But don't forget those base metals. Copper has been a moon shot, nickel, and many more have all seen price increases as the demand for them increases. I've talked about this before, but the food prices are really beginning to push the envelope… Sugar… And so on.

What is this an indication of? Inflation… Pure and simple. You won't see this in the stupid CPI report… But if you really want to see inflation, check out the commodities… Oh, and probably your child's tuition (thank goodness my son goes to public school!) or health care, insurance, medicine, movie tickets. It's all there, and it's all chock full-o-inflation!

Norway's Central Bank, the Norges Bank, surprised the markets yesterday with a rate hike… I was busy getting ready for a very long interview (1 hour) and Ty yelled across the desk that the Norges Bank had hiked rates. Well… I half expected them to continue their work with rate hikes to offset the rising price of oil… So it wasn't that big of a surprise to me! Here again, is Norway… Flying under the radar, along with Sweden… Alternative currencies to euros, should you already have a boatload of euros. They've been at the top of my Hit Parade for over two years now. When will they be at the top of yours?

And don't look now… But the dollar index is just a tick above the all-time low of 78.19 this morning… I'm not a chartist, nor do I play one on TV, not that anyone would have recorded it if I had, but I believe a break below this all-time low is not a good thing.

Currencies today: A$ .8810, kiwi .7550, C$ 1.0015, euro 1.4180, sterling 2.0285, Swiss .8550, ISK 61.80, rand 6.8680, krone 5.44, SEK 6.4920, forints 176.84, zloty 2.6620, koruna 19.4170, yen 115.40, baht 31.64, sing 1.4850, HKD 7.7610, INR 39.7250, China 7.5025, pesos 10.92, and out newest member to the currency roundup will be Brazil 1.8420, dollar index 78.20, Silver $13.70, and Gold… $745

The Indeflating Sub-Feral Government

"I took the box of porn and pizza mess and put it all over the office of my assistant, and HE got canned when I fired him! You should have heard him scream about how he was innocent! Hahahaha!"

by The Mogambo Guru

Of course, nothing could be more insane than the news from the AP, "Senate panel sets national debt limit at $9.82 trillion, $4 trillion higher than when President Bush first took office".

Now put this together with Goldmau.com, "The debt growth rate is now higher than GDP growth, a recipe for eventual hyperinflationary outcome."

And all this new debt is certainly needed, as my buddy JMR Phil S. sent a chart from some guys that calculate that it now takes $5.53 in debt to create $1 of GDP growth!

And sometimes not even that, as JMR Dan B. sends a pithy little summary saying, "China has increased their money supply 53% while the U.S. has increased it 12% during the same time period. I don't know if that implies some level of corruption, but it must bring tears of joy to the eyes of Helicopter Ben."

Well, I am happy to report that the situation DOES bring tears of joy to the eye, as the same thing recently happened around here! I mean, at one moment, there I was, mentally cleaning out my desk after being canned, and I was imagining that my boss was there ("I've waited a long time for this, you Worthless Mogambo Human Trash (WMHT)") and the security guard ("I've waited a long time for this, you Worthless Mogambo Human Trash (WMHT)") and all the people from the other offices ("We've waited a long time for this, you Worthless Mogambo Human Trash (WMHT)") and how, this one time, I'd like to go with pride and dignity, with my head held up high, instead of being dragged out, screaming and fighting and crying and slobbering all over myself ("Please, please, please don't fire me!"), by cops working as enforcer-goons for the mental health workers ("We've waited a long time for this, you Worthless Mogambo Human Trash (WMHT)".

My keen, analytical mind realized that, if that was truly my plan, I ought to at least clean out all the old pizza boxes and pornography from all the desk drawers. So I gathered up a big box of the stuff out of the bottom drawer of the desk, but then I realized if I did that, then there would be nothing else in the damned drawers, and they would be empty, and then everyone would say, "We were right! He really WAS stupid!", whereas with the pizza boxes and porn everywhere, they would naturally say, "He was, we admit, smart enough, talented enough, even brilliant perhaps, but he was just too distracted and sleepy from eating all that pizza, and maybe we ought to hire him back! And at a big increase in salary and benefits! And a secretary with great legs and short skirts to look at, so that he could at least have some empty desk drawer space!"

Well, that is the way I had it all planned out, but it didn't work out that way after all. I took the box of porn and pizza mess and put it all over the office of my assistant, and HE got canned when I fired him! You should have heard him scream about how he was innocent! Hahahaha!

Anyway, without anyone at the executive level around here to take over, I am still employed and holding my own, just like the dollar against the yuan (CNY)!

Anyway, Dan didn't seem the least bit interested in my crafty career moves as a parable on the changes in the money supply, and instead says "on another note" that foreigners stopped investing in U.S. bonds as sales "dropped from $97 billion to $19 billion in August. That was before the interest rate cut!!" He calls attention to the two exclamation points, which I take as a secret signal to look for conspiracies and corruption everywhere, trust no one, and prepare to take refuge in a bunker of some kind, like the Mogambo Ultimate Bunker (MUB), shooting first and asking questions later.

Probably sensing with dismay the direction the discussion has suddenly taken, he changes course and says, "California is already $750 million in arrears in collections versus commitments. Do you expect foreign pullback to be Sudden Mogambo Death (SMD) for sub-feral…no no no, I mean sub-federal government?"

The answer is, "Yes. Yes, of course", and was preparing to preface my remarks with a long, haunting death-wail, which seemed so symbolically appropriate, when I was interrupted by an email from David K., which began with the customary salutation. "Oh, Mighty Mogambo," it read, "if you will take a moment to go to Lew Rockwell's site, lewrockwell.com, you will notice that there are two articles, one entitled 'The Fed Is Deflating' by Gary North, and the other, 'The Fed Is Inflating' by Murray Sabrin.

"My question to you is: What the French, Toast? Dr. North makes some very good points, and I agree with his conclusion. Mr. Sabrin makes some very good points, and I agree with his conclusion.

"So what in the hell is going on? Is the Fed deflating? Inflating? Indeflating?"

I immediately wondered, "Indeflating? What in the hell is indeflating?" I figured it was a secret message of some kind, so I didn't let on that anything was amiss, and replied, "Dear JMR David, They are both right! Did you think that my wife's love for me, dropping like a stone until one day I can see her, hiding behind the hedge, looking at me through the crosshairs of the telescopic sight of a .30-.30 deer rifle and smiling to herself, means that neither you, nor anyone else, cannot find true, everlasting love? Of course not! You can exult, waxing prosperous, happy and sleek, whilst I sulk and wither and die of a broken heart and a knife in my back.

"Except for the 'everlasting' part which is, of course, a big load of crap, as there is very little of an evolutionary advantage in it after the kids are big enough to be put to work hunting, begging, stealing or working, and yet still too young to legally keep you from stealing them blind, or too little to keep a crazy man bigger than them and with a baseball bat from coming over there and taking any damned thing he pleases, including not only a damned full tank of barbeque propane in exchange for my empty one, but anything else I take a fancy to, because you probably stole it from me to start with."

At this point I realized that I was getting off the track and into one of my paranoid persecution delusions, which never seem to end well. So I hurriedly changed back to the topic and continued "Nevertheless, the answer to your question is that some things will go up in price until you are squealing like a stuck pig, and some other things will go down in price until you are squealing like a pig, too", which summed it up perfectly.

P.S. To get The Daily Reckoning sent directly to your inbox, sign up for our free email newsletter, or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
Editor's Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter - an avocational exercise to heap disrespect on those who desperately deserve it.

The Daily Reckoning

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*** Big gains flee the go-go areas…money in Miami does a disappearing act…stock deals can't roll without wheels…

*** China still no match for gold…artists wanted - dead or alive…whatever they claim to know, we know even less…

*** Greenspan can't stop talking…commodities looking good, unless you need to eat…new flights to an Olympic-sized economy…and more!

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"A fresh blow to the housing market," is how the Financial Times describes it.

The Daily Telegraph comes up with a more bodacious headline:

"US housing market in freefall as prices crash."

And follows up with this:

"Sales of new homes in the US plunged in August at the fastest rate since modern records began, prompting fears the economy is sliding into a full-blown recession…

"Total sales dropped 8.3% on the month and are now down 21.2% during the past year, a sign that the credit crunch has cut off mortgage funding for large numbers of people."

Both papers give us new data on house prices:

"The median home sale value fell 7.5% from $246,200 to $225,000, its lowest since January 2005," says the FT.

Two and a half years of price increase - wiped out.

But in go-go areas, even bigger gains have gone-gone. Miami was one of the hottest housing areas in the nation. Now, its condos are being marked to market. Here's the report:

"There are at least 50 buildings under construction or nearly completed in the downtown Miami area alone, consisting of about 20,000 units," reports David Sutta from CBS4.com in Miami.

"To move inventories along, developers have gone to the auction block to get them sold.

"On Thursday evening, at the Miami Biscayne Bay Marriott Hotel the gavel struck as auctioneers sold about 20 units in the 119-unit Platinum development owned by Alex Redondo.

"When it was all over, [one bidder] walked away with a two bedroom unit on the 19th floor. To put the price in perspective, a one bedroom priced at $350,000 sold on average at auction for $176,000, almost half.

"A two bedroom unit that sold for about $600,000 last year, sold on average for $295,000."

Yes, dear reader; if you are thinking of moving to Killeen, Texas, you better act soon. Those big housing gains are disappearing. In Miami, prices are being cut in half.

You might be thinking…well…one man's loss is another man's gain. But think again. While the bidders got apartments at half-price, the owners of other apartments saw their assets lose 50% of their value almost overnight. A week ago, they may have had an apartment worth $600,000. Now it is worth only $300,000 - and falling.

What happened to that $300,000? It vanished. Poof. That's what put the 'd' in deflation. Money d-isappears. Wealth d-issipates. Values d-ecline. The economy d-egenerates. People get d-epressed.

Meanwhile, stocks held steady yesterday. Stock market investors seem to think they've got a "Bernanke Put" on their hands - an option that will always protect them from losses; if stocks begin to go down…Bernanke will just cut rates.

But Robert McAdie, head of credit at Barclay's Capital, addressed the issue yesterday. He noted that though the Fed may cut rates, and may bail out a few large speculators, there is no guarantee that money will find its way into the hands of the people who really need it. A bank can borrow from the Fed at the Fed's rigged rates, but that doesn't mean it isn't going to be careful with the money. Rates dropped after the Fed funds cut last week, but long-term finance rates actually went up…and the gap between the Fed's rate and the banks' own interbank lending rates remained unchanged. What gives? Lenders are still worried. They're afraid they might let out some money…and not get it back. So, they demand a little extra return, as protection. In July, the spread between commercial paper and the fed funds rate was only four basis points. Now, it's 62.

Money is cheaper, generally, but as McAdie put it:

"Cheap money is now history. There are not going to be any more of the big leveraged buy-out deals for a long time because the CLO [collateralized loan obligations] market that financed them is effectively closed."

Oh my… The homeowners can't sell their houses. And the Wall Street hustlers can't sell their deals. How d-isappointing. How d-iscouraging. For example, the Bank of Montreal - Canada's fourth largest lender - announced that it couldn't get rid of its asset-backed paper. And the global mergers and acquisitions market got hit in the head with a brick. After setting a record in the first nine months of the year, the deals declined 42% in the third quarter.

What's an investor to do? Without 'deals on wheels,' what will keep stocks rolling? And without rising house prices, how will consumers keep spending? And without consumer spending (it is 72% of the economy…no economy in history ever depended so much on people spending money they didn't have on things they didn't need), what will prevent the U.S. economy from going into recession?

We don't know. But, as a dear reader remarks below, there are many things we don't know…

First, you will recall our Trade of the Decade. Sell the Dow…buy gold.

Well, in 2000 an aunt died and left our children a very small inheritance. We took our own advice, more or less. We set up an account for each of the children, put the money (not enough to merit diversification) into Newmont Mining (NYSE:NEM), and forgot about it. But now, Maria has turned 21. She has to take charge of her account herself.

"What should I do with this…maybe I should invest in something else? I think I should invest in China…that's where the growth is," she pointed out.

She is right. Chinese shares are rising at about 10% PER MONTH! CITIC, a fast-growing Chinese brokerage, is now said to be priced at $40 billion - or $8 billion more than Lehman Bros. (NYSE:LEH) and $24 billion more than Bear Stearns. (NYSE:BSC)

Looking at the entire basket of emerging markets, we find extraordinary growth. Gold has done well over the past seven years - up more than 150%. But Chinese stocks have risen that much in the last 15 months. Emerging stocks generally, have gone up about twice as fast as gold since the year 2000. Since the bottom in 2002, emerging market shares are up four times.

Newmont Mining has done well; it is worth about twice what it was when we bought it. But it is a laggard compared to emerging market shares.

If you were to look back another decade, you still would have done remarkably well in emerging markets. The MSCI index, in dollar terms, rose from about 200 in '90 to about 1200 today - a 500% increase. (Meanwhile, the price of gold rose only modestly.)

Looking back even further…to that fateful year, 1971…when the dollar and gold parted company for the last time, where has the big money been made?

In U.S. stocks - up about 13 times. In emerging markets - up a bit more. And in gold - up from around $41 to over $730 - an increase of nearly 18 fold - though, admittedly, with long periods of time when gold was going down in dollar terms. But gold is not really an investment. All it does is measure out the pace of the dollar's decline. For the past 36 years, simply betting against the dollar has out-performed every major investment class.

Yesterday, the dollar sank to a new record low against the euro (EUR). Compared to gold, the dollar sank too - putting the gold price up to almost $740. Oil climbed back over $80. And the commodity index hit a new record high.

What will happen next? Will the money that comes from trees finally find its roots? Will it stand as tall and straight as a mighty oak? Or will it continue to dry up…and whither like an autumn leaf? Might it will even blow away?

"I would stick with Newmont for a little while longer," we told Maria.

Finally, a dear reader offers this comment:

"I greatly enjoy The Daily Reckoning and have bought more things than I could possibly need from you over the years and made some money from them despite you not knowing anything about anything. Notwithstanding the fact that you don't know anything, I bought gold at under $300 and more at under $400 at your recommendation and I'm sure that you have no idea when I should sell this poor investment that has barely doubled my money in two years.

"However, when you talk about the U.K. housing bubble (compared to the United States), is it really like with like, when you consider available land and future housing requirements?

"I know you don't know and I certainly wouldn't take your advice if you did know. I have a house and I don't care if it goes up or down, as house prices are (or should be) of academic interest only to people who already have them.

Regards

"PS: What piece of America shall I buy with all my dollars when I sell this gold? Hang on though, you won't know this either…"

Our writer is a shrewd observer: 'Never take advice from a man who claims to know what he is talking about,' is his message.

In that sense, you are safe with us, dear reader. We know nothing.

The beginning of our ignorance dates back to 1980. Before that, we knew everything. But then gold began to fall. We couldn't believe it. We assumed it was temporary. Everyone we knew back then expected the price of gold to keep going up. We were more sure…we knew it was going up. But it didn't go up. It went down…and down…and down - for the next two decades.

And with each dollar gold declined - from above $800 to under $300 - some of what we knew for certain disappeared. By the time it reached $275…our head was completely empty.

But what we lost in certain knowledge, we gained in humility. As our gold stocks went down, our stock of humility went up. The more we lost, the more we gained. What we paid in tuition, we earned in wisdom…or so we'd like to think.

Of course, we'd rather have the money. But you have to make the best of what you have. And now, we have a full tank of humility. In fact, we're about the most humble financial commentator we know. Whatever they claim to know, we know even less.

But we notice that gold is finally coming back. It is still below the record set 27 years ago…but considering all that has happened in the intervening years - the invention of the CDO, the explosion of hedge funds, the global liquidity glut, Warhols that sell for $72 million, Alan Greenspan, George W. Bush - we wouldn't be surprised to see this cycle carry it well beyond the high set in January 1980.

But what do we know?

Enjoy your weekend,

Bill Bonner
The Daily Reckoning