Suburbia Delenda Est / The Daily Reckoning

verfasst von - Elli -, 22.07.2003, 13:33

-->Suburbia Delenda Est

The Daily Reckoning

Paris, France

Tuesday, 22 July 2003

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*** When does the muddler muddle through no more?

*** Watch our for falling bonds! Has Alan's latest bubble
burst?

*** Gold back above $350. Did you buy, dear reader? We wish
we had!

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"When will we be there?"

The question was for John Mauldin, who was visiting over
the weekend. Neither of us doubts that the Dollar Standard
period will someday come to an end. Everything does.

But when?

For the moment, we are"muddling through," says John. When
do we stop muddling, we wanted to know?

Here at the Daily Reckoning, we sit on the edge of our
chair. We are such optimists; we can't help but think that
a sort of economic rapture is at hand. Surely, this mess
will be sorted out soon, we feel; at long last, people will
get what they've got coming.

Bonds fell sharply again yesterday. Is this the beginning
of The End of the World? Or is it merely the end of the
beginning? Or maybe it is nothing at all... but merely
another feint by Mr. Bear... just to keep the muddlers on
their toes.

The real value of U.S. bonds will eventually be discovered.
Investors have been lending dollars to the world's biggest
debtor at negligible yields, while Ben Bernanke and the Fed
crew promise to make those dollars worth considerably less
when they get them back. There is smart money, dear reader.
There is dumb money. And there is money so imbecilic that
it cries out for euthanasia. So far, Mr. Bear has just been
playing with the switch. But sooner or later, he will pull
the plug on the bond market.

In the meantime, of course, we muddle through...

[See John Mauldin's article on the DR website:
"Are Deflation Worries Dead And Buried?"
http://www.dailyreckoning.com/body_headline.cfm?id=3320 ]

"Can Americans save enough for retirement?" asks the Kansas
City Star. Putting the question to a financial planner from
McLean, Virginia, they get this soft-headed reply:

"Americans nearing retirement not only need to step up
their savings significantly, they also have to overcome the
fears instilled by the 1999-2001 market decline and get
back into stocks and other investments with better rates of
return, Glassman said."

Ah... that is the trouble with muddling through. It assumes
that things just continue in the same direction,
indefinitely. Mr. Glassman is so accustomed to stock market
gains, he cannot imagine that the 1999-2001 decline was
anything more than a temporary setback. The baby boomers
have spent their entire lives in the Dollar Standard
period... they can't imagine that the dollar would ever be
rejected. Nor can they imagine that their retirements will
be any more difficult than their parents' and
grandparents'. 'Pop and Grandpappy muddled through their
retirement,' they say to themselves. 'Worst case, so will
I.'

But Grandpappy lived through the Depression. He had no
debts and kept a few chickens in the backyard. And Pop had
paid off his mortgage long before he retired.

A free, solvent man can muddle through for a long time. A
man deep in debt, on the other hand, cannot permit himself
the luxury.

And now, Eric, with the latest news:

-------------

Eric Fry on Wall Street...

- Yikes!... Watch out for falling bonds! U.S. Treasuries
tumbled again yesterday - falling for a fifth day in six
and driving the yield on the 10-year note to its highest
level in four months. The stock market also fell, as the
Dow dropped 91 points to 9,096 and the Nasdaq retreated
1.6% to 1,681. But gold perked up a bit, as the yellow
metal added $3.70 to $351 an ounce, its highest level since
July 3.

- Suddenly, the financial markets aren't looking so
chipper. We were never persuaded that the stock and bond
markets should have been rallying in the first place. But a
few million investors saw it differently. The problem was,
and is, that even after a three-year skid, stocks are
pricey. Bonds look even riskier than stocks by offering, as
they do, return-free risk.

- And now the risks are becoming apparent. Across the
entire yield curve, bond prices are cascading from the
heavenly heights they reached early last month... which
means that bond yields are soaring.

- The swift, perpendicular ascent of bond yields is truly
breathtaking. The yield on the 10-year Treasury, for
example, has soared from 3.07% in early June to 4.17%
yesterday. That's a stunning 110 basis points in little
more than a month. You don't see that every day. According
to Bank One Capital Chief Economist Anthony Chan, the 10-
year yield has risen by at least 100 basis points over a
period of six months just eight times in the last four
decades.

- Yesterday was a day for round numbers in the bond market.
For the first time in several months, the 30-year T-bond
yield jumped above 5%, the 10-year yield soared above 4%
and the 5-year yield pierced through 3%. In short, rates
are rising... swiftly.

- Your New York editor has encountered no estimates about
the size of the investment losses resulting from the bond
market's swift sell-off, but he would expect them to be
rather large. PIMCO's long-term government bond fund, for
example, has tumbled about 10% in the last six weeks.
That's probably not the sort of"safe" and"steady" return
that most bond fund investors were expecting when they
sought refuge from the"volatile" stock market.

- Your New York editor has made no secret of his contempt
for the bond market - actually, more fear than contempt -
which is why he has referred to the bond market previously
in the Daily Reckoning as the"single best short sale in
any financial market." Okay, maybe he exaggerates a bit.
But certainly, bonds have not been a terrific thing to own
over the last few months. And it does not seem likely that
bonds will be a rewarding investment over the next few
months, either... or even over the next few years! Most
likely, the bond market is - like a hornet's nest - better
avoided than embraced.

- Foremost among the bond market's myriad challenges is the
swelling Federal deficit. Washington's half-a-trillion-
dollar annual budget shortfall is certain to boost"supply"
in the Treasury market. Uncle Sam will likely hawk another
$60 billion worth of IOUs over the next three months alone.
At what price for the government's 10-year bonds? A 4%
yield? 5%? 10? Who knows?

-"Federal Reserve Chairman Alan Greenspan hasn't used
'bubble' and 'bond' in the same sentence," Bloomberg News
observes. Maybe he should. Heaven knows we've been linking
those two words often enough in the Daily Reckoning.

- Nevertheless, let's try to be patient with the Chairman.
Perhaps he will do so when he is testifying before Congress
that he could not possibly have recognized the bond bubble
while it was growing and that even if he had, he could not
possibly have prevented the bond bubble from occurring.

- In the meantime, we wonder how many more days will pass
before we see the words"bubble" and"Greenspan's
reputation" in the same sentence.

-------------

Bill Bonner, back in Paris...

*** When will The End come? Your editor and John Mauldin
muddled through several bottles of wine, but never reached
a conclusion. Japan has been in a long, slow-motion fall
for 13 years... muddling through an 80% stock market
correction, a 50% real estate collapse, on-again, off-again
recessions, and deflation. Then again, the Japanese were
net creditors when they began, not net debtors. They could
afford a slump.

*** As Eric points out, Gold rose back above $350
yesterday. Our advice has been to buy whenever it falls
below $350.

*** And here cometh another gritty little irritation to the
Land of the Once-Free: the French magazine, Alternatives
Economiques, reports that income, wealth and inheritance
taxes in socialist France, as a percentage of GDP, are
actually lower than they are in the U.S. In France, these
taxes come to 11.7% of GDP,"which is 1.7% less than the
European average, 3.8% less than in Britain, and 1.1% less
than the United States."

Note, these figures do not include social welfare charges
or sales taxes... which are very high in Europe, generally
regressive, and hard to compare with the U.S.

***"Wonderful wonderful wonderful... you propel me into
self-salvation," writes a Daily Reckoning reader. Do we
detect a touch of irony?

"Today I had a garage sale... emptying my closets and
bookshelves and cabinets and garage of my surplus of
stuff... my wife and I have sold our house and taking our
profits and are now downsizing into an LA condo (we still
have work/business needs here)... and starting the Two Years
To Being In France Plan (or maybe down the road in
Italy... but I lean toward France). By then the French
economy ought to be as bad as ours and I'll be ready to
pounce and it won't matter too much what paper money I
offer, everyone will be desperate to grab it. Paris or
Nice... which ever gives me the most bang for the the
the... gold. I'm already teaching my favorite cat (three
legs, black, Marcello) to meow and understand French and
how to pose like an existentialist. The only thing left to
do... and I'll wait until the last minute... is to confess to
my wife that once we cross the ocean, it will be very hard
to get me back."


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The Daily Reckoning PRESENTS: A DR Classique originally
broadcast one year ago today.


SUBURBIA DELENDA EST
by Bill Bonner

"It was the flight to suburbia [after 1929] that smashed
land values in the big cities. That mighty blow to the
economic centers of the country helped to bring on the
Great Depression."
- Jack Lessinger


A few months ago a friend, keeping me abreast of the
hometown news, sent a clipping.

"La Plata Destroyed by Tornado," said the news article. The
accompanying photograph showed several buildings
leveled... with bits of vinyl siding scattered on the ground
and fiberglass insulation hanging from a surviving tree as
though it was Spanish moss.

The report told how 3 or 4 people were killed when a
twister let loose and went through the Southern Maryland
town.

"Small price to pay to rid the world of La Plata," your
editor thought to himself. Even the debris was
embarrassing. A decent building would have yielded at least
a pile of bricks or stone. This stuff was so light the
cyclone must have ripped it apart like a child opening a
birthday present and carried it across the bay. They're
probably still finds bits of aluminum siding and quarter-
inch plywood over on the Eastern shore.

La Plata was once a fairly decent little burg. Your
correspondent recalls his first summer job. Working for a
building contractor, he was given 5 minutes instruction and
put to work painting the new bank in the center of town. As
the white paint dripped down his arm, he felt a little
pride in having gainful employment and on contributing to a
handsome building - for the bank was built on the colonial
theme, out of brick with white trim (and the occasional
serendipitous splash of white paint on red brick, courtesy
of your editor).

Years later, Route 5 coming out of Washington was widened,
and in came the commuters, the shopping malls, auto
dealers, and almost every imaginable commerce that a man
can put a price behind and parking lot in front of.
Hamburgers, pizza, Chinese takeout, tacos... muffler
replacement, tires, lubrication... once the division of
labor took hold, there seemed no stopping it. You had only
to drive along in the far right lane, keep your eyes
open... and anything you might want would soon appear,
advertised on a billboard. And so convenient!

European cities are different from Americans ones: people
want to live in them.

Prices in Paris have risen sharply in the last 5 years. A
one-bedroom apartment of just 500 square feet sells for
$300,000. The closer to the center of town, the higher the
price. And no wonder, in the center of European towns, you
find good restaurants, movies, bars, clubs, museums -
sidewalk cafes and street life. At 6PM on a Friday
afternoon, when the weather is good, a person can scarcely
find an empty chair at the Paradis across from our office.

By contrast, downtown Washington, at the vesper hour, is
deserted.

With a few exceptions, American cities are not places
people choose to live. They wouldn't choose to park their
cars downtown either, but it is a necessity. And as soon as
working hours are over, they get in their cars after work,
roll up the windows, and get on the freeway. But instead of
heading to some paradise beyond the city walls, the poor
hapless commuter spends an hour in traffic to get nowhere.
Driving down Route 5 to La Plata, Maryland, for example, he
finds no museums, no cafes, no decent bars, no restaurants
with a chef, no charm, nothing but a wasteland of strip
malls and insipid houses tracked across the landscape like
cogs in a zipper.

Nor are there any public fountains, gardens, grand avenues,
parks worthy of the name... no history... and here we offer a
guess: no future. Nothing but a desolation of parking lots
and forlorn residential cul de sacs where the trees have
been cut down so the streets could be named after them. On
Dogwood Lane the houses are butted up against one another
so a man risks splashing his neighbors when he washes his
car. And over on Maple View Drive the neo-plantation style
houses begin at $499,000, believe it or not. For the price,
you get all the latest popular conveniences - water jets in
the bathtubs, cable and alarm wiring, in-ground pool, 3 car
garage, decks with barbecue and Jacuzzi, and heck, maybe
even a family dog. Just hope that no tornado whips up and
blows it all away.

It's the windows that bother us most. They stick the
$499,000 house out in the middle of a tobacco field without
even a locust tree for shade... and then nail the vinyl
shutters to the wall. You'd think for that kind of money
you'd get decent windows you could open... and decent
shutters you could close. But shutters went out of fashion
in America before WWII. Since then, people just turn up the
air-conditioning, draw the blinds, and turn on the TV.

There are probably people who like suburbs. Of course,
there are people who like Barbara Streisand and sumo
wrestling. Most people look at the suburbs as a necessary
evil - like taxes, except that it is an evil they plan to
escape... after the kids have left home and their
retirements have begun.

Therein hangs a tale, we believe. For suburban real estate
represents the number one item on American's balance sheets
- and also their biggest liability."Real estate loans
anchor our whole economy," writes Jack Lessinger, an
economist who specializes in real estate patterns."In the
event of a large and permanent collapse in real-estate
values, property owners default on their mortgages, banks
and other lenders go belly up, depositors aren't able to
pay their bills, production and consumption slow down,
unemployment rises and government is helpless because
bailouts would be too expensive."

As America's love affair with stocks began to turn a little
sour, investors slouched back to their homes... and looked
upon them with new favor. Every passing day, the stock
market seemed to get older and uglier. But the real estate
market never looked finer... for every dollar their equities
had lost, their homes seemed to gain one - or almost. In
the last five years, stocks rose by $6 trillion... and then
gave the money back. The real estate market gained about $5
trillion and still has it in its pocket.

And Greenspan's low rates made it possible for a homeowner
to borrow out some of his"equity"... and still end up with
lower monthly payments. The consumer not only did himself a
favor by buying a new house - or refinancing an old one -
he gave a boost to the entire economy. And Greenspan
applauded his efforts on national TV!

Houses, like automobiles, are considered"durable" goods.
They are meant to last. Automobiles lose value at a
notoriously fast speed. Until now, houses have generally
increased in price. Nothing says they have to; suburban
housing prices, in particular, may prove much less durable
than people expect.

Lessinger believes the next major phenomenon in the real
estate market will be the collapse of the suburbs.

America's baby boomers are not just getting older and more
desperate, says Lessinger, they are also changing their
minds about what they want:

"Suburbia is no longer the centerfold of the American
Dream..." The boomers want"something quite different," he
continues,"life in a small, friendly community far from
congested freeways - a village in the midst of natural and
unpolluted open space. And since 9-11 there's another
factor: Dense metro areas make inviting targets for
terrorists. As people are increasingly anxious to leave,
the demand for suburban real estate is leaking away. When
that leak becomes a flood... expect a crash."

In the early 1900s, one of the surest investments one could
have made was in America's large cities. Rural populations
migrated to urban areas to find work... and escape boring
lives in hick towns. But by the 1920's a new trend was
already underway - the big cities were filling up with
Blacks and Catholics, so those who could afford to were
moving out of the center of town to close-in suburbs. The
market break in '29 marked the end, not just of an mania
for stocks, but also of in- town property prices. Cities
such as Baltimore, St. Louis and Philadelphia hit their
peaks around '29 - and never recovered.

Likewise, Lessinger believes the current bear market on
Wall Street will take suburban property prices down with
it, permanently. Trendy, fashionable, wealthy people will
never again want to live in the suburbs. Which is not to
say that the suburbs will be destroyed like La Plata. That
is more than we could hope for.


Your editor,

Bill Bonner

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• Suburbia Delenda Est / The Daily Reckoning - - Elli -, 22.07.2003, 13:33