The Daily Reckoning - Make The Desert Bloom (Dan Denning)

verfasst von Firmian, 30.07.2004, 19:26

-->Make The Desert Bloom

The Daily Reckoning

Baltimore, Maryland

Thursday, July 29, 2004

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

*** Stocks in Super Red Light Mode...crash imminent?

*** Oil hits new all-time high...Yukos to halt
production...

*** House Hysteria...Boat Hysteria...Call Girl
Hysteria...and more!

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

We are stuck in the summer doldrums...locked in irons on a
dead, still sea.

There is no wind to move stocks...no breeze to push along
the price of gold...no air to blow away the bubble...no
ventilation to take out the stale odors of the great
consumer-led humbug.

The Dow is back above 10,000. The price of gold is back
below $400. Barely any progress has been made in any
direction all year. And now they sit with liquidity,
liquidity everywhere...and not a drop of real money. Real
money comes from real savings...which get used to build
real factories...which pay real wages...by making real
profits...by selling real things...to people with real
money! Instead, Americans have credit. And equity in their
houses. And delusions galore. (More below...)

But watch out. A storm could blow up at any time. This just
in from Steve Sjuggerud:

"REPEAT OF CRASH OF '87 COMING?"

"We've just recently entered"Super Red Light" mode on my
1-2-3 Model...something that basically never happens. But
when it does, watch out!

"Over the last 30 years, we've only entered Super Red Light
mode three times...just before the Crash of '87, in mid-
1994, and late 1999. Two out of three of those Super Red
Light calls were fantastic. If you acted immediately on
those signals, you'd have beaten the '87 crash and the
2000 crash. Wow! (In the mid-1994 signal, the market was
flat.)

"Remember, in my 1-2-3 model there are three things to
watch:

1) Is the market expensive?
2) Is the Fed in the way?
3) Is the market acting badly?

"If we're 'in the clear' on all three of these, it's green
light mode. If one of the three is against us, it's yellow
light mode. And if two or more are against us, then it's
red light mode. It's extremely rare when all three are
against you (occurring less than 2% of the time).

"Looking at stocks now, #1 is against us... stocks are
still expensive, as the P/E ratio of the overall market is
above 17. A month ago, the Fed put #2 against us, by
raising interest rates. And just recently, #3 has gone
against us, as the fall in stock prices in the last few
weeks has finally put the S&P500 Index below it's 45-week
moving average. That's three strikes!"

And here's the news from Eric...

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

Eric Fry, from the Big Rotten Apple...

-"$50 oil now seems more realistic than ever," says Kevin
Kerr, editor of Outstanding Investments. Kerr, a steadfast
oil bull, bases his outlook on the growing tension between
the world's delicate oil supply and an increasingly robust
demand.

- The global oil supply may not be up to the demands placed
upon it - like a solitary sushi chef trying to feed an NFL
football team, or a lone oyster-shucker trying to provide a
steady supply of Blue Points and Kumamotos to a roomful of
Republicans...a quick bathroom break would create a major
supply disruption.

- The oil price spiked to a new record high yesterday on
word that Russian oil production is about to take a
bathroom break of sorts. Crude prices jumped $1.06 to
$42.90 a barrel on the New York Mercantile Exchange after
OAO Yukos Oil Co., Russia's largest oil exporter, said the
Justice Ministry had ordered the company to halt production
from its main Siberian unit. (Daily Reckoning readers who
are unfamiliar with the Yukos saga should know that the
Russian government has been trying to recoup a few billion
dollars of back taxes from the delinquent oil company.)

- The Yukos news pushed crude futures to a record high of
$43.05, before closing at $42.90 a barrel - the highest
levels the exchange has seen in its 21-year history of
trading crude futures. The prices of heating oil, gasoline
and natural gas all soared in step with crude oil.

- The soaring energy prices sparked a swift retreat by the
stock market, temporarily erasing most of Wednesday's
gains. But the buyers regained their courage - or whatever
the exact motivating force may have been - to charge back
to market. By day's end, the Dow Jones Industrial Average
had advanced 32 points to 10,117 and the Nasdaq slipped
half a percent to 1,858. The stock sellers seem to have
exhausted themselves for the moment. But after a bit of
R&R, we suspect they will return sometime in August.

- Meanwhile, the oil market continues to dazzle and amaze,
holding well above $40 a barrel. Supply worries seem to be
the main driver of rising prices - Yukos being merely one
of many. For now, Yukos continues to pump oil at the rate
of 1.6 million barrels a day, but that production could
come screeching to a halt."Yukos may stop oil shipments to
China," Bloomberg News reports,"because the company cannot
access its bank accounts...it has prepaid until the end of
next week for all rail shipments, which carry one quarter
of the company's output."

- Here's food for thought: Russia supplied about 8.5% of
China's crude oil imports in the first half of the year. So
any major supply disruption by Yukos would send the
voracious Asian oil consumer shopping elsewhere for
supplies."If shipments actually stop," one analyst said,
"the market will move quite a bit higher."

- Meanwhile, Americans continue burning through more oil
than they stockpile, despite soaring imports of crude oil.
The latest data from the American Petroleum Institute
showed a 3.1 million-barrel fall in crude supplies to 298.7
million barrels for the week ended July 23. Inventories
dropped, despite a 1.4 million-barrel-per-day spike in
imports. Imports averaged 11.3 million barrels per day last
week - the first week ever that has seen more than 11
million barrels per day of crude arrivals.

- For those keeping score at home, the price of crude oil
is now a hefty 42% higher than one year ago, and selling
for the highest level in the 21-year history of the
exchange. But fear not, when priced in inflation-adjusted
dollars, the price of crude oil is nowhere near record
highs."The average cost of crude oil used by U.S. refiners
was $35.24 a barrel in 1981," Bloomberg News reports.
"That's almost $73 in 2004 dollars."

- But that couldn't happen again, could it?

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

Bill Bonner, back in Baltimore....

*** The real estate bubble in the mid-Atlantic area seems
to be expanding right before our eyes.

"I was shocked," began Elizabeth after a visit to our old
neighborhood in Baltimore."The place is still a slum but
there is renovation going on all over the place. You
remember that big building on the corner, which was kind of
a flophouse for drunks and drug addicts. You know...where
your friends lived? A developer from New York bought it.
He's gutting it completely. I walked over and talked to him
just to see what he is doing. He's really doing it right.
They're putting in nice one- and two-bedroom
apartments...with everything. Very nice. But I asked how
much he would rent them for. He told me they would go for
$1,600 per month. I dared to ask,"do you really think you
can get that much?" His response was that he could always
cut the rents if he needed to. But I don't see how he'll be
able to cut them without going underwater on his
investment."

The mysteries of real estate investing in the current
hysteria deepen. Six months ago, the most you could hope to
get, renting an apartment in Baltimore's poor sections, was
about $600 or $700 a month. This was not because poor
people were too cheap to pay more; it was neither a
reflection of want nor need, but of means. They could not
afford more rent.

Now, developers expect poor people to pay more than twice
as much rent for a much nicer apartment. Where will these
new renters come from? Where will they get the money? We
don't have any idea.

But the math is no different in middle class suburbs. A few
years ago, an average family might have bought an average
house in Howard County for $250,000 or so. Now, prices look
as though they've doubled, even though they are still the
same people in the area, earning only fractionally more
money than they did before.

"But this is one of the best employment markets in the
country," a friend explained."There's a lot of high tech
in the area...and a lot of government-related spending near
Washington. The place is booming..."

"Real estate is so funny," a visitor remarked, over a drink
yesterday."We came to Baltimore in 1980. Then, nobody had
any interest in property in the city. Everyone was moving
out to the suburbs. You could buy anything you wanted for
pennies. So, we bought our house right on the main
street...well, you've seen it. It's a mansion, one of the
best places in the city. We paid practically nothing.

"Well, that attitude lasted for a long, long time. We kept
expecting the city to be 'discovered' by people from
Washington or New York. It never was. Property just kept
getting cheaper. It was unbelievable. In fact, for 20 years
prices went nowhere. Then, all of a sudden...it seems like
it was only 6 months ago...everything started to go wild
around here. They're building million-dollar condos down at
the harbor...and around here, none of these mansions are
for sale anymore. You can still get nice places...but
you're going to pay a lot for them."

Even in the best markets in the country, prices do not
always go up. A recent piece in the New York Times
described a one-bedroom apartment on Riverside Drive in
Manhattan."Sold for $180,000 in 1985...ten years later, at
the bottom of the region's most recent real estate slump,
it sold for $167,000."

But nearly everywhere we go, we hear the telltale comments
that signal a bubble:

"You just can't go wrong with real estate."

"Better buy now, because it will just be more expensive
later on."

"Buy as much house as you can afford...you won't regret
it."

"I'd like to move to another area, but I can't afford to.
I'm making too much money on my house."

Is this a bubble, or what?

*** Sean Corrigan adds numbers to our anecdotes:

"Total Housing dollar turnover [new and existing sales x
average prices] hit a record $2,035 billion annualized pace
last month, up 28% year over year, and up by 55% in the
past two, compared to 1994-02's trend gain of 11.4% per
year compounded (also rather too rapid, in truth), so it
now stands at 3.7 times 1995's low..."

"As a proportion of the wage fund (weekly salaries x NFP
private payrolls) it has gone from 1989-97's average of
16.2:1 to today's 35.6:1 - a gain of 120%...

"As a proportion of non-government GDP, it has doubled from
1989-97's 10.8% to a record estimate of 21.6% this quarter
(assuming GDP does, this last quarter, what it did in the
previous two)...

"Whereas, in 1989-96, it took 12,000 hourly salaries to buy
the transaction-weighted average house - 6 yrs and 11
months at the-then average work week - it now takes 15,855
hours - 9 yrs and 5 months at today's workweek (50 week
working years assumed in both cases) - for an increase of
36% per home in the ratio...

"Deflated by the CPI (stop laughing at the back), turnover
has risen 175% (+10.7% annualized) over the past decade.
Prices/CPI have risen 41% from the 89-97 mean and have
beaten CPI by 8.9% annualized since Q3 2001...

"Oh, I think we can call this a bubble, all right."

***"How's business?" we began a typical conversation with
a relative.

"Great. It's unbelievable, really. Our business depends on
the economy. When people have money to spend, they buy
boats. We don't sell boats, but we give them a place to
keep their boats - down at the marina. And they have
weddings down there...and there's the restaurant.

"Recently, we've had to build bigger and bigger boat slips,
because people are buying these huge new boats. The little
boats...we pull them out of the water, and store them on
land. We have much better equipment for moving the boats
around than we used to have..."

All around the Chesapeake Bay...on land and on the
sea...the bubble expands.

*** Our friend Michel, writing from France, noticed a news
item:

"In the Indian press, there was only one article about the
Democratic National Convention: it seems there aren't
enough call girls in Boston to satisfy the delegates. It
was necessary to bring in extras from Florida and
California. The rates begin at $200 an hour...this was in a
Reuters dispatch. Did it appear in the American press?"

We must have missed it.

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

The Daily Reckoning PRESENTS: Here's a bold new idea. If
people are the real source of all wealth, shouldn't it be
possible to create a currency backed by human capital
alone?

MAKE THE DESERT BLOOM
by Dan Denning

Right now, the entire housing market rests on that oh-so
precarious of assets, trust.

And whether it's a housing market, a currency, or an
investment phenomenon, once the trust is gone, it's amazing
how quickly the asset values follow.

Let me explain...

On my recent travels, I was introduced to a man called
Stephen Belgin. Belgin is one of the most insightful and
brilliant financial minds I've come across. Currently, he
is working in partnership with a man named Bernard Lietaer
on a book called"Of Human Wealth: Beyond Greed and
Scarcity." Litaer was one of the architects of the Euro
currency and a well-known thinker on the future of money.

The problem with the current monetary order, Stephen
explained, is that it doesn't help meet development needs
in the many poor places of the world. Most of the world's
communities can't raise money for infrastructure through a
bond offering and there isn't enough wealth to use as
collateral for borrowing capital.

So how do you create wealth and opportunity in places that
are not plentiful in capital or natural resources? Stephen is
working on an idea called"complimentary currencies."
Notice that's it's complimentary not alternative. He has in
mind mediums of exchange that work alongside fiat money and
are backed, not by the full faith and credit of a
government or future tax revenues, or gold, or land, but
human capital.

"Hmm," I frowned. I asked Stephen what he thought of
Hernando de Soto. I met De Soto in Paris last year and
listened to his speech about the developing world. His main
point is that land is the greatest form of unused capital
in the world. By creating clear title to land and extending
it to individuals - private ownership - you unlock the
natural resources of both human beings and an economy.

It's a pretty compelling argument, I thought. I like it
because of the idea of stewardship...that an owner is
likely to be the best caretaker of his most valuable asset,
his property. Owners make the desert bloom. It's only on
publicly owned land, with no ownership and therefore no
accountability, that you see huge mismanagement of natural
resources.

Steven nodded, but said I had put the question to him the
way most of the world would. This didn't offend my pride.
But it did make me wonder. How can any economic transaction
be based on anything other than a medium of exchange whose
value is agreed upon by both parties? Granted, that medium
could be arbitrary...a seashell, oxen, or an ounce of gold.
But doesn't it have to be a real thing that has the
attributes of a good medium of exchange?

Steven nodded again, but less amused I think. He asked what
the real source of all wealth is."People," I said. To use
Thomas Sowell's phrase, people are the ultimate resource.

Stephen agreed with that and asked me to imagine a world
where the basis of the currency is the faith we have in
each other as human beings, as wealth producers. What kind
of great societies could we produce if we abandoned the
mental trap of scarcity thinking and unleashed human
capital on the world?

It's a provocative question. And what I like about it is
that Stephen and his colleagues are trying to solve a real
problem...how to create currencies that work at the local
level. He said he believes in currencies that work
alongside fiat money.

But I think that someday, and perhaps soon, it won't be an
academic question. It will be a practical one with some
urgency. How do communities create a medium of exchange
when government paper becomes worthless? That's why it's a
question worth asking. The skeptic in me says you can't
have a currency based on belief in basic human potential.

Some human beings are bad loan risks, whether you look at
it in banking terms or moral terms. It's prudent not to
trust all people because not all people are trustworthy. A
man's word may be his bond in some places, but in other
places, I'd much rather have his land as collateral than
his handshake.

It's a matter of trust. And it's also a matter of memory.
You can get burned in a deal, at the micro level. And the
macro level, crashes can happen. They happen all the time,
in fact.

The other day a colleague sent me a note saying that a
crash in the U.S. housing market was impossible because
there was no such thing as the U.S. housing market. His
point was a variation of a point I've made before. Don't
confuse the real estate market with the mortgage lending
market.

Real estate prices are affected by interest rates. But they
are also affected by local factors as well. Demand for
housing, location, taxes...these are just some of the
factors that account for the differences between real
estate prices in different parts of the country. And in
truth, regardless of what's happened in the housing market,
in some parts of the country real estate is still cheap.

But that doesn't meant there won't be a housing crash. Home
prices in some parts of the country are up primarily
because the Federal Reserve kept interest rates so low for
so long before finally reversing course last month. The
rising value of homes was as much a function of low
interest rates as it was of sustainable demand for new
housing.

And in any event, the Government sponsored enterprises
aren't exactly poster boys for full disclosure and
transparency. We found out at the end of June that Freddie
Mac (FRE) posted a 52% decline in profit in 2003 from 2002.
I don't care what business you're in, a 52% decline is
pretty severe.

Freddie told investors it wouldn't report 2004 results
until March of 2005. The company says it's grappling with
antiquated accounting systems. That's a comforting thought
for an entity that manages trillions in risk, and
apparently isn't managing it too well.

To what did the GSE attribute its losses, you ask? Rising
interest rates and their affect on Freddie's derivative
positions. The company said,"To the extent changes in
interest rates continue to be significant, our overall net
income will remain volatile."

We've been assured that the GSEs are wizards at managing
interest-rate risk. And Alan Greenspan has told us that
existence of the derivatives market has allowed for the
dispersion of risk throughout the system...and that it's
been a GOOD thing.

But there's another way of looking at it. It's that you
can't package up dozens of other people's liabilities and
sell them as assets and pretend there is no risk.

You can't expect profits when your borrowing costs go up
faster than the money you make lending at low rates.

Mortgage bond buyers beware!

Regards,


Dan Denning
for The Daily Reckoning

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gesamter Thread:

• The daily reckoning:"Noch ist es zu früh auf einen fallenden Ã-lpreis zu setzen" - Sorrento, 30.07.2004, 18:47
  • The Daily Reckoning - Make The Desert Bloom (Dan Denning) - Firmian, 30.07.2004, 19:26