Holiday Wealth Annihilation: 3 Trends Ending 2008; Housing Prices down for 28 Consecutive Months, Place 20 Percent of your Portfolio in the Mattress, and a Shopping Tax Holiday.
Flying over Arizona on the red-eye I couldn’t help noticing all the interspersed housing subdivisions lighting up the desert landscape like a sand painted Christmas tree. Earlier I had caught CNBC reporting that Phoenix had the worst year over year drop of all the Case-Shiller metro areas. How many of those units are sitting empty, underwater, or incomplete awaiting an audience that has neither the money nor will to purchase a home in this fragile economic climate? With epic Ponzi schemes this year is becoming Enronesque. Financially many will want to forget 2008 and chalk it up to experience.
Alas, I wish it were so simple. The market rallied on news that the government was going to buy mortgage backed securities which ironically is something it already said it was going to do. Great. However the caveat is the securities have to be fixed agency debt; that is, little help is provided to the ticking time bomb of pay option ARM mortgages which will engulf the country in the next few years. The government is treading on a very murky line here. First, the public is getting agitated that trillions of dollars are being thrown at the agents that caused this mess in the first place. Little help is trickling down to the average person on shaky Main Street. This perception is correct given that the unemployment numbers are looking worse and worse as each monthly number is dished out. Why? The unemployment rate usually peaks months into an equity correction. And for most Americans, employment is the number one sign of a healthy economy. Was November 20th the bottom or only a head fake of things to come?
Even some areas in Los Angeles County are seeing zip codes coming in with five-figure prices. Maybe a stunner for some but many have geared up for this kind of massive price destruction. The bubble is in full burst mode. Keep in mind historically December is kind to the markets but not this time. Santa put a piece of coal in the stocking of most investment portfolios.
It is astounding that after all the money being hurled to banks and Wall Street institutions like NFL deep routes, not much has improved. Sure some crony capitalist are now off with nice severance packages but nothing has improved for the lot of most Americans. The housing market is still tanking. Sticking money into your mattress would have outperformed the stock markets of the globe! And to top it off we are now hearing echoes of a shopping tax-free holiday. Wasn’t it shopping for big homes, big cars, and big TVs that got us here in the first place?
Case-Shiller 28 Months Down
*Click for sharper image
The number 28 may hold significance to you. It is the atomic number of nickel, a lunar month is roughly 28 days, and there are 28 dominoes in a standard set. Or it can also mean the number of months the Case-Shiller 20-City Composite Index has fallen. That is right, the overall index is now down for 28 straight months. Yet we still have people in the mainstream media with the gall to call for a housing bottom. How about we first have at least a few up months before we even start discussing any bottom?
With the above chart I have also added the LA and Phoenix metro areas. As you can see with Phoenix, the drop is almost a perfect vertical. The correction has been so stiff that Phoenix is quickly approaching a trend line. Los Angeles with a higher peak is still over priced and with 10 other reasons for a long-term housing correction, we are years away from a bottom in the state.
2008 has been the worst housing market on record. With the employment picture deteriorating, why are we to believe housing will stabilize anytime soon?
*Source: CBS MarketPlace
Take a long look at the above chart. 2008 has been horrific for global equity markets even after every imaginable government intervention known to humankind has been tossed at them. We bailed out banks, insurers, nationalized our mortgage giants, and even gave a tiny helping hand to domestic automakers. Even with this, global markets had one of their worst years on records.
Here is the real irony. Ben Bernanke and Hank Paulson are determined to annihilate the U.S. Dollar. Why? Simple. It is the only mathematical way we will ever work our way out of our massive debt. Every action they have taken is inflationary although the market in the short-term is reacting with deflation. The reason for this is you can’t force people to load up with more debt. They are already maxed out. Yet the one enemy of Bernanke and Paulson, the U.S. Dollar is one of the few areas up for the year! Bwahahahaha!
How long this will last is unknown. I assure you if you asked Americans if they are comfortable with a government policy that destroyed the U.S. Dollar’s value across the globe they would be in an uproar. Yet I’m not sure how many people are aware that the policies currently being taken are direct affronts to our own currency.
Another curiosity is gold is up for the year. Even after the massive fall earlier in the year, this is another glowing area. People are fleeing to perceived safety. This happens in all bubbles after they burst and the U.S. Dollar still has this reputation. Give Bernanke another year and I’m sure things will be different.
Shopping Tax Free Holiday
I stand by my assertion of the Super Ignorant Investment Vehicle SIIV – each subsequent bailout is progressively dumber than the previous one. The new idea making the rounds is being put out by the National Retail Federation (NRF), which is a sales tax holiday. This fantastic idea is another knee-jerk reaction just like every other bailout we have seen. First, spending and “shopping” is a reason we are in this mess. As a country, we need to focus on production and move away from spending ourselves into oblivion. Next, if any thought went into this they would realize that many states rely on sales taxes for revenues. States like, oh, I don’t know, California:
27 percent of California’s revenue comes from sales taxes. The state can barely stay afloat as it is and we are talking about removing one of the biggest line items for a few days? Brilliant ideas once again!
You’ll love the wording in the letter:
“We urge you to act quickly on legislation to help stimulate consumer spending as one of the first priorities of your new administration,” the NRF said in the letter. “To be effective, any fiscal stimulus package must be enacted with great speed. It must be substantial. And it must be sustained. To accomplish this, the plan must include a longer-term investment designed to produce sustained economic growth through job creation as well as short-term economic stimulus aimed at increasing consumer spending.”
Don’t you love how they sneak in consumer spending a couple of times into the letter? Who is going to argue with job growth? Or sustained economic growth? Yet what in the world does encouraging debt strapped Americans to spend more have to do with job growth or sustained economic growth? It doesn’t. Another fabulous idea that goes into the SIIV.
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