Yesterday, the Dow decided to keep us wondering. It rose almost 200 points. In our view, the tide is going out. The credit cycle peaked out this past spring… and the great wash of cash and credit is now ebbing.
But if we’re right, we’d expect to see asset prices go down. So far, housing prices ARE going down. The last figures we saw showed U.S. housing prices down 13%. Robert Shiller, who probably knows more about housing cycles than anyone, says they’ll probably go down 30%-40%. In Britain, houses just registered their third losing month in a row – with many more to come.
You can count on lower housing prices – at least in real terms. Because there is no way that the average house can remain out of reach of the average buyer for very long. Houses are consumer items, not investments. They will fall in price to a level where the consumer can afford them.
But stocks are not consumer items. They are capital items…investments that go up and down based on various things – animal spirits, credit, earnings, etc. Earnings are going down (they always revert to mean)…and the credit cycle has probably turned negative.
Yesterday, the number one man at Legg Mason said that credit markets were in the worst shape in 47 years. And a Washington Post writer opined that it was the “biggest mess since ’29.”
That leaves “animal spirits” – Keynes’ term for market sentiment. The animals are still believers. They’ve come to think that capitalism will make them rich… and that capitalism’s custodians will make sure that nothing goes wrong. And whenever they begin to doubt it, Ben Bernanke and his fellow zookeepers throw them some red meat. A rate cut is coming… and a plan to rescue the mortgage market – relief is on the way!
But can the feds always save investors from their own mistakes? Can they make sure that stocks remain high forever? Can they protect the dollar… and make bad loans good again?
No… of course not. But that doesn’t mean they won’t try! The animals would be very disappointed if they didn’t.
Our old friend Rick Ackerman comments:
“We always expected the Fed to pull out all the stops when the U.S. economy began to slip into the void, but we never could have imagined the spinmeisters would invent ‘mortgage welfare’ even before recession had been officially declared. Treasury’s latest plan is designed to make it easier for certain ARMs borrowers to temporarily freeze their starter rates to avoid foreclosure. We know the situation is dire because the big lenders are signing on without even having their arms twisted… Paulson’s plan is not merely being fast-tracked, it is being shot out of a legislative cannon.”
But will the feds hit the mark? Will they be able to reverse the tide… or like King Canute, merely look like silly old fools?
We’ll see, won’t we?
Markets and Money