The correction in the U.S. housing market made its sharpest move ever in February, with houses nationwide down 12.7% from 12 months earlier. In Las Vegas, Miami and Phoenix prices were down 20%. Foreclosures doubled in the first quarter, with Nevada leading the way.
The falloff in American housing has cast a shadow over the whole consumer economy. Consumer confidence is at a 5-year low. The LA Times tells us that people who live on tips – such as waitresses and bellhops – report that clients are tighter with their money than they used to be. Even the big spenders are less willing to part with their money. Says the Rocky Mountain News: “millionaires are singing the recession blues too.”
But let’s go back to commodities, oil and gold. Just because there will eventually be a correction in these markets doesn’t mean it is going to happen tomorrow.
Let us turn to the case of gold, for example. Yesterday’s close left the price at $876. If we’re right, a lot of investors and speculators are beginning to worry. We bought most of our gold when the price was below $500. But many of these guys got into the gold market at $800 and above. Some have already lost money. Others are worried about preserving their gains. Even a few of the old-timers are recalling the terrible bear market in gold of ’80-’99. They lived through it; they won’t live through it again, they say to themselves.
But even at $900…or $1,000…gold has still not gotten to the silly stage of a bull market. That is, it is a bull market…but not a bubble. The charts show a steady rise in the price, but no vertical spike.
And, as we’ve pointed out many times, a lot has happened since ’80. Simply adjusting the ’80 price to inflation, gold would have to sell for nearly $2,500 in today’s money to return to its previous high. But inflation of the dollar is only a part of the picture; a bubble in the credit markets has led to trillions of dollars worth of derivatives…trillions of dollars’ worth of new debt…trillions worth of dollar reserves in China, Japan and Russia…dizzy prices for “works of art”…madcap building projects in the Mideast…breathtaking growth in China…and more debt than the planet has ever seen. Many of these prices and projects must be mistakes. Many will have to be corrected.
The Fed should raise rates…and bring on the correction. But that’s not going to happen, because another very important difference between ’80 and ’08 is the difference between Paul Volcker and Ben Bernanke. Volcker protected the dollar – which is why gold entered a 2-decades long bear market. Bernanke has no interest in protecting the dollar – which is why this bull market in gold has a long way to go. Instead of correcting the mistakes of the last 20 years, the Bernanke Fed is determined to help people make more of them.
Markets and Money