Now the bear is starting to sink in his claws. The Dow fell 306 points yesterday. There were only 12 stocks hitting new highs, against 397 hitting news lows.
The fight between the inflation and deflation is beginning to resemble the Corrida de Toros we saw in Madrid . That is to say, it does not look like a battle between equal and opposite opponents. It almost looks like the fix is in.
The inflationary bull comes out snorting and pawing the ground. He charges at full speed and looks like he is going to knock down the stadium walls. He looks unstoppable. But the picador stands his ground and drives his spear into the bull’s back. Then, the banderilleros go to work…jabbing him with their little spikes. The bull weakens. The life bleeds out of him.
The bull can’t win. Not in a bullfight. Occasionally, he’ll gore one of the banderilleros. But the smart money goes on the matador.
Yesterday, news came out that Merrill Lynch had lost twice as much money as forecast…Lehman Bros. laid off 1,300 people in its mortgage unit…and housing starts hit their lowest level since ’91.
This last item is really good news, but investors didn’t seem to see it that way. The bear market in housing can’t end until new building slows. Until now, builders have been putting up houses that they had in the works before the crisis hit. These houses merely added to the inventory that needs to be sold off before prices can stabilize.
It’s going to be a long process. There are two million homeowners who face mortgage increases in the next two years. Their houses are already down 5% to 10%…and more. The Bureau of Labor Statistics added that, once discounted for rising prices, the wages of American workers fell 0.9% between December 2006 and December 2007. Now, with unemployment rising…many of them are not going to be able to keep going.
The ratio of unsold, vacant houses to the houses on the rental market is 50% higher than it was 20 years ago. And from the Bay Area of California comes word that sales are at a 20-year low.
It gets worse. Business Week warns of a “home equity crisis ahead.” People not only borrowed to buy houses…they borrowed against their houses to buy other things too. Now there is $14.7 billion of home equity line credit said to be delinquent. Bad home equity loans are up 130% at some lenders, from ’06 to ’07. It’s an $850 billion business…and much of it is going to go bad .
Even “rich” homeowners are having trouble, adds a Reuters article. Elite neighborhoods, of $1 million plus houses, are beginning to look a little gaunt, says the report. The influx of marginal new buyers…and the rise in house prices…teased middle-class homeowners into houses they couldn’t really afford. They stretched their finances in order to enjoy a bigger, more prestigious house…hoping that the rise in prices would pay off big. It didn’t. Now, they’re really stretched…and, for many, the elastic is beginning to snap.
None of this is bullish…not for housing prices…and not for stocks either.
What has gone wrong? Weren’t the feds taking action? Wasn’t Ben Bernanke warming up his helicopters , so they could drop cash onto the people who need it?
Yesterday, Ben Bernanke, former head of the Princeton Economics Department and now head of the biggest central bank in the world – the U.S. Federal Reserve – explained that monetary policy wasn’t enough. Already, as we pointed out here in Markets and Money , the yield on 10-year Treasury notes is lower than the rate of consumer price inflation (or close to it). This means that the most qualified borrowers can get money on very favorable terms – it is practically free. But who wants to borrow? What would they do with the money? Buy stocks? The average stock market portfolio is down about 5% so far this year. Who wants a piece of that? Or maybe they could buy property? Forget it; not many speculators are eager to buy now. Or, maybe they could use the money to expand their business? But who expands before a recession? Only pawn shops.
Markets and Money