The trouble with following the financial news is that there is so much of it. Everyday brings news information, new facts, new theories – dozens of them. The financial news becomes like a dense Russian novel, with so many characters coming and going that we forget the plot.
Of course, if you’re reading Dostoevsky this summer, you can always stop, flip back and figure out what is going on. In the financial markets you can never stop. The news just keeps coming…the absurd character keep popping up…the intrigues and sub-plots get denser and more confused.
And yet, it’s in the financial markets that the plot really matters.
A serious investor is probably better off with neither television nor newspapers to distract him. In fact, he would probably be better off never reading Markets and Money either. It would force him to pay attention to only what he actually knows or can find out. He might study a local bank, for example…meet its management, explore its ledgers, and parse its financial statements. He might find that it is a good investment – or a bad one. In so doing, he is much more likely to be right than the fellow who reads Barron’s and decides that it is a good time to get back into the bank shares.
But here at Markets and Money, we are not investors. Our job is to keep an eye on the financial news and try to make sense of it. It is a vast and confusing story; our mission is to try to keep track of the main plot.
Wednesday brought more complicating details. The Dow sold off another 109 points. Oil rose $3.44. The dollar was up slightly…still at $1.49 per euro. And the price of gold leaped up $16.90. The 10-year T-note rose to yield 3.94%.
We suggested a possible plot outline yesterday:
Boy meets girl. Boy and girl go on spending spree. Wall Street and Washington collude to cause them to spend more than they could afford and to go much further into debt than they should. Boy and girl can’t pay their debts; they’re losing their houses. The moneybags who lent to them are going bust.
Subplot: Meanwhile, on the other side of the planet, the foreigners who kept selling them gadgets and gizmos are running into trouble. So, they’re buying less stuff to make gadgets and gizmos with. And, wouldn’t you know it, the people who sell them stuff – oil, copper, coal and so forth – are also running low on cash, because the price of their stuff is falling.
As the curtain went down last week, it looked as though the whole world economy were sinking into a soft, slow, Japan-like mud.
The storyline seems solid enough. The facts seem to fit more or less. But we have a strong feeling that there are more twists and turns in this plot…and that, when the show is over, the story will turn out be very different.
In the first place, the boys and girls may be in bigger trouble than we’ve seen so far – and there may be more of them.
“Skies Darken for Retailing as Spree Fades,” says a headline in the Wall Street Journal . U.S. retail sales fell in July for the first time in five months. Rising sales were misleading anyway; they were more a reflection of higher prices and rebate checks than of an actual increase in either the consumers’ willingness or ability to spend more.
Meredith Whitney, one of the few professional analysts who foresaw the subprime crisis, says that the downturn will be more severe than people yet realize. One in ten households overextended itself in the bubble period, she points out. Bankruptcy, default, and foreclosure rates will inevitably worsen as these Jacks and Jills roll down the hill.
Toll Bros., one of the country’s biggest builders, announced that revenues were still going down.
Anyone waiting for the financial industry to return to the glory days of 2006 may have a long wait. As a credit-fueled boom turns into a bubble, it takes more and more lending to produce an additional increment of GDP growth. In the real boom years after WWII, it took about $1.40 worth of credit to produce $1 worth of GDP growth. The ratio rose sharply after the Reagan Revolution…and now stands at about $6 of credit to every extra dollar of GDP. Of course, that is why Wall Street made so much money – it was selling credit. But it’s also why that story is history; that show is over. As the cost of growth – in terms of credit – rises, so does the cost in terms of debt service. Even at 5%, the cost of $6 of credit is 30 cents per year. If it produces $1 of GDP growth, that extra output would need a 30% profit margin to break even. Not very likely.
And the good news just continues to pour in from the housing sector. RealtyTrac reported this morning that bank seizures of U.S. homes have risen 184% since the group began tracking this data in 2005. Banks have repossessed close to 3 times the amount of homes in the United States, when compared to last year’s stats.
One in four houses sold in America today is sold at a loss, says a report on CNNMoney. That totes up to a lot of losses for the whole financial chain…the homeowner, the mortgage company, the builder, the real estate agent, and the investor who bought a mortgage-backed security.
This epic rise in foreclosures is depressing home values throughout the country. The S&P/Case-Shiller index shows that home prices fell 15.8% in May.
Real estate website Zillow.com reports that in the year leading up to June 30, almost 25% of all homes sold in the United States pulled in less than the seller originally paid.
CNN.com reports: “In Merced, Calif., 63% of homes sold during the past 12 months brought in less than what the owner paid. Prices there have fallen 40% over the past 12 months and 56% from their 2006 peak.
“About 63% of sellers in Stockton, Calif., lost money during the same period, 60% in Modesto, Calif., 55% in Las Vegas and 38% in Phoenix.
“And the trend has worsened in recent months. In Merced, 74.9% of sellers took a loss when they sold during the three months ended June 30 compared with just 28.7% during the same period in 2007.”
The bottom is still not in view – Zillow.com says, “With $3.9 million unsold homes on the market, prices will have to come down even more before the market stabilizes.”
We can all agree that many things need to occur to stabilize the U.S. economy as a whole – and there may be more of these ‘supershocks’ to the system on the way.
While the United States may be in greater trouble than the markets realize, China may be in less. In other words, the slump in the West may not be so soft. In the East, it may not be in a slump at all.
Retail sales in the United States are falling, but sales in China are going up at 23% per year. Even after inflation, they’re going up at 15% – the fastest pace in 9 years. Sales of gasoline are increasing at a 55% annual rate.
Incomes are rising too – real, after inflation incomes are going up at an 8% annual rate.
In other words, maybe China is not slowing down very much, after all.
Remember, if these big, emerging economies can continue to grow, it will keep the pressure on prices for raw materials. This then makes the situation worse for Americans; they pay more for food and fuel…even as their incomes and assets fall in price.
Markets and Money