Is the dollar doomed?

I had the pleasure of listening to Dr. Ben Steil, Senior Fellow and Director of International Economics at the Council on Foreign Relations, speak at the New York Hard Assets Investment Conference about ten days ago on the subject of the U.S. Dollar, specifically, whether or not it is doomed.

They've put a transcript and recording up at the Resource Investor website that is well worth a look (note that the audio begins playing automatically.)

He didn't really answer the question posed in the the title of his speech, but it was sure interesting getting to the non-conclusion.

A lot of reporters ask me these days whether we're in the midst of a commodity bubble. In fact, next week I'm going to Washington to give a Senate testimony. Our good folks in Congress are examining whether we are in fact experiencing a commodities bubble driven by irrational speculation, and what we need to do about it.

My perspective is that the more interesting, and indeed more important, question to ask is whether we're at the end of what I would call a ‘fiat currency bubble.’ If we go back to the early 1980s, under the Volcker effect, inflation, and at least equally importantly inflation expectations, were driven out of the system through a pretty ruthless policy of very tight money, high interest rates.
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In the 1990s, I'm sure many of you remember that central banks around the world sold off most of their gold reserves, and said, “We don't need this anymore. We don't need hard assets. We've got a hard U.S. dollar, managed by a responsible central bank. The stock pays interest. Gold doesn't pay interest. We don't need this stuff anymore.”

Now, fast-forward to today, and what do we have? Is this Federal Reserve dedicated to price stability? Well, we have a Fed Funds Rate at 2%. We've got consumer price inflation at 4%; wholesale price inflation at 7%; a broad measure of U.S. money to supply growth. M3, interestingly enough, is no longer calculated by the Federal Reserve. We rely on private estimates going at around 17%. It is not surprising that people around the world are beginning to lose faith in this fiat dollar.

So I think it's a mistake to characterize what we're seeing now as somehow a commodity's bubble. It may be in the grand historical sweep of things a return to normality; that may not be necessarily a good thing. The world of a responsible fiat dollar may very well be very desirable for all of us. But we have to ask, given the broad sweep of history, whether that's really possible.

In testimony before Congress a few days ago, Dr. Steil took much the same tack citing fundamental factors such as supply and demand along with declining inventories that were more likely responsible for recent commodity price increases.

What he probably should have said was that right-thinking people with lots of dollars now realize they might be better off trading in a goodly portion of those dollars for something that holds its value a little better.

To learn more about investing in natural resources using commonly traded ETFs, stocks, and mutual funds, see this description at Iacono Research. Or, sign up for a free trial.

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Oil and gold contest update #2

This is update #2 for the mid-year oil and gold contest - it's been an interesting two weeks since the initial update and some of those oil guesses don't look all that crazy anymore. For this update, the price of oil is pegged at $132 per barrel and gold at about $924 per ounce. When it gets down to the end, the New York closing prices will be used to eliminate any question in determining a winner.

As it stands today, Atox has a combined error of just 1.41 percent, followed by Linda M and AWC both of whom are under 4 percent combined error. It's too bad that there are more than five weeks left to go for these contenders.
Perennial favorite tj and the bear is not far off in 9th place, needing about a $50 bump in the price of the yellow metal, and your humble scribe is in 16th place with a bold guess of $140 for crude oil.

The winner receives a free one-year subscription to Iacono Research where the model portfolio is now up about six or seven percent on the year after this week's gains.

Gains this week you say?

Yes, gains.

The model portfolio performance thingy in the left sidebar will be updated in a few hours with the exact figures.

To learn more about investing in natural resources using commonly traded ETFs, stocks, and mutual funds, see this description at Iacono Research. Or, sign up for a free trial.

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Fiat money and silver coin quotas

In all the fuss about soaring commodity prices lately, it's easy to lose sight of the fact that "price" has two variables - money (e.g., dollars) and goods (e.g., a barrel of oil). Far too little attention has been paid to the numerator in this equation (dollars) when seeking to explain why prices (dollars divided by goods) have moved upward so sharply.

Further, the value of the U.S. dollar relative to other paper money has made the discussion unnecessarily complicated. Asking, "How could the price of oil triple while the value of the dollar has fallen by just 40 percent against the euro?" just confuses the issue.

No major currency is backed with anything other than a promise by the issuing government to act responsibly and therein lies the problem.

Nowhere is this problem more evident than in the announcement that the U.S. Mint has now imposed quotas for silver eagles.

In one of the most hubristic moves ever by a government - as a sort of bold proclamation that fiat money will endure forever, no matter how much of it the government creates - for many years now, the mint has manufactured silver and gold coins with market values far in excess of their fixed face value.

One dollar silver coins sell for $19 or $20 in coin shops or online at eBay. Similarly, a $50 gold coin (still accepted as legal tender at its face value) now fetches more than $900 on the open market.

People are beginning to figure out that there is something seriously wrong with this math.

This report($) in the Wall Street Journal provides the details on the new quotas:

The government rationed food during World War II and gasoline in the 1970s. Now, it's imposing quotas on another precious commodity: 2008 dollar coins known as silver eagles.

The coins, each containing about an ounce of silver, have become so popular among investors seeking alternatives to stocks and real estate that the U.S. Mint can't make them fast enough. In March, the mint stopped taking orders for the bullion coins. Late last month, it began limiting how many coins its 13 authorized buyers world-wide are allowed to purchase.

"This came out of nowhere," says Mark Oliari, owner of Coins 'N Things Inc. in Bridgewater, Mass., one of the biggest buyers of silver eagles. With customers demanding twice as many as they did last year, Mr. Oliari would like to buy 500,000 a week. But the mint will sell him only around 100,000.

The coins have a face value of $1. But the mint sells them for the going price of silver, plus a small premium, to a handful of wholesalers, brokerage companies, precious-metals firms, coin dealers and banks. The dealers mark the coins up a bit more and sell them to the public. Currently, the coins are fetching about $19 apiece, with some sellers seeking more than $20.

This is an interesting twist on Gresham's Law that posits "bad money will drive good money out of circulation" - individuals are increasing taking their "bad money" (U.S. dollars) and exchanging it for "good money" (precious metals) in a shocking example of how people aren't as dumb as the government might hope.

To learn more about investing in natural resources using commonly traded ETFs, stocks, and mutual funds, see this description at Iacono Research. Or, sign up for a free trial.

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Housing market "better positioned for a turnaround"

The National Association of Realtors reported lower sales volume, higher inventory, and a year-over-year price decline of 8.0 percent but maintained that the housing market is "better positioned for a turnaround".
As long as sales continue to decline, inventory continues to grow, and prices continue to tumble, the "positioning" should continue to get even better in the months ahead. In fact, you might say that the "positioning for a turnaround" has improved almost every month for more than two years now.

We just might reach optimal "positioning" sometime next year.

The realtors' trade group reported a one percent decline in the sales of existing homes from March to April, a 17.5 percent decline from year ago levels. Inventory now stands at an all-time high of 11.2 months and the median sales price has fallen from $219,900 last year at this time to $202,300.

"It's a great time to buy or sell a home"

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This is what five dollar gas looks like

Via the L.A. Land blog - they say this is from Death Valley so it doesn't really count, but this is what it will look like someday in other areas.

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Oil, peak oil, that is

Today's front page story (it's free!) in the Wall Street Journal describes how the International Energy Agency has taken one step closer to embracing peak oil:

The world's premier energy monitor is preparing a sharp downward revision of its oil-supply forecast, a shift that reflects deepening pessimism over whether oil companies can keep abreast of booming demand.

The Paris-based International Energy Agency is in the middle of its first attempt to comprehensively assess the condition of the world's top 400 oil fields. Its findings won't be released until November, but the bottom line is already clear: Future crude supplies could be far tighter than previously thought.
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But the direction of the IEA's work echoes the gathering supply-side gloom articulated by some Big Oil executives in recent months. A growing number of people in the industry are endorsing a version of the "peak-oil" theory: that oil production will plateau in coming years, as suppliers fail to replace depleted fields with enough fresh ones to boost overall output. All of that has prompted numerous upward revisions to long-term oil-price forecasts on Wall Street.

Not coincidentally, for those of you new to the subject, the folks at The Oil Drum are re-running their series Peak Oil - Whom to Believe?

If you're like me, you might have spent a moment or two in recent months pondering how billionaire oilman T. Boone Pickens, oil banker Matthew Simmons, and many others are suggesting that the world is reaching Peak Oil now, and at the same time, Cambridge Energy Research Associates (CERA) headed by Pulitzer Prize writer Daniel Yergin, and others such as Exxon Mobil, are not predicting a Peak in global oil production until circa 2040 followed by a slow gradual decline. How can such smart and successful people disagree by decades on a topic so vital?
Is it possible they use different data sources? Do they mean different things when they say "Peak Oil"? Do they get different secret handshakes from Saudi princes? Do they have different agendas? Are they using different boundaries of analysis? Is one of them kidding? This 3 part post will address how people can differ so much on something so important as a peak and subsequent decline in world oil availability, addressing both factual and psychological reasons. Does the world have plenty of oil? Maybe, but as I will discuss below the fold, this is not among the questions we should be asking.

Both are worth taking the time to read - much of the explanation for the $130-$135 now required to buy a barrel of oil is contained therein.

To learn more about investing in natural resources using commonly traded ETFs, stocks, and mutual funds, see this description at Iacono Research. Or, sign up for a free trial.

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An "ad-lock" for LifeLock?

Maybe this Associated Press report detailing pending lawsuits and something less than "comprehensive protection" for its founder will result in some sort of an "ad-lock" for one of the most annoying promotional campaigns in recent memory.

Hi, my name is Todd Davis and I have a virtually unlimited advertising budget that has enabled me to claim the title "most irritating pitchman in 2008".
Really, how many full page ads in newspapers and magazines can one start-up company afford? It's clear that, in order to be successful in the consumer products business, promotion is much more important than product (this is a shining example), but don't radio stations limit how often the same ad can be repeated?

Hi, my name is Todd Davis and my social security number is ...

The AP report provides the details:

Todd Davis has dared criminals for two years to try stealing his identity: Ads for his fraud-prevention company, LifeLock, even offer his Social Security number next to his smiling mug.

Now, Lifelock customers in Maryland, New Jersey and West Virginia are suing Davis, claiming his service didn't work as promised and he knew it wouldn't, because the service had failed even him.

Attorney David Paris said he found records of other people applying for or receiving driver's licenses at least 20 times using Davis' Social Security number, though some of the applications may have been rejected because data in them didn't match what the Social Security Administration had on file.

Davis acknowledged in an interview with The Associated Press that his stunt has led to at least 87 instances in which people have tried to steal his identity, and one succeeded: a guy in Texas who duped an online payday loan operation last year into giving him $500 using Davis' Social Security number.

According to one of the interview subjects in the story, LifeLock charges $10 per month to set up alerts with credit bureaus, something that consumers can do for themselves at no charge.

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Bluntly assessing the economy

So, we're going to "bluntly assess the economy" a couple weeks from now down in Long Beach - the folks at Reuters/AdvicePoint were kind enough to create the graphic that will appear in the right sidebar for the next week or so.
I don't know who the other participants are for the panel that I'll be on titled "Stepping into the Financial Blogosphere" but I'll find out later today - it should be a fun event.

This will be my first return to Southern California since our move northward almost exactly one year ago - I think our remote control for the entrance to the gated community in Ventura County where we used to rent should still work, so maybe we'll grab the latest foreclosure listings and have a look around the old neighborhood.

It always cracked me up to see people doing crazy things with borrowed money like tearing out perfectly good, brand new driveways to replace them with equally functional ones that better matched the landscaping theme they so desired.

It's much easier to "bluntly assess" the 2005-2006 economy than the current one, but I'll give it my best effort.

On a related note, apparently, things went well enough in New York that the folks at the Hard Assets Investment Conference have already asked me to speak at the next gathering in Las Vegas this September.

I understand it's lovely that time of year in Sin City.

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Five dollar diesel

We saw this when we were out the other day but didn't have a camera ready to snap a picture.

A reporter for the local newspaper apparently did have a camera at the ready when they drove by as what you see to the right showed up in yesterday's afternoon edition.

In Tuesday's California SUV fill up index at $4.00, the imminent appearance of the number five was alluded to - just when residents of the Golden State were getting used to looking at 4's across the board, up pops a new and very odd looking figure for their brain to wrestle with.

Most of you probably remember the period after the 2005 hurricanes when retail gasoline prices first breached the $3 level - gas stations were running short on 3's for their signs and in some cases had to make do with magic markers.

There hasn't seemed to be a similar problems with 4's - maybe they ran short in Southern California, but not around here.

Have they already ramped up production and placed orders for 5's? This gas station owner may have had his sitting around for a while and with diesel recently at $4.89, maybe he just thought, "What the heck? I'll put it up just to see how it looks".

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Software engineers blamed for credit crisis

As a former software engineer (the real kind, not the "Microsoft Certified" variety that I understand has denigrated that title in recent years) I couldn't resist writing the headline you see above.

It came after reading this story in the Financial Times about a coding error at Moody's that resulted in incorrectly rating CPDOs (not to be confused with C3POs):

Moody’s awarded incorrect triple-A ratings to billions of dollars worth of a type of complex debt product due to a bug in its computer models, a Financial Times investigation has discovered.

Internal Moody’s documents seen by the FT show that some senior staff within the credit agency knew early in 2007 that products rated the previous year had received top-notch triple A ratings and that, after a computer coding error was corrected, their ratings should have been up to four notches lower.

News of the coding error comes as ratings agencies are under pressure from regulators and governments, who see failings in the rating of complex structured debt as an integral part of the financial crisis. While coding errors do occur there is no record of one being so significant.

They should have done more thorough code reviews - latent defects are much more costly than most deadline-obsessed managers realize. I should know - I had a few doozies in my day (yes, both latent defects AND deadline-obsessed managers).

In the case of Moody's, however, the managers may have been obsessed with more than just deadlines.

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Good sources in "Bad Money"

The mention of the Mortgage Lender Implode-O-Meter in the introduction of Kevin Phillips' new book Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism was a good sign of what might lie ahead. Then there was the early reference to the work of John Williams at the Shadow Stats website and liberal use of his findings later on.

In the recent article at Harpers Barry Ritholtz was mentioned, his "inflation ex-inflation" meme picked up as a central element in Numbers Racket: Why the Economy is Worse Than We Know.

But it was something of a surprise to see the chart below show up on page 86 in this new book that is opening the eyes of many across the land (see How owners' equivalent rent duped the Fed at Seeking Alpha).
The chart looks much better in color, as shown below, which reminds me that I'm seriously delinquent in updating that series of charts that have the Case Shiller Home Price Index laid up against all kinds of other economic data with interesting results.

Here's the accompanying text from Bad Money on the issue of owners' equivalent rent and the Consumer Price Index. This follows the section on the mid-1990s changes for hedonic adjustments and geometric weighting that relies on the work of John Williams.
Mish (Michael Shedlock) of Mish's Global Economic Trend Analysis was also quoted later in Chapter 3 - Bullnomics - which is as far as I've gotten.

Yesterday brought this story in MarketWatch where Paul Farrell credits Kevin Phillips with pulling back the veil of the economic data, noting that "most economists are quiet, working for the conspiracy".

An interesting conclusion indeed - I always thought "unwitting accomplice" was a better characterization than "co-conspirator". There are about 500 comments on this story at MarketWatch with some interesting perspectives.

All it took was $4.00 gasoline for people to finally notice.

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The "gloomiest newspaper" competition heats up

Yesterday's New York Times story about repossessing pleasure craft is well worth reading to learn about what happens when boat owners default on their loans, but it also contained a few gloomy assessments of the current state of the U.S. economy.

The Times seems to be in competition with the Wall Street Journal for the "gloomiest" newspaper of them all (see Monday's post The gloomiest newspaper).

To wit, note the opening paragraph:

So many people have so many things they can no longer afford. This is an excellent time to be a repo man.

Yes, the end of the debt-fueled consumption binge is becoming conventional wisdom, but you don't often see it presented in such a glib manner in a major newspaper.

And speaking of things people can no longer afford, we visited a nearby open house over the weekend and the owner was there to greet the few potential buyers that trickled in. This was a custom (and somewhat very odd) design that probably held very little appeal for most buyers.

The owner noted that they designed and built it as their "dream home" but they can no longer afford it - any reasonable offer was being entertained (i.e., they are desperate to get out from under it).

As in the New York Times piece, it was an interesting choice of words - that many people "can no longer afford" these things. As if they could afford them at one time? When home prices moved in only one direction?

Anyway, back to the competition:

Some people lose their house or their boat to abrupt setbacks: illness, job loss, divorce. Mr. Dahmen, who works as a technology manager for a car manufacturer, belongs to a second, probably larger group: he simply spent beyond his means. He is one of the millions of reasons the consumer-powered American economy did so well for most of this decade, and one of the reasons its prospects look so bleak now.

The mainstream media is certainly catching on but they are obviously still struggling with the whole notion that a debt-based, consumer-driven economy is fundamentally flawed.

By some metrics, the U.S. economy has done well over the last ten years, but when factoring in the asset value/debt level tango that is once again turning into a very wicked dance, maybe it wasn't such a great idea to stake the entire future of the country on perpetually rising asset prices that would forever outpace the expansion of credit and debt.

How can an over-indebted, over-consuming individual be one of the key factors in an economy that "did so well" earlier in the decade AND a reason for things to "look so bleak" now?

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Greenspan spots bubbles in real time for Pimco

According to this report from Bloomberg, former Federal Reserve Chairman Alan Greenspan was able to not only identify a bubble in real time but predict its demise with sufficient accuracy to assist new employer Pimco in profiting handsomely.

Chief investment officer Bill Gross noted that the company made "billions" of dollars from his advice.

Interestingly, this stands in stark contrast to the repeated claim while Fed chairman that it is impossible to detect bubbles until after they have popped.

During a 30-minute discussion on banks several months before the global credit crisis, Greenspan's "brilliance in terms of forecasting the potential for exactly what happened was a big money saver for us," Gross said yesterday at a conference organized by the Asia Society in Los Angeles. "He's made and saved billions of dollars for Pimco already."

Another of the Maestro's major clients in his new consulting business is John Paulson of Paulson & Co., a hedge fund that made billions betting against the subprime mortgage market not long ago (see this WSJ story for details).

When do they start writing the history books for the current period?

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Didn't we learn anything over the past two years?

The funniest thing about the recent developments at Fannie Mae and Freddie Mac - where they were recently given the go-ahead to fund more loans, in larger amounts, with relaxed lending standards - is that this is where all the housing problems started back in 2003.

After much hand-wringing when neither firm could produce understandable financial statements and the OFHEO threw up their hands before Congress claiming there was no way to effectively regulate the "Government Sponsored Entities", at the urging of former Fed Chief Alan Greenspan, much of Fannie's and Freddie's work was outsourced to Wall Street.

Everyone knows what happened next...

Oddly, this was the only "systemic risk" that the Maestro ever admitted to seeing in his 18+ year term as Fed Chief - too much government involvement in mortgage securitization.

Caroline Baum at Bloomberg takes note of the recent developments and we pick up the story after the amusing Fannie Mae fairy tale introduction:

Fannie announced it will now accept mortgages with a loan-to-value (LTV) ratio of up to 97 percent on a primary, single-family residence, even in areas where prices are declining.

"I'm not even sure this makes sense as public policy," says Michael Carliner, an independent housing economist in Potomac, Maryland. "Fannie should be making loans, but the underwriting standards shouldn't be lowered to that extent."

Just think about it: With home prices in a handful of hard- hit areas of California and Florida down 10-15 percent last year, according to data from the Office of Federal Housing Enterprise Oversight, or Ofheo, Fannie's regulator; and with widespread expectations that prices will continue to fall to attract buyers, Fannie Mae is loosening down-payment requirements when a house in these areas could be worth less than its loan value in a matter of months?
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"We are able to adopt this new, national down-payment requirement, even in markets where home prices are declining, because our new automated underwriting risk assessment model DU Version 7.0 will limit risk layering and assess each loan more precisely," the company said in a statement.

I wouldn't know model DU Version 7.0 from model DU Version 6.0. It's still a model that uses information about the borrower and the property to determine the viability of a loan. Falling home prices, which can eliminate that 3 percent equity stake in a jiffy, aren't one of the inputs. (Fannie has other models that forecast house prices.)

Didn't we learn anything over the past two years?

No.

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The California SUV fill up index at $4.00

Well, we had our first $75 fill up the other day when we opted to go with the $4.05 regular for a full tank rather than putting in just enough to get us to the lower priced petrol at Costco next week. It's hard to believe that, when the SUV fill up index was started back in August of 2005, gas at $2.70 a gallon was a big deal.


While the national average reportedly reached $3.79 per gallon yesterday and in the state of California the price dipped slightly to $3.96, it's fours-across-the-board around here except for places like Costco and some ARCOs.

It won't be long until you start seeing diesel with a 5 handle in the Golden State. With prices down the road already at $4.89 per gallon and with no relief in sight until well into the summer (if then), it seems inevitable.

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Gen X, Gen Y, debt, and savings

This USA Today story kind of misses the whole point about Gen Xers by starting out with a 30-year old lawyer and his soon-to-be MBA wife who are struggling with college debt.

Generally defined as those individuals now 27 to 43 years old, Gen Xers are far better represented by the millions of 40-year old spendthrifts who are just now realizing that their home isn't going to do all the heavy lifting for their retirement savings.

Of course, the current problem for all generations is the debt that they have all accumulated and Gen Y - from 11 to 25 years old - may be best prepared for the future simply because they've had less time to borrow and spend.

"One of the biggest issues facing the Gen Xers," observes Pam Hess, director of retirement research at Hewitt Associates and a Gen Xer herself, "is lots of competing priorities, juggling lots of different costs and financial priorities. It will continue to be a struggle."

Consumer debt is one of the main reasons. Nine out of 10 consumers in their 30s are in debt, compared with 76% of those in their 20s, according to the Federal Reserve's Survey of Consumer Finances. In a recent Charles Schwab study of more than 2,000 Gen Xers nationwide, 45% of respondents said they had too much debt to think about saving.

Gen Xers also are the first generation to graduate from college with significant student loan debt. About 20% of adults in their 30s are still paying college loans, according to the Federal Reserve study; the median balance exceeds $13,000. Yet, even as Gen Xers continue to grapple with college debt, experts tell them they need to be putting aside money for retirement, as well as for college savings for their children.

While it it true that college debt is much more significant than, say, 20 years ago, the twenty-something that duly saves for retirement is an odd-bird indeed. What little discussion of retirement planning you get while still in or just out of school seems to go in one ear and out the other and understandably so.

Who wants to think about retirement when you've just started to work?

However, if you're not beginning to think about long-term financial planning by your mid-thirties or early-forties at the latest, then you are setting yourself up for a big disappointment later in life, which is basically what most people are going to get.

While an excellent development for the bottom lines of corporations, replacing fixed benefit pensions with fixed contribution 401ks and IRAs is not the way to ensure sound retirements for the many millions of Americans who have become accustomed to spending more than they earn.

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SoCal real estate in April: rising sales, flat prices

A short time ago, DataQuick reported on Southern California real estate sales for the month of April. Now two months into the spring selling season, sales have rebounded, but prices remain under pressure, holding about even from last month.
It's all about foreclosures now and how aggressively banks price their inventory. Almost 38 percent of the overall sales were the result of a foreclosure, up slightly from last month and up from only about 5 percent a year ago.

More than half of the homes sold in Riverside County were foreclosures, explaining much of what you see below as prices dipped 28 percent on a year-over-year basis for both Riverside and San Bernardino.

Price declines in our old stomping ground of Ventura County have pulled back a bit after having taking the lead down a few months ago.Marshall "almost all if not all of those gains are here to stay" Prentice, President of DataQuick, had these comments on the April data:

Quite a few more buyers stepped off the sidelines last month to snap up homes at substantial discounts relative to the market's short-lived peak. It's no surprise, given the magnitude of the price declines in inland areas and the fact sales have been so amazingly low for so long. We continue to look for evidence of a sales bounce in the mid-priced and higher-end markets along the coast. If the higher conforming loan limits are making a difference in those areas it's certainly not a large one, at least not as of the end of April.

Sales levels are quite low compared to the boom years. The March-April rebound doesn't even rise to the levels of the January-February "doldrums" going back at least through 2003.
The sales and price data for the next few months should be quite interesting - how aggressive banks are in pricing their properties for sale and how willing buyers are to step in and take a chance.

In our new Northern California neighborhood, foreclosures that are priced aggressively sell very quickly.

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The gloomiest newspaper

The mainstream financial media is, if anything, perplexing. During Larry Kudlow's show on CNBC last Wednesday where Barry Ritholtz was "thrown to the bulls", Larry had the following to say about the Wall Street Journal:

...on the front page of the Wall Street Journal which has been practically the gloomiest newspaper - not the editorial page, but the news part...

Another memory from last week came trickling back upon watching the CNBC video, a video clip that stands as a stunning testament to just how bullish this one part of the mainstream financial media has been and will probably always be.

During our chat last week, Barry commented something to the effect of:

Remember that CNBC is not business news, it's entertainment.

The subject of market sentiment, CNBC, and the Wall Street Journal made something of a nexus this morning after sitting through the Kudlow segment following the reading of the Money & Investing section of the WSJ.

Two stories (both behind the subscription wall) stand out:

This Stock-Market Rally Is a Keeper ... or a Tease
By E.S. BROWNING
May 19, 2008; Page C1
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People like Eric Bjorgen of Leuthold Group, a money-management and research firm in Minneapolis, are wondering whether this rally is something they can invest in for the medium term or just a bear-market bounce that will soon fade.

To figure that out, Mr. Bjorgen looked at 10 past stock recoveries. He wanted to know what kinds of stocks usually are strong when the market recovers from serious trouble, and whether those groups are leading today. He discovered some anomalies.

Over the past 60 years, market leaders at the start of lasting recoveries often were stocks tied to consumer spending: hotels, resorts, cruise lines, general-merchandise stores, banks, home builders. Investors were betting on a rebound in consumer spending.

This time, only a handful of those groups are leaders, including consumer-finance companies, home-furnishing stores and Internet retailers. More of the leaders are heavy-industry groups that usually rally late in bull markets, notably those tied to coal, steel, fertilizer, oil and industrial gases.

Mr. Bjorgen says he fears that investors are looking backward. They are showing confidence in the areas that were strong late in the past bull market because of the robust global economy.

And in the Ahead of the Tape column:

Stalwart P/E Shows Stocks Getting Pricey
May 19, 2008; Page C1
By MARK GONGLOFF

Stocks have had a nice run these past couple of months. The downside: They may no longer be a bargain.
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One view of P/E offers a warm blanket to the bulls: The Standard & Poor's 500-stock index trades at 15 times forecast operating earnings this calendar year. But that's not much of a deal when compared with the 60-year average of about 12, according to various estimates.

And earnings forecasts for the remaining months of this year are probably optimistic, as they assume a quick and roaring recovery amid an economy barely scraping by. Lower those forecasts, and the forward P/E ratio rises.

Other takes on P/E lead to a still-more-bearish conclusion. When measured against the past 12 months' reported earnings, the S&P 500's P/E ratio jumps to about 21, above its 60-year average of roughly 16.

Entertainment versus solid financial reporting - perma-bulls versus gloomy pragmatism - an interesting contrast.

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Let the prices fall

Wow! Even Lawrence Yun, the Chief Economist for the National Association of Realtors, is getting on the "let's get the price declines over with" bandwagon.

In this fine LA Times report by Maura Reynolds, when asked about plunging home prices, the usually upbeat Yun noted, "Peak to trough, we'll be looking at 20% or even greater" and then continued with, "Because the prices are going down so fast, we'll be hitting the stabilization point sooner".

When you think about it, maybe it does make a lot of sense to encourage the downward move in asking prices - stubborn sellers certainly aren't going to wake up to this reality without the help of the real estate sales industry and six percent of something is a lot better than six percent of nothing.

The Times report covers all the bases on the growing realization that maybe it would be best if home prices were allowed to reach more reasonable levels sooner rather than later.

The hard truth is that the housing correction is turning out to be deeper and longer than nearly anyone anticipated. And that's bad news, not just for homeowners and would-be home buyers but for pretty much everyone.
With every month of lower home prices, homeowners see their net worth decline. Potential purchasers are paralyzed by a lack of financing and by the fear that if they buy before the market hits bottom, they will lose money too.
...
Thomas Lawler, a housing economist who runs a consulting firm in Leesburg, Va., noted that in the last housing price correction, which occurred in the early 1990s, it wound up taking prices seven years to drop 20%. Compared with that protracted slump and recovery, he thinks the current free fall in home prices is a good thing.

"Do you want a slow bleed?" Lawler asked. "Wouldn't it be nice to just get it over with? It might be that that's what we're seeing."

The latest DataQuick real estate sales figures for Southern California should be out in the next day or two.

Who knows what's in store for the month of April. Here's what it looked like as of March.

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Conversations with father

Last week was very much of a whirlwind - one day quickly expiring and leading into the next without allowing sufficient time to reflect on what had happened.

Recollections of conversations now come drifting back after the pace has slowed and a normal schedule resumes.

Two such conversations were with my soon-to-be 80-year old father on the changes that have occurred over the generations with the younger crowd.

Seventy-some years ago he started working as a paper boy earning a whopping 5 cents per week. As was the custom during that era, one or two pennies went to his family and he kept the rest.

When I was a teenager, working part time, particularly during the summer months, was about the only way that one could afford to buy their own car (or at least make the required sizable contribution toward one) and fund other expenditures.

Today, teenagers come from eastern Europe by the thousands to work along the east coast every summer because many of the younger crowd couldn't be bothered with slaving away for minimum wage.

Times sure have changed.

Dad also takes particular pride in telling the story about how his son insisted on paying back money borrowed to finish up college twenty-some years ago. At first the elder Iacono refused the monthly remittances but the son insisted on making regular payments for more than five years.

When the story is told today, the listener usually stares in disbelief as freely flowing home equity money has helped to make expensive college educations seem a birthright.

Times sure have changed.

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The "Ownership Society" in reverse

While Robert Shiller is normally dead-on when it comes to most aspects of the nation's housing market mess, he makes one critical error in his Sunday op-ed piece in the New York Times.

Dr. Shiller noted, "No one is likely to starve or sleep on the streets as an immediate result of a foreclosure, and the authorities no longer dump a family’s furniture on the sidewalk when it happens. Nonetheless, there is deep trauma."

As noted in the comments section of the last post where a reader left this link to a CNN video report, that does not appear to be the case in Santa Barbara. Unless, of course, there is a meaningful distinction between "sleeping in your car" and "sleeping on the street".
Poor Barbara lost her job in the mortgage business and then lost her place to live. The 67-year old now sleeps in the back of her car in a "women's only" parking lot set up by the city of Santa Barbara and her kids worry.

While it was not clear whether Barbara or the other ladies were former homeowners, there must be at least a few foreclosure stories further south in Ontario where the homeless numbers are growing.

This LA Times report notes the efforts of the City of Ontario to reduce their "tent city" from over 400 to about 170 by allowing Ontario residents only. Surely, some former subprime borrowers populate these ranks.

Back to Dr. Shiller's NY Times piece:

Homeownership is fundamental part of a sense of belonging to a country. The psychologist William James wrote in 1890 that “a man’s Self is the sum total of all that he CAN call his, not only his body and his psychic powers, but his clothes and his house, his wife and children, his ancestors and friends, his reputation and works, his lands and horses, and yacht and bank account.”

Homeownership is thus an extension of self; if one owns a part of a country, one tends to feel at one with that country. Policy makers around the world have long known that, and hence have supported the growth of homeownership.

MAYBE that’s why President Bush’s “Ownership Society” theme had such resonance in his 2004 re-election campaign. People instinctively understand that homeownership conveys good feelings about belonging in our society, and that such feelings matter enormously, not only to our economic success but also to the pleasure we can take in it.

But we are now seeing the president’s Ownership Society plan operate in reverse. Already, the homeownership rate has fallen — from 69.1 percent in the first quarter of 2005 to 67.8 percent in the first quarter of 2008. That’s almost back to the 67.5 percent level where it stood when Mr. Bush took office in 2001. And it is likely to fall further.

The pain of this reverse movement could leave a psychological scar that will be with all of us for the rest of our lives.

It's funny (and now sad) that so many new homeowners in the last few years thought that they somehow "owned" the home they purchased when in reality all they really owned was a debt obligation that many really didn't understand.

ooo

This week's cartoon from The Economist:

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