Friday, November 10, 2006

Getting to the bottom of this housing bust thing

Guambat's bottom tends to follow on behind him. I'm not sure what Greenspan has his finger on, but he's describing the housing market by saying "This is not the bottom, but the worst is behind us."

Meanwhile all those good home buyers, investors and owners have all evaporated, to be replaced by nar-do-well speculators. "Chief Executive Robert Toll said Thursday the company is seeing record cancellations now.... [S]peculative buyers are now walking away and giving up their deposit as the home comes to completion. [H]e said buyer confidence has declined with many "waiting for someone to tell them the housing market has bottomed"."

So, Greenspan ain't saying it's so, and if even speculators are not buying, you know damn well there is no bottom in the housing bust.

But Guambat won't be running around like Chicken Little saying "the roof is falling, the roof is falling", or will he?

Someone who has seen a whole lot more market history than Guambat might seem to think so, too. Dow Theory Letters' Richard Russell is quoted in this Peter Brimelow article as saying, "The consensus continues to be that housing is due for a 'soft landing.' ... I think it's going to be a very hard landing, one that will work a hardship on the entire nation." Brimelow also has some interesting things to pass on from others, and you should read his article.

Now, if housing hasn't bottomed, and if, as one bullish market mavin says in the Brimelow article, "We still have a super bullish relative valuation of the stock market...", what's a soon-to-be-poor investor to do?

Over in Minyanville, one of the Minyans says, " the end of the day, a “store of value” like gold may become the chief beneficiary of the official sector’s response to the housing bust." His rationale:
Thus far, the inflation in the system has merely “manifested” itself in higher commodity prices, but at some point, the market becomes conscious of what is happening. And when it does, that’s typically when “stores of value,” like gold, outperform basic commodities, which are not stores of value.

In 2000, when the tech bubble popped, it became apparent that the Fed would once again respond by printing money. What did the “smart guys” do? They bought real estate and housing stocks in anticipation that the Fed’s actions would create a bubble in housing.

Fast forward to today… the housing bubble has now unquestionably popped. How will the Fed respond? The answer is obvious. They will print money, just like they always do in response to problems, except this time there are no more asset bubbles left to blow.

Instead, all you are left with is an eventual collapse in the dollar. But since the dollar is also the world’s reserve currency, other paper currencies also derive their “value” from the purchasing power of the dollar. So, the dollar may not necessarily “collapse” against foreign currencies, although it will most certainly depreciate, as self-interest eventually forces foreign central banks to raise interest rates.

The true “collapse” will be in the dollar’s purchasing power and the purchasing power of other global currencies that hold dollars as their primary reserve asset, and the biggest collapse will likely be against a “store of value” like gold.

One never truly knows the answer to that question ["what are the smart guys doing?"] until after the fact, but I think a good case can be made that the “smart” trade at this point is to be long gold.

Being the dunderhead he is, Guambat has always felt, except when war is at the door, that gold is the last refuge of the scoundrel.


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