Monday, May 22, 2006

World Markets

Markets across the world have been collapsing, and I mean with major losses in many cases. And the weird part of it is that I have heard or read very little about it. And I certainly haven't heard of any reasons why it's happening.

I don't think it's just a correction of previous speculative excesses. The declines are too large for that. And the internal deterioration has been going on for too long. No, something else must be in the wind.

And suddenly, everyone is piling into what they must consider "the safest place to be" -- the currencies and even the US dollar.

But what about the broad, international weakness? Could it be this? Central banks the world over have been worrying about rising asset prices, with particular emphasis on housing. So far, the tightening has been working. I've been using charts to show subscribers that US building stocks have been "falling out of bed."

So question -- what if the housing picture in the US really turns bad? Remember, the US consumer has been the engine of growth for the whole world. If housing prices cave in, US consumers could turn pessimistic and cut back substantially on their spending -- they could (God forbid) even start to save. A US housing collapse could be deflationary and very painful -- and the resultant pain could spread across the face of the earth.

At any rate, I'm watching the US real estate picture very carefully. If US real estate is heading for a "hard landing," my prediction would be simply -- "Watch out!"

A correction of the real estate boom has started. The consensus is that real estate is in for a "soft landing." Alan Greenspan agrees with the "soft landing" position (why shouldn't he, he was responsible for the real state bubble in the first place?). But I'm not at all convinced that real estate is heading for a "soft landing." There's been too much questionable financing and far too much construction -- inventories of unsold homes and condos are now bulging.

My criteria of "whether housing is overpriced" is as follows -- if you buy a house, and you can't rent that house and cover all your expenses, then your house is overpriced (Martin Barnes agreed with me on this). In other words, renting today may be costly, but it's a bargain compared with buying a home


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