Dear CR

I am sure you have seen these reports from the Wall Street Journal. That seem to belie the report from Lennar

Economy Poised For '07 Rebound, Forecasters Say
Weakness in Housing, Manufacturing Is Likely To Take a Lighter Toll

And

End of Housing Slump Seems to Be Drawing Near

The question might be does the strength in the services industries more than compensate for weakness in manufacturing and housing?

Thanks

ac wrote:
"All the Wall Street economists are saying housing is bottoming out going to be fine in 2007.

Who you gonna believe?"

I enjoyed your sarcasm, so let me reply with a straight face. Generally, I place more reliance upon the statements of those who might face criminal charges or the loss of a career if they make unfound projections. Let me see - post Sarbanes-Oxley, that would be the executives in the homebuilding companies, wouldn't it?

"For anyone who has tuned into the ongoing infomercial that is CNBC as of late, and actually allowed the volume to be turned up, you already know that the favorite pastime of so many of the current commentators spewing "information" on this media platform has now become calling the bottom for the housing cycle. Without question, we fully expect this to continue throughout the year to come and perhaps well beyond. For as you know, we witnessed exactly the same experience six short years ago in yet another asset class when headline and mainstream commentators repeatedly attempted to call the bottom for the tech cycle and its related stocks. But we all know, or should know, how and when asset class cycles truly bottom, right? They bottom when no one is any longer calling for the bottom. They bottom in silence."

Market Observations

Seems right to me.

The question might be does the strength in the services industries more than compensate for weakness in manufacturing and housing?

If the services sector keeps growing, then I think in general the economy does fine (I think it represents 80% of the economy).

The problem as I see it is that the US consumer has made a leveraged bet on real estate which seems to be going bad now - house prices are falling, so far with no end in sight. The argument that "the negative savings rate is OK because consumer asset values are increasing so much" suddenly doesn't hold water.

If we begin to see consumer and lender retrenchment due falling house prices and loans going bad, I think that will cause the service sector to contract.

To put it another way, what may be the biggest asset bubble in history is now bursting. I have a hard time seeing how this will end in a "soft landing."

Bottoms happen when no one is willing to sell at a lower price. What we do not know is what price that is going to be and when that is going to occur. Most likely it will be a regional event. For the most part homeowners have yet to lower their prices as they are still in the denial phase, hense, it may be some time before the bottom happens.

Could you please describe the process of moving this money from the CFB's to consumers. Will it be a direct deposit from the Bank of Japan into a household's chequing account? What kind of collateral wil consumer put up if it is a loan from the Bank of China or any other lender for that matter?

You're such a party pooper, kris b. Why I'll bet that if you went over to someone's house and saw an elephant standing in the middle of the living room, you'd say something like: "What's that elephant doing here?"

;>)

Dear kris b

First let me state: I think the downside risks to this insane party are more numerous than any upsides.

But I think the Chinese/Japan and other Asian countries and at least Saudi Arabia are locked into a currency cross flow/money game with the U.S. right now.

See

Investors Riding the 'Cash' Rapids - WSJ.com

Investors Riding The 'Cash' Rapids Plenty of Money Available,
Much of It in Riskier Markets

And

Steven Pearlstein - Of Public Debt and Private Wealth - washingtonpost.com

Of Public Debt and Private Wealth

Not saying it is healthy but I think we might be surprised at the lengths these countries will go to keep the U.S. supplied with easy credit and out of financial chaos, at least with the current power structures in place.

The thing about elephants is that they are hard to move…but just imagine the pile they leave behind.

Regards,

umber2son:

I was comparing management styles, not product quality. From the standpoint of quality and aesthetics, virtually all tract housing makes me cringe. It also fails to meet my structural requirements since I frequently have one or more elephants standing around in my living room.

"Bottoms happen when no one is willing to sell at a lower price."

Don't be silly, transactions are a game between a buyer and a seller, and the buyer gets his say too.

Bottoms (conversely tops) happen when buyers are willing to buy at the lowest price sellers are willing to sell at.

If it was up to the sellers then prices would max hold, and we wouldn't have seen a 4% price drop thus far.

Regarding foreign entities floating the consumer, you have it backwards, the US consumer is floating foreign entities by buying their stuff. In exchange we give them dollars, which they have to do something with, which is eventually recycle back into US assets. Not much use otherwise.

Sure they can trade it for, say, oil with another foreign entity. But then what is that guy going to do with it? Put it in Treasuries.

kris b wrote:
Could you please describe the process of moving this money from the CFB's to consumers. Will it be a direct deposit from the Bank of Japan into a household's chequing account? What kind of collateral wil consumer put up if it is a loan from the Bank of China or any other lender for that matter?

They will buy treasuries, agencies and corporate bonds which will make it possible for people to continue to work for the federal govt, FNME to buy mortgages and zombie corps to continue walking.

kris b

I think the whole thing is crazy but in theory here is how it can work.

When there is too much money/capital sloshing round out there, it chases yields/interest rates. Because there is so much money, the interest rates drops-standard market thingee-the sellers of money outnumber the buyers so the rates drop. As the rates drop, deals that are not viable at rate X are viable at rate Y. The folks with the gushing money have to do something with it so take the Deals Y, then Deal Z and Z1, Z2 because the money has to be put to some investment.

So accounting for risk and interest, the quality of the deals keep on diving.

Now for Mr. joe sixpack, who borrows too much, he can default on his loans, well the creditors of joe, have derivatives that 'insure' them against loss. So now they have that plus all the other money to invest, but the deals keep on deteriorating so now they lend to joe sixpack again on a new loan, thus putting more money in his pockets.

Kinda like watching a shell game. Too much money funds both risky loans and the insurance to back those loans.

In theory, a certain percentage of US homeowners could be foreclosed on and get new mortgages in 30 days. Ditto for credit cards and car loans.

So here is a method by how additional funds get into over their heads in debt folks.

The details involve a lot more. The funds flows are complex.

It is also very complex, depending of a system that is untested and relationships between parties that are adversoral. Chaos theory predicts that such a system will fail at some unexpected point. But when and how-no one knows.

Dear 4shzl,

“Save” was a poor word choice. But, cheap (or artificially inexpensive in dollar terms) foreign goods contribute to our “artificially” high living standard.

The imbalance will be corrected someday…who knows when? My only point is that FCBs can keep it up for a long time.

Please sign me up for a 4shzlCard!

Regards,

Any thoughts on Countrywide Financial?

With His/Her credit cards maxed out, very little equity in the house, where is the next asset class he/she can borrow against?

Credit worthiness isn't written in stone handed down on tablets. If the lender estimates you are credit worthy - you are, by definition - worthy of his credit.

Now whether you can repay or not is another issue. So far the greater global markets aren't even asking that question.